STMicroelectronics NV

PAR:STMPA

Earnings Call Analysis

Revenue Decline and Lowered Full-Year Guidance

In Q2 2024, net revenues decreased 25.3% year-over-year to $3.23 billion, mainly due to declines in the Industrial and Automotive segments. Gross margin fell to 40.1% from 49%, while operating margin dropped to 11.6% from 26.5%. Despite slight growth in Personal Electronics, overall net income was down 64.8%. For Q3 2024, projected net revenues are $3.25 billion, with a gross margin of about 38%. The full-year revenue estimate has been revised to $13.2-$13.7 billion, reflecting a 22% decline compared to 2023. Management expects challenges in both Automotive and Industrial segments to persist.

A Challenging Quarter and Year

STMicroelectronics faced a tough second quarter in 2024, with net revenues of $3.23 billion, which was above the midpoint of their business outlook but still marked a significant year-over-year decline of 25.3%. This decline was largely driven by the Industrial segment's slowdown and a softer-than-expected performance in Automotive. The company's gross margin dipped to 40.1% from 49%, while operating margin fell to 11.6% from 26.5%. Moreover, net income plummeted 64.8% to $353 million, signaling significant profitability pressures.

Continued Weakness in Key Segments

The weakness in key segments, namely Industrial and Automotive, played heavily on STMicroelectronics’ performance. Industrial revenues were down more than 50%, and Automotive saw a drop of about 15%. While Personal Electronics increased marginally by 6%, the broad decline was a testament to the challenging market conditions and specific headwinds in largely cyclical segments. Additionally, the Microcontrollers and Power & Discrete segments faced sharp declines. Microcontrollers, in particular, saw a revenue drop of 46%, driven by a decrease in general-purpose microcontrollers.

Strategic Wins Despite Market Adversities

Despite these challenges, the company secured multiple strategic wins in the automotive sector, particularly with its silicon carbide and IGBT technologies for traction inverters, and automotive smart power tech for power domain control in new electric vehicle models. These strategic achievements underline ST's robust technology and product portfolio positioning, which is crucial for leveraging future growth opportunities in car electrification and smart mobility, including a notable long-term silicon carbide agreement with Geely Auto.

Revised Guidance and Future Outlook

STMicroelectronics revised its full-year 2024 revenue guidance to a range of $13.2 billion to $13.7 billion, indicating a decline of about 22% at the midpoint compared to 2023. The gross margin for the year is now expected to be around 40%. For Q3 2024, the company forecasts net revenues of approximately $3.25 billion and a gross margin of 38%. This outlook reflects continued pressures, particularly in unused capacity charges. The anticipated Industrial recovery has been delayed further, impacting overall revenue projections.

Operational Adjustments and Strategic Plans

In response to the challenging market environment, ST has implemented strict cost control measures, adjusted CapEx plans, and aligned operations to balance supply and demand dynamics. They have particularly focused on fine-tuning their operating expenses, projected between $905 million and $915 million for Q3, aided by seasonal vacation impacts. Looking ahead, the company plans a significant multiyear investment of EUR 5 billion, including EUR 2 billion supported by Italy's state funds as part of the EU Chips Act, to develop a new silicon carbide manufacturing site. This investment emphasizes their commitment to long-term growth and innovation.

Inventory and Market Dynamics

STMicroelectronics noted that distribution inventory levels remained relatively flat compared to the previous quarter, with an expected decrease in Q4. The company reiterated its adaptability in addressing the inventory adjustments necessary across various segments. They continue to monitor the automotive market closely, with an acknowledged dynamic situation, especially in electric vehicles and Tier 1 customer engagements. The proactive approach to managing inventory and aligning production rates underscores their operational resilience amid market volatility.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the STMicroelectronics Second Quarter 2024 Earnings Release Conference Call and live webcast. I am Moira, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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, executive]

Thank you, Moira, and good morning. Thank you, everyone, for joining our second 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 and Chief Financial Officer; and Marco Cassis, President of Analog, Power and Discrete, MEMS Sensors Group and Head of STMicroelectronics Strategy, System Research and Applications and Innovation Office.

This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call.

This call will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from management'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. [Operator Instructions]

I'd now like to turn the call over to Jean-Marc, ST President and CEO.

[Jean-Marc Chery, executive]

Thank you, Celine. Good morning, everyone, and thank you for joining ST for our Q2 2024 earnings conference call. Let me begin with some opening comments. Starting with Q2. Second quarter net revenues of $3.23 billion were above the midpoint of our business outlook range, driven by higher revenues in Personal Electronics, partially offset by lower-than-expected revenues in Automotive. Gross margin of 40.1% was in line with expectations.

On a year-over-year basis, Q2 net revenues decreased 25.3%, mainly driven by a decline in Industrial and, to a lesser extent, in Automotive. Gross margin decreased to 40.1% from 49%. Operating margin decreased to 11.6% from 26.5%. And net income decreased 64.8% to $353 million.

On a sequential basis, net revenues decreased 6.7%. For the first half of 2024, net revenues decreased 21.9% year-over-year to $6.7 billion, mainly driven by a decrease in the Microcontrollers and Power and Discrete segments.

We reported a gross margin of 40.9%, operating margin of 13.8% and net income of $865 million. During the quarter, contrary to our prior expectations, customer orders for industrial did not improve and automotive demand declined.

For Q3 2024, our third quarter business outlook is for net revenues of about $3.25 million at the midpoint decreasing 26.7% year-over-year and increasing 0.6% sequentially. Gross margin is expected to be about 38% impacted by about 350 basis points of unused capacity charges.

For the full year of 2024, overall, in Q2, customer order bookings did not materialize as expected. Therefore, we now anticipate a delayed recovery in Industrial and a lower-than-expected increase in Automotive revenues in the second half of the year versus the first half. We will now drive the company based on the plan for full year 2024 revenues in the range of $13.2 billion to $13.7 billion. Within this plan, we expect a gross margin of about 40%.

By segment, on a year-over-year basis, Analog products, MEMS and Sensors was down 10%, mainly due to imaging. Power and Discrete products decreased 24.4% with a decline both in power and in discrete products. Microcontrollers revenues declined 46%, mainly due to general purpose microcontrollers. And Digital ICs and RF products declined 7.6%, with a decrease in ADAS, more than offsetting an increase in RF Communications.

By end market, Industrial declined by more than 50%, Automotive by about 15% and Personal Electronics by about 6% while communications equipment and computer peripheral increased by about 2%. Excluding the impact of the change in product mix in an engaged customer program, Personal Electronics was up about 14%. Year-over-year, sales decreased 14.9% to OEMs and 43.7% to distribution. Overall, Q2 net revenues decreased 6.7% sequentially with a decline of 4.3% in Analog products, MEMS and Sensors; 8.8% in Power and Discrete products; 15.7% in Microcontrollers, while Digital ICs and RF products increased 8.6%.

By end market, Industrial was down about 17% sequentially; Automotive, down about 8%; and Personal Electronics, down about 5% while communications equipment and computer peripherals was up about 15%.

Gross profit was $1.3 billion, decreasing 38.9% year-over-year. Gross margin decreased to 40.1% compared to 49% in the same quarter of last year. The decrease was mainly due to the combination of product mix and sales price and higher unused capacity charges.

Operating margin was 11.6% compared to 26.5% in the year-ago period. All reportable segments were down on a year-over-year basis with the main decline in Microcontrollers and Power and Discrete. On a year-over-year basis, Q2 net income decreased 64.8% to $353 million compared to $1 billion in the year ago quarter. Earnings per diluted share decreased 64.2% to $0.38 compared to $1.06.

Net cash from operating activities decreased at $702 million in Q2 versus $1.31 billion in the year ago quarter. Net CapEx in the second quarter was $528 million compared to $1.07 billion in the year ago quarter. Free cash flow was $159 million compared to $209 million in the year ago quarter.

Inventory at the end of the second quarter was $2.81 billion compared to $3.05 billion in the year ago quarter. Days sales of inventory at quarter end were 130 days compared to 122 days in the previous quarter and 126 days in the year-ago quarter.

During the second quarter, ST paid $73 million of cash dividends to stockholders, and we executed an $88 million share buyback, completing our $1.04 billion share repurchase program launched in 2021. On June 21, 2024, ST announced the launch of a new share buyback plan totaling, sorry, up to $1.1 billion to be executed within a 3-year period.

ST's net financial position of $3.2 billion as of June 29, 2024, reflected total liquidity of $6.29 billion and total financial debt of $3.09 billion.

I will now go through a short update on some of our strategic focus areas. As mentioned, contrary to our prior expectation, we saw a decline in automotive demand during the quarter. This was characterized by some reduction in backlog already in Q2 and reduced forecast from some of our customers, including adjustments related to electrical vehicle production decrease and with inventory adjustments going along the supply chain.

We continue to execute our strategy supporting car electrification during the quarter. We had multiple wins in Power and Discrete with both silicon carbide and IGBT technologies for traction inverters at leading car manufacturers. We also won business with our automotive smart power technology for power domain control in new electrical and electronic architectures.

We announced a long-term silicon carbide supply agreement with Geely Auto for silicon carbide power devices in their battery for electrical vehicles. We have also established a joint lab to share knowledge and explore innovative solutions related to evolving automotive architectures.

In car digitalization, we saw further momentum with our portfolio of Automotive Microcontrollers. This includes wins with our later-generation Stellar MCUs in a body domain application with a leading European carmaker as well as other MCU wins for battery management and HVAC systems.

In automotive sensors, we introduced a 6-axis module that enables a cost-effective solution for functional safety applications, such as precise positioning and navigation systems and digitally stabilizing cameras, LiDARs and radars. Our design win activity in smart mobility highlights the robustness of our technology and product portfolio, positioning ST to leverage the structural growth of this key market.

In Industrial, during the quarter, the anticipated stabilization of demand did not materialize as expected, and customer orders did not improve. In particular, for general purpose microcontrollers, we continue to see weakness in the market for short cycle businesses such as power tools, residential solar, lighting and appliances and more resilience in longer cycle business, such as energy storage, grid, electrical vehicle charging and process automation. This has resulted entering the second half in a weaker backlog than expected.

In the short term, we are facing a longer and more pronounced correction in Industrial than what we anticipated due a progressive weakening of end demand, amplified by a severe inventory correction along the industrial market value chain. With this environment, we continue to work with our customers to design in our product of today and to invest in R&D to build the next generation of products.

A good example is what we are doing to build on our leading position in industrial embedded processing solutions. ST was presented at Embedded World Show in Germany, where over 5,000 people visited our booth. There, we received very positive customer feedback on the new products and solutions we announced shortly before including low-cost wireless and high-performance microcontrollers as well as new 64-bit microprocessors for industrial applications.

We also announced an innovative smart sensor with HAI processing for motion tracking in industrial and robotics applications. We also introduced the first embedded team in the industry to meet the incoming GSMA standard for eSIM IoT deployment. This simplifies the management of large numbers of connected devices in support of the proliferation of secure cloud connected autonomous things.

Finally, we also continue to build momentum on edge AI enablement for our customers. In early June, the ST Edge AI Suite came online bringing together tools, software and knowledge to simplify and accelerate edge AI application development. The Suite supports both optimization and deployment of machine learning algorithm, starting from data connection to final deployment on hardware, streamlining the workflow for different type of users.

We are confident that our ongoing designing and development efforts with customers and distributors in the industrial sector will position ST to capitalize on the net market upcycle more effectively. In Personal Electronics, Communications Equipment and Computer Peripherals, our engaged customer programs are running as expected.

Moving now to manufacturing. In May, we announced a strategic update with the construction of a new high-volume 200-millimeter silicon carbide manufacturing facility in Catania, Italy. This facility will make power devices and modules and will include both device manufacturing and testing and packaging in conjunction with a silicon carbide substrate manufacturing facility being prepared on the same site. These facilities will collectively form ST's silicon carbide campus. This development will fulfill our vision of a fully vertically integrated manufacturing hub for the mass production of silicon carbide devices, all within a single location.

The program is projected to be a EUR 5 billion multiyear investment including EUR 2 billion support provided by the State of Italy in the framework of the European Union Chips Act. During the quarter, we also announced the extension of the existing multi-year 150-millimeter silicon carbide substrate wafer supply agreement with SiCrystal.

Now let's move to our third quarter 2024 financial outlook and our plans for the full-year 2024. For Q3, we expect net revenues of about $3.25 billion at the midpoint, representing a year-over-year decline of 26.7% and a sequential growth of 0.6%. Q3 gross margin is expected to be about 38% at the midpoint, impacted by about 350 basis points of unused capacity charges.

For 2024, entering the second half with our current Q3 and year-end backlog and with ongoing market dynamics, we have further revised our plan for 2024 revenues, which we now see in the range of $13.2 billion to $13.7 billion, representing a decline of about 22% at the midpoint compared to 2023. Within this plan, we expect a gross margin of about 40%, impacted about 270 basis points of unused capacity charges at the midpoint of our 2024 full-year indication.

To conclude, following an unprecedented chips shortage situation, the current semiconductor cycle is impacted by a number of factors, the desynchronization between the various end markets in terms of demand normalization or weakening and inventory adjustments or corrections; the available capacity moving from tension to excess; and the nonlinear acceleration of structural trends towards sustainability in areas like renewable energies, electrification of mobility, right to repair and second-hand devices. This backdrop clearly affects the Automotive and Industrial end markets.

As we have pointed to in our strategy, both of these markets are undergoing a deep transformation, also driven by a number of megatrends. This, coupled with the current cycle dynamics I have just mentioned, is bringing both opportunities and challenges in the short, medium and longer term for ST and for our customers equally.

In the short to medium term, we are working to best adapt our operating plans to this complex situation. We have already implemented measures and are addressing them in response to the evolving situation. Medium to long term, we continue to be convinced that this transformation will provide the basis for our growth ambition.

We will be hosting a Capital Markets Day on November 20 in Paris to provide an update. It will be an in-person event, and we will also webcast it live.

Thank you, and we are now ready to answer your questions.

[Operator]

[Operator Instructions] The first question is from Jerome Ramel from BNP Paribas Exane.

[Jerome Ramel, analyst]

One question, Jean-Marc, you mentioned on the gross margin, the impact of the under-loading cost but also a little bit of price. Could you update us on the pricing environment for globally speaking and specifically for Industrial and Automotive?

[Jean-Marc Chery, executive]

Jerome, I will let Lorenzo comment at this point.

[Lorenzo Grandi, executive]

Good morning, everybody. Good morning, Jerome. In terms of price, I would say that is consistent on what we have said also last quarter, we don't see, at this stage, let's say, significant difference in the price environment. Of course, it's different than last year. Now what we see is that there is some pressure on the pricing. But overall, for the company, it remains at the low single digit.

There is some difference between the market, is higher, let's say, in Industrial, definitely; is higher, especially when we look at our product line of Microcontrollers. Here, we are more in the mid-single-digit, while when we look Automotive, it remains, let's say, at the low single digit. There is no particular, as I said before, difference in respect to what we were expecting last quarter.

[Jerome Ramel, analyst]

And maybe as a quick follow-up, Jean-Marc, you said on the short term, there's some overcapacity for the industry and for you. How are you addressing it in terms of CapEx and maybe a ramp up of the different manufacturing that you had in mind?

[Jean-Marc Chery, executive]

We are adjusting the working hour of our manufacturing already in Q3 definitively, and it will follow in Q4. That's the reason why we have accessed the revised down of our sales and operating plan. We have immediately adjusted this activity. And, of course, okay, we are cutting all the discretionary costs. And as I mentioned already, we have put the company on a higher increase, but this is a conjunctual measure. Now, okay, what is important for us is to focus to come back on the run rate of revenue we have last year.

[Lorenzo Grandi, executive]

If I may add, Jean-Marc, with respect to the CapEx, we confirm that we are going to spend at this year something in the range of $2 billion to $5 billion. That is -- and this is mainly addressing our conversion towards, let's say, the 12-inch that -- and the -- let's say, for the silicon carbide, we have the plan, as we were mentioning before about the campus to more rapidly our silicon carbide from the 150-millimeter to the 200-millimeter. These are the main, let's say, projects that we have in this CapEx of 2.5, and these are confirmed.

[Celine Berthier, executive]

Thank you very much, Jerome. Next question, please, Moira.

[Operator]

The next question is from Francois Bouvignies from UBS.

[Francois-Xavier Bouvignies, analyst]

My first question is on the Industrial and Microcontroller, general purpose mainly. Obviously, it's sharply down, and I think there is kind of this destocking happening. However, there is this, I mean, discussion in the market that maybe you would have much higher inventories that maybe to peers, when you listen to peers, I mean, Renesas, Microchip and TI, they said they are through the worst and that they are proactively -- or they did proactively manage inventories in the channel.

So my question is like, I would explain why you saw a bit later than everybody else, the Industrial downturn and maybe why it's sharper in terms of downside. So my question is, do you -- what's your view on this comment that maybe you have higher inventory than relative to peers that would explain this sharper decline? And more importantly, how it plays out for the rest of the year? How long this understocking would last for you? That would be my first question.

[Jean-Marc Chery, executive]

Okay. Thank you. Well, I will not comment the benchmark with our competitors. Well, first of all, TI has had a different go-to-market approach with the distribution, and they have much more inventory in home. About Microchip, I invite to check the number in detail. And for the other competitor, I will not comment.

No, we -- let's say -- first of all, okay, we have the widest product portfolio on microcontroller. And again, we are addressing all the regions of the world. And as I mentioned in my speech, we are really addressing as well short-cycle business and more long-cycle business. On the short-cycle business, in fact, the end demand fluctuated a lot during the recent quarter for different reason. And the inventory is not only at our distribution channel and not only at EMS, is in the value chain at system maker and including at the end customer.

So that's the reason why, first of all, it has taken much longer than the other, okay, to first absorb the excess of inventory at the end customer or system maker. And now, yes, there is still, let's say, some excess of inventory at distributor in EMS.

The point I would like to recall for this business, this business is a business which suffered the most during the shortage of semiconductor under the pressure of carmakers, Tier 1, and big industrial working in the field of energy, power conversion, and I have to say, energy, transportation, electrical vehicle charging. They suffered the most. That's the reason why, okay, when we allocated, we started to allocate the capacity we have. I repeat, we negotiated with them warranted volume and non-cancelable order. So means up to March 2023, we ship according backlog they give to us, and this order were not cancelable.

Most likely, we have assessed that already at this period of time, their end markets were already on, let's say, down cycle. And that is the reason why they have continued to accumulate inventory. So when we have completely removed this policy of non-cancelable order, of course, we have just adopted a new policy and started to decrease our POP and so on and so forth, but it will take time.

And it will take time, why? Because it is not only an inventory correction, it is also a real economical problem for this short-cycle business. Now, we see a different path for the long-cycle business. I repeat, so renewable energy, what is related to electrification of mobility, what is related charging station and so on.

Here also, in a certain extent, some inventory were present. But we expect that starting Q4, this will start to grow again. So the reason why ST has a profile a little bit longer in terms of restart is related first to our wide exposure on general purpose micro, and we have the widest portfolio.

The fact that in '22, '23, up to March, we have non-cancelable order policy that increased the inventory for sure that now we have to digest. Unfortunately, in '24, this business is -- has a problem of demand -- end demand. That's the reason why it takes longer. For the rest, okay, we behave very similarly, our competitor, and they have a similar profile in terms of business recovery for this year. While for the benchmark, we would be careful of the Renault.

[Francois-Xavier Bouvignies, analyst]

Right. And maybe my follow-up, if I may, is on the Automotive. You mentioned that it weakened. I mean maybe you could explain a bit in details what exactly is happening in terms of Automotive? And if you could remind us what you expect for Automotive, Industrial for the full year? What your full year is based on for GP generally would be great. And I will leave it there.

[Jean-Marc Chery, executive]

On Automotive, there is, let's say, 3 points. But the point number one, let's classify on legacy. On legacy, starting in May, we have seen our main Tier 1, let's say, pulling out the consignment stock, less pieces, because you know the Tier 1 now, they came back with carmaker with 2-week call off. So they have a very short-term visibility.

And starting end of May, there's a start for us, okay, to pull out from our consignment stock less pieces. So as a consequence, they can sell some frame order. So already in Q2, we have been impacted about less revenue than the forecast that was based on our backlog, about $100 million, is point number one.

The point number two, still on this legacy business and, let's say, usual application in the Automotive, they have declined, okay, their forecast for H2. So that's the reason why we have been obliged to revise down the forecast for Automotive legacy, already impacted in Q2, about, let's say, $100 million and, let's say, about $350 million, $400 million for H2.

The second point is the growth for what is related electrical vehicle. We will grow in H2 all of our components related to electrical vehicle, but less than forecasted. And you know why? Because the production of electrical vehicle in the world has been adjusted now below 13 million of cars.

However, I confirm that H2 will be a growth driver for ST for all the components related to electrical vehicle, particularly for silicon carbide and particularly everywhere, okay, in China and also with our main customer. That's the reason why we confirm our silicon carbide revenue about $1.3 billion this year.

Well, then the third element is what we already mentioned that is a little bit, let's say, increasing. You know that last year, one of our main customers for ADAS, built a certain level of inventory, is adjusting in Q3 a little bit more the inventory with us. So all in all, the Automotive for ST will grow in H2. I have to say 4% versus H1, about $100 million with a growth on electrical vehicle with silicon carbide, offsetted by the adjustment of the legacy from our Tier 1 and some inventory adjustment from our main customer in ADAS. So this is what we face in H2 in Automotive.

[Celine Berthier, executive]

Thank you. We will invite the next question, Moira.

[Operator]

The next question is from Stephane Houri from ODDO.

[Stephane Houri, analyst]

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

[Jean-Marc Chery, executive]

You have already seen the impact in Q2 because in Q2, we exceeded a bit the midpoint of our revenue guidance, thanks to Personal Electronics and thanks to our main customer. That has been offsetted, as I just mentioned, by Automotive. In Q3, we have a solid forecast for them. And now, as usual, Q3 is the biggest quarter, while in Q4 we will have -- for the time being, we see a decrease versus Q3. But so far, now the plan they gave to us are stabilized.

About the content of semiconductor in ST, I repeat, second half this year and first half next year is a lowest point in terms of content of ST in our main customer. Why? Because we have lost this famous optical module. But I confirm to you that starting H2 2025, the content of ST in our devices for our main customer will increase because we self-design.

[Stephane Houri, analyst]

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

[Jean-Marc Chery, executive]

Today, on R&D, we don't cut, okay, our R&D programs because all these programs are engaged and completely consistent, okay, with our strategy. ST, we have already cleaned and disengaged a product line we want to disengage, let's say, many years ago. So all the programs are strictly under control and executed, okay, under the decision of the Executive Committee. So now we continue to execute them.

Of course, also, I repeat that from the organization we have put in place early this year, we have already extracted some synergy and productivity that enable our capability to run this R&D program minimizing or stopping any hiring. We just, let's say, focus on hiring on critical profile of expert. On SG&A, of course, we are -- we have put it on a very strict control.

[Operator]

The next question is from Sandeep Deshpande from JPMorgan.

[Sandeep Deshpande, analyst]

I'd like to actually go into -- you've reduced your full-year guidance by about $1.5 billion for the full year now again. How does that divide up into Automotive, Industrial? And you said in the quarter that you saw some weakness in the automotive market. Can you quantify how much weakness you saw? And do you see that continuing into the current quarter?

[Jean-Marc Chery, executive]

The Pareto of the variance between the 2 guidance, the famous $1 billion delta is about 40% Automotive, 60% Industrial. I repeat, on Automotive, already in Q2, about $100 million. The rest is on H2 and mainly on what we call legacy business and partially on ADAS, ASICs. Again, I repeat what is related to silicon carbide, okay, we will go, but at a lower pace than what was expected.

On Industrial, which is about 60%, no impact in -- on Q2. On Q2, we have done an execution consistent with our forecast. The point is that in Q2, we didn't enter booking for Industrial billable for 2024 at the expected level. So that's the reason why we have cut our forecast by about USD 600 million. And also, we exceed the POS of our distributor, let's say, decreasing.

And taking into account the feedback they gave to us, we don't expect now to increase our POP in Q3. On contrary, we will continue to decrease the POP on Q3 on Industrial to decrease the inventory at distribution level, but we expect our POP to increase in Q4. So this is the dynamics.

So the takeaway is about 40% of the $1 billion Automotive, already about $100 million in Q2 and about USD 600 million for Industrial. Why? Because, okay, no order in Q2 and POS still decreasing in Q2, so postponing in Q4, the restart of the distribution queue.

[Sandeep Deshpande, analyst]

Understood. And follow-up question is on Automotive. We are hearing from many automotive companies that they are seeing weakness in the market. So do you think that the orders more than the revenue, now you gave me this view on the revenue, will continue to be weak in autos for the next few quarters?

[Jean-Marc Chery, executive]

We receive from the Tier 1, what they say, delivery forecast, okay? Now, with the delivery forecast they gave to us, it's encompassing, okay? All the adjustments we have already seen in Q1 that has been a bit amplified in Q2. Now we have our backlog. We -- as I said, the Tier 1 they are working with 2 weeks call-off from carmaker. Of course, okay, this is something that we have to put under a strict scrutiny. And we monitor, okay, with all our customers, okay, is a dynamic of the treatment and the orders they put on us.

On electrical vehicle, I think it's a different story. Here now, adjustment has been done. And we do believe that, okay, we will deliver our -- about $1.3 billion on SiC. But yes, on automotive, the market is dynamic. It's more on an inventory adjustment. But according to some, let's say, analysts for the automotive industry, looks like the production of vehicles is confirmed around 90 million vehicle. Now, we do believe that if it is confirmed, the inventory adjustment is basically done. So the backlog we have in front of us is variable. However, we have to monitor the situation on a very dynamic way.

[Operator]

The next question is from Sébastien Sztabowicz from Kepler Cheuvreux.

[Sébastien Sztabowicz, analyst]

On the OpEx for Q3 and 2024, how should we model the OpEx in the next 2 quarters? Are you expecting to have some benefit of some specific cost saving impact? This is the first question.

[Lorenzo Grandi, executive]

Yes, I answer about the OpEx. But in this, as we were commenting before, now in this market environment, we will continue to have a strict control of our expenses. You see that in respect to our expectation in Q2 operating expenses that, I repeat we consider net, including other income and expenses, came lower than we were expecting entering the quarter. This was also due to the fact that we were realizing the difficulties that we were facing for the second half.

But for Q3, we do not -- we now estimate something in terms of expenses between $905 million, $915 million. So means that we will continue to keep control. You know that during Q3, we had a positive impact of the seasonal vacation, especially in Europe that is helping us on this.

When I look at the total year, I think that also thanks to the fact that other income and expenses should increase in respect to last year. So it means that this year, we expect something in the range of $150 million positive. Our expenses overall in the year were slightly increasing with respect to last year, a very modest increase with respect to last year.

[Sébastien Sztabowicz, analyst]

And for Q4, where do you see the OpEx?

[Lorenzo Grandi, executive]

You can make the math. At the end, we will stay substantially flat. There will be some increase, in respect, very mild, very mild on the very -- a few percentage points. And over in the year, you can model something similar to what was the net OpEx of 2023 with a very mild increase in respect to last year.

[Sébastien Sztabowicz, analyst]

And in terms of dynamics for Q3, where do you see your revenue trending in Q3 by divisions or by verticals to understand a little bit the different dynamic to bottom in your flattish, I would say, sequential degrowth for the group?

[Jean-Marc Chery, executive]

I'll come back on the revenue after Lorenzo. But if you -- by end market first, so compared to Q2 on Automotive, we expect to grow 4% sequentially. On Industrial, unfortunately, as I said, because of lack of visibility and weaker backlog, we will continue to decrease minus 17%.

Personal Electronics, we will grow 17%, but this is a seasonality effect, and the engaged customer program we have with our main customer. And on communications equipment and computer peripheral, we will decrease minus 8%. It's related to the legacy business. We are disengaging progressively.

If we move to reportable segment, so Analog, MEMS and Sensor will be flattish, almost flattish, 0.2%. Well, Power and Discrete will increase 12.9%, driven by silicon carbide MOSFET. Power MCUs in Q3 will slightly increase 1.3%, but general purpose will continue to decrease and offsetted by auto MCU and secure MCU.

And on Digital and Radio Frequency, it will decrease minus 17.8%, but mainly it is related to ADAS, okay? It is the destocking of our customers that was partially anticipated. So this is the 2 dynamics by end market and by reportable segments.

[Lorenzo Grandi, executive]

As you can see, we are very precise this time.

[Celine Berthier, executive]

Is it okay for you, Sébastien?

[Sébastien Sztabowicz, analyst]

Yes, that's perfect.

[Operator]

The next question is from Didier Scemama from BofA.

[Didier Scemama, analyst]

A few things. First of all, Jean-Marc, I mean it feels to me like this is a downturn similar to what we saw at the turn of the last century. So it's a 2-year downturn. And I think the lesson we learned from that downturn is that you needed to be much more aggressive on the cost. So 2 questions is, a, I know you've said you've sort of implemented a hiring freeze, et cetera, but what do you think about your CapEx? I know it's unchanged, but is that prudent at this stage to be spending that much money on CapEx on adding still capacity?

And I would like to come back to a comment you made at a conference recently where you said you were thinking about upgrading your 6-inch and your 8-inch fab to 300-millimeter. Should you accelerate that transition given that those fabs, especially those in Europe, perhaps even in Singapore, are in direct competition with the CapEx being spent in China? So that's my first question, sort of the fiscal discipline being more aggressive into next year. And I've got a follow-up.

[Jean-Marc Chery, executive]

Well, it is clear that we are facing, let's say, the strongest inventory correction, certainly, we ever faced since a long time. However, I would like to say do I like 2 or 3 points? Well, first of all, we continue to be convinced that even if, okay, it's not completely linear or less smooth than expected that the transformation that our 2 main markets, Industrial and Automotive, let's say, will provide, okay, really for ST, the basis for our growth ambition.

Also, supported by some specific, let's say, initiative, every time we believe we can win differentiation in the field of Personal Electronics or including in the field of Server for AI with the power stage or later on in the optical transmitter. So we have our megatrend there.

Then we said that we are convinced that, for us, our capability to continuously improve the fundamental value of the company is to convert our activity to 300-millimeter for silicon-based technology. Of course, each time it is a trend that is monetary and to convert to 200-millimeter the silicon carbide one. That's the reason why this year, okay, we have confirmed the engage CapEx and the engagement we have with some suppliers to go in this direction.

Now, the third point for us as a priority is to assess the baseline and in order to understand at which speed we will come back, okay, to 2023 revenues. Under the light of these 3 points, it is clear that the acceleration of the conversion, respectively, to 200-millimeter to 300-millimeter, acceleration of the 150 to the 200-millimeter in silicon carbide. In the best trade-off to minimize, okay, our CapEx at the right level is what we are working on. It is what I said when I say we are adjusting our sales and operating plan consistently with what we see.

But I repeat, we are convinced that ST will come back on a growth trajectory. We are convinced that we must convert to 300-millimeter and 200-millimeter, respectively. This is mandatory. Of course, okay, acknowledging the baseline is the dynamic of the market, we will decide which level of CapEx, okay, we have to cautiously expect, but maybe accelerating some conversion with all the implication linked to this conversion.

[Didier Scemama, analyst]

Very good. My second question is about geopolitics. So I think how you're thinking about the world we might enter into next year with sort of 10% tariffs on all products imported into the U.S. I mean, one of your competitors obviously is boasting about is sort of domestic U.S. capacity, call it, geopolitically dependable.

You've taken the sort of, I would argue, a smart decision to partner with a local Chinese company to build your silicon carbide capacity over there, which I think is very differentiated versus your peers. But what are you thinking about the need to have maybe local capacity also in the U.S., which you don't have at this stage? Or do you think that your Automotive and Industrial customer base is European enough to not warrant really the need to have capacity in the U.S.?

[Jean-Marc Chery, executive]

Well, at this stage, we -- the manufacturing strategy that is, let's say, we have -- adopt in order to take into account what you mentioned, so China. For China, so one is execution. So again, I repeat that we are building an ecosystem in China, let's say, as independent as possible along the value chain, so from raw material device wafer processing, wafer sort, assembly and test, but including application lab and design center.

At this stage, we do believe that our European based or recognized countries reliable for America in term of location for manufacturing where ST is already implemented are good enough or adequate enough to support and face this decoupling. However, we are always, let's say, open for some partnership with the player in terms of manufacturing arrangement.

On the model, okay, we are in cold with GA for the model we are in Agrate, we still aren't just. At this stage, there is nothing on the table, but this is a kind of model we are open. What I can confirm to you at this moment, we do not intend, okay, to build a fab from scratch in U.S. Why? Because ST, we have lots of boundaries to do it. We have already project, okay, in our plate like the Campus in Catania, okay, to continue whole timely; to continue Agrate timely; to continue the Geely wisely in China. We do not intend, okay, to build an infrastructure in U.S.

[Didier Scemama, analyst]

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

[Jean-Marc Chery, executive]

We are working on -- actively on the right target.

[Celine Berthier, executive]

We have time for very last question, Moira.

[Operator]

The next question is from Joshua Buchalter from TD Cowen.

[Joshua Buchalter, analyst]

For my first one, last quarter, you were kind enough to give us details, and I think you mentioned that there were 2 months of channel inventory that you wanted to get down and it was running above target. I know a lot of it's at EMS and OEMs. But would you mind updating us on maybe either where you feel like levels are at entering this quarter and with -- in particular, the down 17% Industrial guidance for the third quarter, your -- does the rest of the year outlook assume that you get channel inventory back in line during the third quarter?

[Lorenzo Grandi, executive]

Maybe I can take this question. During the second quarter, when we look at the distribution evolution, we see that the POS were not improving, in general were not improving. We have seen some areas a little bit better, but in general, not improved. So at the end, through that, we were shipping less to distribution, and this is visible in the result, especially when we look at the Industrial.

But when we look at the level of inventory, when we look at the situation of the inventory, I would say that is similar to the one exiting Q1, so I would say that still we don't see significant improvement in this respect, especially because, let's say, the POS is not improving.

Probably, let's say, we will see some mild improvement in Q3. Our expectation is to start to see some more material improvement and moving inside the Q4. But for the time being, the situation of the inventory remains, as we'd say, not particularly on the positive side on the improvement in respect to the one that we'll have to exiting Q1.

But for what concern, the inventory in our balance sheet, I can tell you that today, you see we are in the range of 130 days, will be most likely in Q3 similar, at the end of Q3. We do not expect strong improvement during this quarter notwithstanding the unused and the level of production that has been reduced, while we will start to see the benefit in Q4. In Q4, we expect, let's say, to decrease in the range of at least from base in average of 10 days in respect to where we stand today.

[Joshua Buchalter, analyst]

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

[Lorenzo Grandi, executive]

In the fourth quarter, the main driver of the improvement of our gross margin in our model is mainly coming from the mix. Of course, we do not expect to have positive -- significant positive impact in pricing. As you know, we are not modeling any improvement in the price environment. We do expect price more or less be stabilized in the range of low single-digit decline.

There is a mix that is improving. There will be also the level of unloading. This quarter, in Q3, unloading is hitting our gross margin by 350 basis points. It will remain a material also in Q4, but declining in respect to the one of Q3. So these 2 components are the main one that make us to modeling the Q4 as an improvement in respect to the current quarter, Q3. Moving back the year, let's say, close to 40%.

[Celine Berthier, executive]

Thank you very much. This was the last question.

[Operator]

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

[Celine Berthier, executive]

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

[Jean-Marc Chery, executive]

Thank you. Bye.

[Lorenzo Grandi, executive]

Thank you. Bye.

[Operator]

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.