STMicroelectronics - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, welcome to the STMicroelectronics Q2 2023 Earnings Results 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 is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead, madam.

Celine Berthier (Group VP and Head of Investor Relations)

Thank you, Moira. Good morning. Thank you everyone for joining our second quarter 2023 financial results conference call. Hosting the call today is Jean-Marc Chéry, ST President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President of Finance, Purchasing, ERM, and Resilience, and Chief Financial Officer. Marco Cassis, President of Analog, MEMS and Sensor Groups, and Head of STMicroelectronics Strategy, System Research and Application, Innovation Office. The 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 statements 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. 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 President and CEO.

Jean-Marc Chéry (President and CEO)

Thank you, Celine. Good morning, everyone, thank you for joining ST, for our Q2 2023 earnings conference call. In Q2, our balance and market approach, our broad product portfolio and strong customer relationships enabled again, a double-digit year-over-year growth. This performance came along with a year-over-year increase of our profitability. As already anticipated, 2023 will be another year of progress toward our $20 billion+ revenue ambition and related financial model. Let's start with the financial highlights overview. Second quarter's net revenues of $4.33 billion came in above the midpoint of our business outlook range. Q2 gross margin of 49% was in line with guidance. Q2 net revenues increased 12.7% year-over-year. The revenue performance continued to be driven by growth in automotive and industrial, partially offset by lower revenues in personal electronics.

Looking at our year-over-year performance, gross margin increased to 49% from 47.4%. Operating margin increased to 26.5% from 26.2%, and net income increased 15.5% to $1 billion. On the first half of 2023, net revenues increased 16.1% year-over-year to $8.57 billion, driven by growth in all product subgroups except the analog and MEMS subgroups. We reported gross margin of 49.3%, operating margin of 27.4%, and net income of $2.05 billion. On Q3 2023, our third quarter business outlook at the midpoint is for net revenues of about $4.38 billion, increasing 1.2% year-over-year and by 1.1% sequentially.

Excluding the impact of the change in product mix in an engaged customer program in personal electronics, I mentioned in January, the Q2 revenue growth at the midpoint would be 3.5% year-over-year and 3.2% sequentially. Gross margin is expected to be about 47.5%. For the full year 2023, we will drive the company based on a plan for revenues of $17.4 billion ±$150 million. This represents a year-over-year growth of about 8%, and we now anticipate the Gross margin to exceed 48% for the full year. I will move to a detailed review of the second quarter. Net revenues increased 12.7% year-over-year.

This performance was driven mainly by ADG, up 34.4%, and NDG up 13%, on continued strength in automotive and industrial. AMS revenues decreased 15.7%, mainly reflecting lower revenues in personal electronics as expected. Year-over-year, sales increased 9.8% to OEMs and 18.3% to distribution. On a sequential basis, net revenues increased 1.9% with ADG up 8.2%, MDG up 4.3%, and IMS down 11.9%. Net revenues came in 110 basis points above the midpoints of our outlook, mainly due to automotive. Gross profit was $2.12 billion, increasing 16.5% year-over-year. Gross margin increased to 49% compared to 47.4% in the same quarter last year.

The 160 basis points expansion was driven by product mix, favorable pricing, positive currency effect net of hedging, and partially offset by higher manufacturing costs. Year-over-year, the second quarter operating income increased 14.2% to $1.15 billion. In the quarter, net operating expenses include negative, non-recurring, non-cash items amounting to $34 million. Operating margin was 26.5%, increasing from 26.2% in Q2 2022. On a year-over-year basis, Q2 net income increased 15.5% to $1 billion, compared to $867 million in the year ago quarter. Earnings per diluted share increased 15.2% to $1.06, compared to $0.92. Looking at our year-over-year sales performance by product group.

ADG revenues increased 34.4% on double-digit growth in both automotive and power discrete. AMS revenues decreased 15.7%, with lower revenues in the three subgroups. MDG revenues increased 13% with growth in microcontrollers and RF communications. In terms of operating margin, two of three product groups delivered year-over-year improvement. ADG operating margin increased to 31.9% from 24.7%. MDG operating margin increased to 35.4% from 33.6%, while AMS operating margin decreased to 14.8% from 24.1%. Net cash from operating activities increased 24.1% to $1.31 billion in Q2, versus $1.06 billion in the year ago quarter.

CapEx in the second quarter was $1.07 billion, compared to $809 million in the year-ago quarter. Free cash flow was $209 million, compared to the $230 million in the year-ago quarter. During the second quarter, ST paid $50 million of cash dividends to stockholders, we executed $86 million share buyback under our current share repurchase program. ST net financial position of $1.91 billion as of July 1, 2023, reflected total liquidity of $4.56 billion and total financial debt of $2.65 billion. Let me go through a recap of the main Q2 corporate and business highlights. We had two important announcements in Q2 related to our 300 millimeter in Silicon Carbide strategic manufacturing programs.

First, we announced the conclusion of the three-party agreement among the state of France, GlobalFoundries, and our company, as approved by the European Commission. This relates to the new 300 millimeter semiconductor manufacturing facility in Crolles, France first announced last July. This agreement will contribute to our $20 billion+ revenue ambition and related financial model, will further reinforce the European and French SOI ecosystem. We will build more capacity for our European and global customers in advanced technologies and the transition to digitalization and decarbonization. The total investment for this project is expected to be about EUR 7.5 billion, will benefit from French state financial support up to about EUR 2.9 billion, in line with the objectives set out in the European Chips Act.

In Silicon Carbide, we announced a joint venture with Sanan Optoelectronics for high volume, 200 millimeter Silicon Carbide device manufacturing in China. The joint venture will support the rising demand for ST Silicon Carbide devices in China for car electrification and industrial power and energy applications. Sanan will build separately a 200 millimeter Silicon Carbide substrate manufacturing facility to fulfill the JV's need. The combination of the 200 millimeter substrate facility to be built by Sanan, with the front-end JV and ST's existing back-end facility in Shenzhen, will enable ST to offer our Chinese customers a fully vertically integrated Silicon Carbide value chain, a significant competitive advantage in the Silicon Carbide landscape. The new joint venture Silicon Carbide fab is targeting to start production in Q4 2025, and full build-out is anticipated in 2028.

It is an important step to further scale our global Silicon Carbide manufacturing operations, coming in addition to our continuing significant investment in Italy and Singapore. It will be one of the key enablers of the opportunity we see to reach above $5 billion Silicon Carbide yearly revenues by 2030. In this corporate development overview, I would like also to mention a change in our Executive Committee. During the quarter, Orio Bellezza, President, Technology, Manufacturing, Quality and Supply chain, and member of ST Executive Committee, announced his retirement from the company. Orio will remain Managing Director of the company's Italian subsidiary until the expiration of his mandate. Fabio Gualandris, ST Executive Vice President, Head of Backend Manufacturing and Technology, and Deputy to Orio Bellezza, is appointed President, Quality, Manufacturing, and Technology. Upon my proposal, ST Supervisory Board approved the appointment of Fabio to the company Executive Committee.

I would like to thank Orio for his engagement in the numerous roles he has played at ST, and I wish Fabio all the best in his new role. I will now go through a short update on some of our strategic focus areas. In Silicon Carbide, we continue to increase the number of engagements. We are now working with 90 customers and 140 projects. Silicon Carbide-based power systems for electrical vehicle traction and industrial drives are completed by our industry-leading STGAP galvanic isolation drivers, based on ST's unique IP and advanced BCD technology. We announced an R&D cooperation collaboration with Airbus on wide bandgap semiconductors for aircraft electrification and decarbonization. This confirms ST's leadership and the strength of our Silicon Carbide technology roadmap. In car digitalization, we saw continued design win momentum with our latest generation of automotive microcontrollers, called Stellar, across multiple applications.

In parallel, in head ADAS, we continue working closely with our long-time customer and partner, Mobileye. Their EyeQ6 product is now in production, and EyeQ Ultra at the handy phase. Volumes of previous generation are ramping up. In May, we held our annual STM32 Summit event for industrial customers in China, with 2,700 customers in person and a record-breaking of 80,000 online. During the event, we made announcements related to Edge AI, namely AI running on microcontrollers, microprocessors, and sensors. We launched a new family of microprocessor for secure Industry 4.0 and Edge AI to allow our developers to address higher performance applications. We also gave further details on the upcoming STM32N6 microcontroller.

This is ST's first MCU with our Neural Processing Unit hardware accelerator, and will bring the best-in-class computing power consumption, and cost of ownership for the application we target. One of the industrial application demos we built with the customer performs up to 75 times faster for AI workloads versus today high performances MCUs. We will start to sample the STM32N6 from September onwards. For developers, we are expanding our STM32Cube.AI software offering, including the launch of a collaboration with NVIDIA around the TAO, so train, adapt, optimize toolkit, now available. Edge AI is not only STM32, we have the same approach for sensor, with the release of a new toolkit and associated software for our intelligence MEMS sensor, for activity recognition and anomaly detection directly in the sensor.

Let's move to our third quarter 2023 financial outlook and our plan for the full year 2023. Wait a minute, please. For the first quarter, at the midpoint, we expect net revenues to be about $4.38 billion, representing year-over-year and sequential growth of 1.2% and 1.1% respectively. As anticipated in January, we are entering in H2 2023 with a significant change in product mix in an engaged customer program in personal electronics. Excluding this change, our Q3 2023 revenues at the midpoint would grow year-over-year by 3.5% and sequentially by 3.2%. Based on our indication of $17.4 billion revenues for full year 2023, H2 2023 revenues would grow by about 6% compared both to H1 2023 and H2 2022.

Q3 gross margin is expected to be about 47.5% at the midpoint, including about 150 basis points of unused capacity charges. For 2023, based on our visibility, we will drive the company based on a plan for full year 2023 revenues of $17.4 billion, ±$150 million. This represents growth of about 8% over 2022. The full year 2023 gross margin will exceed 48%. We confirm our 2023 CapEx plan of about $4 billion. Thank you. We are now ready to answer your questions.

Operator (participant)

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment, may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands while asking a question. Anyone who has a question or a comment may press star and one at this time. The first question is from Jerome Ramel from Exane. Please go ahead.

Jerome Ramel (Analyst)

Good morning. Thank you for taking my question. First question, maybe Jean-Marc, if you could help us to understand the dynamic per division for Q3 and the second half of this year, that would be the first question. Thank you.

Jean-Marc Chéry (President and CEO)

The dynamic for Q3, sequentially, and year-over-year, I have to say that year-over-year, ADG will grow significantly, well above 20%.

Jerome Ramel (Analyst)

Yeah.

Jean-Marc Chéry (President and CEO)

MDG will slightly grow year-over-year, Q3 over Q4. It is linked, okay, to the fact that China will not start, okay, slower than expected. NIMS, okay, will decrease year-over-year by 31%. Also, this must be also corrected by the fact that we have this change in product mix. Sequentially, if we look Q3 2023 versus Q2, ADG will continue to grow. I have to say, single digit. IMS will be basically flattish and MDG, okay, will slightly decrease, again, for the same reason, because in China, we do not see the expected, okay, restart is slower than expected.

Jerome Ramel (Analyst)

Okay. Thank you. Maybe a question for Lorenzo on the OpEx. It probably came above expectation for Q2. How should we think about the OpEx for Q3 and maybe the second half of this year? Thank you.

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

In term of OpEx, let's say last quarter, in Q2, we were coming with a little bit higher level of OpEx. As we said, that we had some one time, that we are not forecasted entering the quarter, and actually the level of grants that we were expecting, were not materializing due to the fact that they were little bit postponed for administrative reason. We were not in the position to recognize. What it will happen in Q3? Next OpEx, including other income and expenses will decline significantly in respect to Q2. We do expect the net OpEx in the range of $880 million-$890 million for this quarter, for Q3. This is the combination of seasonality...

Let's say, the fact that the level of other income and expenses will be significantly positive, thanks to the fact that we will be in the position to recognize R&D grants. That was not the case in Q2. For the year, I think we will position Q4 for sure in term of OpEx, there will be some increase. Usually, it's a quarter that is a little bit in term of seasonality, a more high level of in term of operating expenses. I think at the end of the year, the range quarterly of OpEx will be in the range between $910 million or $930 million, something like that.

Jerome Ramel (Analyst)

Thank you.

Celine Berthier (Group VP and Head of Investor Relations)

Next question, please.

Operator (participant)

The next question is from Francois-Xavier Bouvignies from UBS. Please, go ahead.

Francois-Xavier Bouvignies (Equity Analyst)

Thank you very much. I have two quick ones. First one is on automotive. I mean, obviously, very strong performance, 34% growth year-over-year. If I look at the peers, I mean, NXP is growing 9%, its automotive. Renesas is growing 3% year-over-year this quarter. You seem to outperform, you know, by far, your peers in terms of growth rate. I understand that Silicon Carbide is a big growth driver, even if I try to exclude Silicon Carbide from this growth, I get definitely more than 25% growth year-over-year anyway. I was just wondering, can you explain this strong outperformance versus some of your peers? Texas is also growing, like, 20%, you know, excluding Silicon Carbide as such.

I'm asking because, you know, the U.S. peers, essentially, they are saying that they don't want to fill the industry with inventories, and they are managing basically this. Is there a risk that you fill too much, you know, the channel with inventories or yeah, that's why I'm asking the drivers behind this strong outperformance. Thank you. I have another one after.

Jean-Marc Chéry (President and CEO)

No, I think there is The first reason, fundamentally, that we overperform our peers, basically two reason, is ADAS. Do not forget that we partner with Mobileye. Mobileye is a leader worldwide of ADAS system. ADAS is more and more pervading the car industry, also driven by a regulation. If you want to be a five-star NCAP, this kind of stuff, so you must embed some ADAS feature. ST as a partner of ADAS, and this is what I say in my script, the current generation of ADAS, mainly EyeQ4 and EyeQ3, are really ramping materially.

The second reason, I know we are focusing on Silicon Carbide, versus Renesas and NXP, on top of that, we have a richer portfolio, larger portfolio on the analog and microcontroller and MEMS. Don't forget power. IGBT, low voltage MOSFET, high voltage MOSFET, ViPower. More and more, we are pervading ViPower, which are very adapted device for the new architecture in this car. Our two competitors have not this kind of technology. This is the two main reasons why we overperform our peer. It is ADAS and the remaining portfolio we have in power, including the VIPower.

Francois-Xavier Bouvignies (Equity Analyst)

Right. Thank you, Jean-Marc, very clear. My follow-up question would be on IMS. I mean, I expected the share loss happening in the second half of the year, and I was a bit surprised on the Q2 year-over-year decline. More importantly, the margins, you know, that decreased significantly. I understand the top line, you have some kind of drop through, but can you explain a bit more what's going on in IMS this quarter? Also margin bridge would be amazing. Thank you.

Jean-Marc Chéry (President and CEO)

No, but IMS from a revenue, let's say, point of view, well, receive a serious hit by personal electronics overall, in Q2. I have to say, you know that smartphone, okay, this year, overall will decrease. More important, the inventory correction in personal electronics is going on, will still continue in Q3, as well. On another side, IMS is also exposed to hard drive, and hard drive is in the computer verticals and computer peripheral is also, let's say, very, very weak. Unfortunately, this is really the two main reason at this stage of the, let's say, decrease, significant decrease of IMS revenue year-over-year. About margin, maybe, Lorenzo, you can comment?

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

At the end, this impact on the margin is mainly due to the volume, is mainly due to the fact that, of course, our level of top line is declining, and for sure the leverage on our expenses is worsening in this group. I would say this is the main driver. Of course, it's also impacted by some deterioration in our manufacturing, especially related to the activity that is lower for our MEMS, for this kind of products. The main driver of our operating margin is related to the fact that the volume decrease and the expense to sales ratio for sure is worsening for this group.

Francois-Xavier Bouvignies (Equity Analyst)

Great, thank you very much.

Celine Berthier (Group VP and Head of Investor Relations)

Thank you, for the next question, please?

The next question is from Aleksander Peterc from Societe Generale. Please go ahead.

Aleksander Peterc (Senior Analyst)

Yes, good morning, thank you for taking my question. My first question will be on inventory, which rose to 126 days. How would you qualify this level of inventory? Is it elevated and needs to be worked down the second half? Is it normal and reflecting usual seasonality for your business? I have a follow-up. Thank you.

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

Lorenzo, I take this question, but we judge this a little bit too high. It's true that in Q2, our inventory for seasonality is increasing. Let's say at this stage, 126 days of inventory is on a little bit on the high side. This is also the reason why, in the second part of the year, as we have already anticipated, Q3 and Q4, we will reduce our activity, our production activity, especially on that fab set that are more exposed to personal electronic and the consumer. This will bring unloading, and this, and saturation charges, and this is visible in our, in our gross margin this quarter, where we are hit by 150 basis point of unloading in our guidance of 47.5.

Jean-Marc Chéry (President and CEO)

If you take it down, that is impact, we are more or less similar to the one of Q2 in term of gross margin.

We finish the year in term of inventory?

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

In term of inventory, Yes, thank you. We will, with this, let's say, we think to bring down our inventory more in a range of 100-110 days of inventory in respect to the 126. Thank you for the follow-up.

Aleksander Peterc (Senior Analyst)

Thank you. Thank you for the follow-up question, Jean-Marc.

Jean-Marc Chéry (President and CEO)

It's okay, it's a good way.

Aleksander Peterc (Senior Analyst)

Yeah, absolutely. Wonderful. My second question would be on smartphones. You talked about this already in your introductory remarks. There's a, you know, the lack of recovery, let's call it this way, so far. How would you qualify the market now? Do you see any evidence of any bottoming out of the smartphone market, particularly in China, in the current quarter, or is it too soon to call it? Thanks.

Jean-Marc Chéry (President and CEO)

No, this is what I say. I think, in terms of demand, the data point we have, looks like this year, the market, okay, with the demand of smartphone will slightly decrease, I think 1.5% or 2%, with still a judgment of mix, between the 4G and 5G. The point is, this industry is still paying last year's strong decrease -9%, and of course, the inventory which has been built up, okay, last year, are not yet digested. This will continue in Q3.

We hope, okay, progressively, moving forward, Q4 and Q1 next year, to see first inventory digested and to be exposed to the end demand, to the B2C demand of a smartphone. This is the scenario, most likely, okay, we expect.

Aleksander Peterc (Senior Analyst)

Very clear. Thank you very much.

Celine Berthier (Group VP and Head of Investor Relations)

Thank you, Alex. Moira, next question, please.

Operator (participant)

The next question is from Andrew Gardiner, from Citi. Please go ahead.

Andrew Gardiner (Managing Director and Senior Equity Analyst)

Good morning, guys. Thank you for taking the question. Can I ask one on pricing, please? We covered this with first quarter results, but it'd be great to have a real-time update here with 2Q. Lorenzo, if I look at the gross margin guidance you've given, particularly as you just highlighted, adjusting for the underutilization charges, gross margin's flat into 3Q and still remaining strong into 4Q. It suggests to me that there hasn't been much change in pricing, but if you can just walk us through some of the moving parts there, that would be helpful, and then I do have a quick follow-up. Thank you.

Jean-Marc Chéry (President and CEO)

No, we absolutely see no significant pricing impact sequentially Q3 versus Q2. Again, the gross margin dynamic we have, we will move clearly from 49% in Q2 to 47.5% in Q3, but it is impacted by the in-use capacity. In fact, in Q3, basically, without this unused capacity that we have decided by ourselves to decrease inventory level described by Lorenzo a few minutes ago, our gross margin is still ballpark at 49%. All the other effect, you know that our input parameter like the product mix, the pricing, the manufacturing efficiency, all these parameter offset each other. No, Q3, we don't see any significant impact on the pricing.

Andrew Gardiner (Managing Director and Senior Equity Analyst)

Just related to that quickly, how much is the Agrate 300 millimeter fab ramp a headwind in 3Q?

Jean-Marc Chéry (President and CEO)

Ma, Agrate, in, in Q3, okay, has been included in the manufacturing, efficiency, okay? As the 8-inch, which are, let's say, exposed to consumer. Lorenzo, you.

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

In Q3, started to be, let's say, increasing, but is not yet very significant. It will be a little bit more during Q4, because of course, the activity will start to be more visible. As we said, let's say this is one of the attractor of our second half gross margin, you know. Manufacturing overall, and let's say the impact of the Agrate are, let's say, the main drivers of the declining, of course, together with the unloading charges. This is obvious, but of our gross margin in the second half of the year. Still is not, let's say, super strong. It's not yet, let's say, is part of this degradation, but it's not yet in Q3 so visible.

Andrew Gardiner (Managing Director and Senior Equity Analyst)

Okay. Sorry, just a quick clarification. Jean-Marc, you gave us the sort of adjustment related to the product mix and the customer program in 3Q, saying that instead of 1% year-on-year and quarter-on-quarter, it would be sort of low to mid 3% on both those, so year-on-year and Q-on-Q. Rough math, that's sort of $80 million-$90 million worth of impact. Earlier in the year, you told us it was gonna be $500 million in the second half. Is there? I admit, you broke up a little bit on my line in terms of when you were talking about the full year impact. Are you saying that sort of more of the impact is in 4Q, or is it actually less than you had previously anticipated?

Jean-Marc Chéry (President and CEO)

Well, it's a bit less than anticipated, but it is still very material, because again, I repeat, this module we accepted to support our important customer. The revenue was really concentrated on H2 2022 and H1 2023, and basically disappear in, let's say, Q3 and Q4 2023. The difference between the H2 2023 and H2 2022, impacted by this, by the device, is $multi-hundred million. Below the number I gave in April, yes, it's below, but $multi-hundred million.

That's the reason why, okay, if you make the math, we have confirmed this number of significant change in the revenue dynamic H2 2023 versus H2 2022. I have to say on Q4, if you make the math at the midpoint, is more important, because if you compute our Q4 at the midpoint of $17.4 billion, it's a grow H2, Q4 2023 versus Q4 2022 or 0.7%. Corrected by this module, the growth is 7%. It's really material. The impact difference H2 to H2, is multi-hundred million dollars below the number I gave in April.

Andrew Gardiner (Managing Director and Senior Equity Analyst)

Thank you very much.

Celine Berthier (Group VP and Head of Investor Relations)

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

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

Joshua Buchalter (Senior Equity Research Analyst)

Good morning. Thanks for taking my question. I wanted to ask about gross margin as well. The guidance implies sort of a very modest decline from the Third quarter to the Fourth quarter. I think you previously called out three drivers, half of half over half declines, the startup costs under your utilization charges and mix. It all seems like those should be peaking around the Fourth quarter. Is that the right interpretation? I guess, is there any reason why the Fourth quarter wouldn't sort of be the trough of gross margins as you see things right now, assuming, again, the stable market conditions? Thank you.

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

At the end, when we look at the H2, the gross margin that we will have in average in H2 will be slightly above 47%, you know? This is impacted by more than 100 basis points of temporary and used capacity charges. At the end, the remaining 100 basis points of declining compared to H1, are due to the full impact of our manufacturing increase input cost, as we said many times, that we will be very visible in the second part of the year, and the main part of the ramp-up of the Agrate 300 millimeter. I would say these are the key ingredients for our dynamic of our gross margin.

Joshua Buchalter (Senior Equity Research Analyst)

Got it. Thank you. For my follow-up, I was hoping to ask about Silicon Carbide. Any color you could provide on the JV announcement in China, in particular, you know, how much capacity are you expecting to get out of that? What's your confidence in being able to get enough volumes of 200 millimeter wafers from your partner there? Thank you.

Jean-Marc Chéry (President and CEO)

The capacity at the full build out will be 10,000 wafer per week, at 200 millimeter in 2028. The confidence level on 200 millimeter is now very high. Because they have a process we know very well, because this process is similar to our process of Norstel. Never forget that we bought Norstel from Sanan. We know exactly our process, and we know that our equipment, which has been designed for 200 millimeter in Norstel, do not represent any specialty difficulties to move to 100 millimeter. Contrary, equipment which has been designed purposely only for 150 millimeter. No, our confidence level is very high, that's the reason why we have done this deal.

Joshua Buchalter (Senior Equity Research Analyst)

Thank you. I appreciate all that color.

Celine Berthier (Group VP and Head of Investor Relations)

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

Next question is from Lee Simpson, from Morgan Stanley. Please go ahead.

Lee Simpson (Managing Director and Senior Equity Analyst)

Great. Good morning, everyone, thanks for squeezing me in. Just a couple of classification questions, really. You mentioned at the top there, OpEx, I think right about $880, $890 going into the second half. Just trying to maybe break out or clarify the any changes in other income, particularly as we look at the startup costs on Agrate should be moving out of other income and into COGS. Are we allowing for that in that overall number? That's my first question. I've got a quick follow-up.

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

No, as I said before, let's say, one, what we see in the third quarter in term of expenses and net expenses, is in the range of EUR 880-EUR 890. This is for the third quarter. A little bit higher, we will be in the next quarter, in Q4, in term of expenses due to the seasonality. In term of other income and expenses, in Q3, we will have a benefit coming from the R&D grants that were not, let's say, in the first two quarters of this year, due to the fact that all not the conventions that we needed to have assigned were ready in order to be recognized.

Were, let's say there, because the agreement was already done. The point is that we needed to have the documentation, as you can easily understand, and this will be done during this quarter. At the end, this will be the dynamic. In term of other income and expenses this year, our expectation is to be overall in the year, positive $70 million-$80 million, as slightly above what was my indication entering the year. It will be a little bit better in this respect. In term of startup costs, these other income and expenses are impacted by the startup cost of Agrate 300, but this startup cost progressively will become a manufacturing cost, let's say.

Here, of course, there is on the other side, the fact that we are going to start to produce wafers, so it will not be a pure cost, it will be also contributing to our top line, this activity. For sure, at the beginning, the 300 millimeter will have an efficiency that is not at the best. This is clear. The manufacturing efficiency of this fab will progressively improve in the course of next year.

Lee Simpson (Managing Director and Senior Equity Analyst)

Great. Thank you very much. That's quite clear. Jean-Marc, I think you were also very clear on some of the rationale around the Sanan JV, particularly as it sort of carries on from the design understanding or the work at least, that Norstel would have done prior inside Sanan. It does seem to just gel a little awkwardly with your stated aim to verticalize supply, move more things internally for Silicon Carbide. Also it stands out a little bit to me, that you've involved yourself in a bit of a tech transfer.

Admittedly, it brings in your backend business quite nicely. I wonder if you could just maybe talk through a little more broadly, the rationale for this JV, particularly from that tech transfer risk, and really as it works with your existing strategy for internalization. Thanks.

Jean-Marc Chéry (President and CEO)

I mean, the technology transfer. Okay, I would like to be very clear. This JV is a foundry, and this foundry will work exclusively for ST. It's exactly the same model that is still used, okay, of an OEM, transferring technology to a foundry for its exclusivity usage. This is this model, okay? Clearly, there is absolutely no transfer of IP. There is no license, there is nothing. It's a transfer of a manufacturing process in a foundry that will work exclusively for us to address vertically, the Chinese market, which is booming. Well, I know it's there is a common consensus that electrical car in China, as important, the related infrastructure, loading charges, fast charger, loading charges in residential-...

Then hold the power and energy related to the renewable energy, because of the strong decarbonization in China, all this market will boom in the near future. It's important for ST to address, okay, this market with a local production, end-to-end. From the bare wafer, epitaxy, wafer processing, wafer sort, assembly, and test. For assembly and test, of course, we will leverage our long-lasting JV we have in Shenzhen, called STS, that will assemble and will test our product. The rationale is, point number one, this market will be the fastest growth market in the field of electrification and decarbonization.

We want to address locally this market, okay, end-to-end, so that the reason why with this well-known partner, Sanan, we have just set up a JV, working as a foundry exclusively for us, and we will transfer production process, not IP, that will be processed for us and assembled in our factories.

Celine Berthier (Group VP and Head of Investor Relations)

Does that answer the question?

Lee Simpson (Managing Director and Senior Equity Analyst)

Yeah, that was a great response. Thanks so much.

Celine Berthier (Group VP and Head of Investor Relations)

Thank you. Next question, please, Moira.

Operator (participant)

The next question is from Didier Scemama, from Bank of America. Please go ahead.

Didier Scemama (Analyst)

Thank you so much. Actually, just wanted to go back to a question that was asked previously. Lorenzo, you said on the last earnings call, that there would be 300 basis points of gross margin contraction, H-on-H, in the second half, and of which 100 basis points is pricing pressure, 100 basis points is input cost, and 100 basis points is under loading of the fab. Can you reconcile what are the new components of that H2's, you know, gross margin? Then related to that, again, the question was asked but was not really answered, is there a scenario where your first half gross margin in 2024 are actually lower than the second half of this year? I've got a follow-up. Thank you.

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

In terms of dynamic of the gross margin, I would say that you see that our indication for the year is now, let's say, exceeding the 48% of gross margin. That means that today, let's say, in terms of impact of pricing, we don't see any significant, let's say, impact. As we were saying before, let's say, our social market, this was the dynamic seen in Q3 and Q2 moving forward. At the end, I would say that, as I was saying before, the second half of the year will mainly impacted by two components. Let's say, the first one is the unloading charges. This is clearly something that is driven by the fact that we want to control our inventory.

Here, today, the visibility is that this impact will be slightly above the 100 basis points. The remaining is mainly impacted by the impact of the manufacturing efficiency, and this impact of the 300 millimeter. Mixed price, all the other, substantially offset each other. At the end, these are the main drivers that today, visibility is giving to us.

Jean-Marc Chéry (President and CEO)

Well, this is clearly, the baseline, the solid baseline we have in our hand. 48%, it is what I communicated in April as well. This is totally consistent, okay, with our trajectory to reach a 50% growth margin, associated with our $20 billion plus revenue ambition, in 2025, 2027.

Didier Scemama (Analyst)

48% is the baseline going forward. Interesting. I wondered if you could give us an update also on our Agrate 100 millimeter ramp and on the Catania Silicon Carbide. What I mean by that is, can you give us a sense of the timeline through which those fabs, maybe individually, will contribute to gross margin positively, if that's the second half of next year, or if it's further out? Thank you.

Jean-Marc Chéry (President and CEO)

On silicon carbide, well, first of all, in Catania and Singapore, we are increasing continuously our capacity. I repeat this year, okay, we will deliver about $1.2 billion revenue, and we have the ambition to be at $2 billion in 2025. This is already contributing, let's say, to our operating margin, okay, because it's MOSFET. Never forget that the MOSFET has not the gross margin of MCU or digital IC. Okay, the internal supply, we target to have 40% internal supply.

As a run rate, it will happen end of 2024, and will, let's say, significantly impact our cost, starting 2025, yes.

Didier Scemama (Analyst)

For Agrate?

Jean-Marc Chéry (President and CEO)

For Agrate. For Agrate, today, we are sticking with our plan. We have installed capacity, basically, about 1,000 wafer per week, which is linked to the single of a kind tool we have installed. We have qualified our Pathfinder technology. Yields are very similar than hole, which is a great news, and we are starting the ramp up. again, the objective from this 1,000 wafer per week, is to achieve by end of 2025, the half full build out.

Didier Scemama (Analyst)

Yes.

Jean-Marc Chéry (President and CEO)

of what we have targeted in association with Tower Semiconductor.

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

We think that at the end, or already the second part of next year, Agrate will start to contribute.

Jean-Marc Chéry (President and CEO)

To the gross margin, yeah.

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

To the gross margin, not to be the trap.

Didier Scemama (Analyst)

Very well. Just a quick follow-up, like a quick one, if I may. On the Sanan JV, I mean, I think the concern that everybody's got is that the track record of Western companies, you know, I covered that get loosened in the past, having JVs in China is not great, because number 1, your cash is trapped in China. Number 2, you know, if something happened from an IP perspective, it's very difficult to actually get, you know, reimbursed or at least to have some compensation. I think, you know, what sort of assurances did you get, or can you give us that this is not going to end up badly for ST and ST shareholders?

Jean-Marc Chéry (President and CEO)

First of all, sorry to be a bit, let's say, straight. We have a JV in China since more than 30 years. This JV, okay, of assembly and test, is basically, certainly, one of the most performing assembly and test plants in the world. They always perform at our expectation. We never face any specific issue. They were very resilient during the COVID period. We have this experience. From the financial flow, maybe Lorenzo, okay, you...

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

We are not so worried in the sense that, as I said, as Marco was saying, let's say, we have the experience. We know how to handle, we know how to not to fall in a situation in which we may have a problem with them over repatriating cash. It's 30 years that we work in China with a JV. To be honest, today, we don't have the-- we are not facing this kind of problem with this JV. I do think that we will be able to manage it similarly with Sanan. I repeat, we have some experience, we work, we structure in a way that at the end, is not creating a major risk in this respect. Also not-

Didier Scemama (Analyst)

Thank you very much.

Lorenzo Grandi (President of Finance, Purchasing, ERM, and Resilience and CFO)

It's not also major cost, let's say, it will impact.

Didier Scemama (Analyst)

Very clear. Thank you so much.

Celine Berthier (Group VP and Head of Investor Relations)

Thank you very much. Yeah, now we have time for one last question, Moira.

The last question is from Johannes Schaller, from Deutsche Bank. Please go ahead.

Johannes Schaller (Director and Equity Research Analyst)

Yeah, good morning. Thanks for taking my question. The first one is on Agrate again. I mean, you have a pretty wide range of products and end market applications you can address with that fab. Can you maybe give us a bit of an update, what you are targeting initially for the ramp in the second half of this year? Then obviously more into next year, when volumes are starting, which kind of products, which kind of end markets? Then, as a second question, not just one of your competitors has talked a bit more about gallium nitride in the first half of this year. There were a few others making comments as well.

Can you just give us a bit of an update on your strategy and on your roadmap on the GaN side here, and which end applications you think are the most interesting for ST? Thank you.

Jean-Marc Chéry (President and CEO)

Agrate fab mission is a mix around analog. Analog with, either analog with digital content, to address, let's say, personal electronics and computer and communication. This main advantage is to, let's say, structurally, long-term, have volume, important volume. Well, of course, okay, the short term is a bit challenging, but structurally, okay, this is what we want. The complementary mission of Agrate, is analog for automotive and industrial. At the end, we want. Our strategy is to build Agrate, capable to address, basically the four verticals we address, in order to guarantee a long-term, sustainable and stable loading.

First, of course, we start with consumer and personal electronics, because we go very fast in the qualification. You know that for automotive, it's taken more time, and it is followed by industrial. This is the mix of what the fab will manage: analog with digital content, and/or with more power content, to address automotive and industrial.

Celine Berthier (Group VP and Head of Investor Relations)

Then for GaN?

Jean-Marc Chéry (President and CEO)

For GaN. The GaN strategy. Well, first of all, I would like to repeat, we strongly believe, ST, that the successful leader in the field of power energy, are companies which are capable to control the wide portfolio of technology, okay. Again, from a low voltage, high voltage MOSFET, vertical integrated power, IGBT, GaN MOSFET, and Silicon Carbide and module. This is our strategy. We started very fast on GaN to address, let's say, the consumer market. Basically, the fast charger of, let's say, personal electronics and computer. In order to go fast, okay, we are using the technology of the CNC, and we have already, okay, a business....

link to this technology and to customer, okay, enabling fast charger in the field of personal electronics. In parallel, we are developing GaN MOSFET to address both the power and energy market for inverters. This technology is in development in Tours, where we have set up an 8-inch line, and where we have a strategy to build in the future, okay, our 8-inch capability to address massively this market. Last but not the least, we have two other blocks where we intend to play a role. It is to address radio frequency products.

With RF GaN power amplifier, based on our technology, GaN-on-SiC, that will be processed in Catania. The latest one is what we call a smart integrated GaN, where it's we mix a BCD driver with an advanced controller and a GaN MOSFET. As a takeaway, we say we started very fast with TSMC technology to address the consumer market with fast charger. In parallel, we are developing our technology to address the power GaN MOSFET, mainly to address inverter for industrial market. We complement this strategy with RF power amplifier on our own technology, and then we merge this technology with BCD to develop what we call smart integrated GaN, which will be a very deficient technology to address multiple industrial application.

Johannes Schaller (Director and Equity Research Analyst)

That's very clear. Thank you, Jean-Marc.

Celine Berthier (Group VP and Head of Investor Relations)

I think this conclude our call, with the last question. Moira? Are you around?

Operator (participant)

Yes. Yes, that was the last question. Would you like to conclude the call then?

Celine Berthier (Group VP and Head of Investor Relations)

Yes, please.

Operator (participant)

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.