意法半導體 (STM) 2018 Q2 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon, welcome to the second quarter 2018 earnings release conference call and live webcast.

I'm Myra, the Chorus Call operator.

(Operator Instructions) And 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 Mr. Tait Sorensen, Group Vice President, Investor Relations.

Please go ahead, sir.

Good morning, everyone.

Thank you for joining our second quarter 2018 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, Infrastructure and Services, and our Chief Financial Officer; Marco Cassis, President of Sales, Marketing, Communications and Strategy Development.

This live webcast and presentation materials can be accessed on ST's Investor Relations website.

A replay will be available shortly after the conclusion of this call.

This call will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans.

We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings for a full description of these risk factors.

(Operator Instructions)

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

Thank you, Tait.

Good morning, everyone.

Thank you for joining us on our call today.

I am very pleased to be here to talk with you, together with my colleagues, in my first earning results call that's leading ST.

So let's begin with an overview of our Q2 performance.

Our second quarter results were solid and in line with our expectations.

We had another quarter of double-digit year-over-year revenue growth, balanced across all product groups, regions and end markets.

And we drove another quarter of improved performance across key financial metrics.

Looking at our Q2 business results.

Both revenues and gross margin were above the midpoint of the company outlook.

We grew revenues 18%, our seventh consecutive quarter of year-over-year double-digit sales growth.

The revenue growth was broad and balanced.

This is important to achieving sustainable revenue growth.

From an end market viewpoint, Industrial was particularly strong during the quarter.

Our gross profit increased substantially, $911 million, up 24% over the year.

Our gross margin was 40.2%, increasing 190 basis points year-over-year, largely driven by improved manufacturing efficiency and by a favorable mix shift toward higher-value products.

Operating expenses were $622 million, above our expectations, mainly due to one-time nonrecurrent items that were not embedded in our Q2 expected launch.

Importantly, our sales growth translated into operating leverage, driving expansion of our operating income, margin and net income.

ST's operating income increased 60% to $289 million.

Our operating margin improved 330 basis points to 12.7%.

And our net income increased 73% to $261 million.

Turning to our cash and investments.

Our profitable growth is driving improvements in our net cash from operating activities, with an increase of over 36% on a trailing 12-months basis.

For the quarter, net cash from operating activities was $360 million.

Free cash flow was negative $40 million in Q2, mainly to 2 elements: a high level of CapEx in the quarter above the annual run rate of our expected 2018 CapEx range between $1.2 billion to $1.3 billion; a change in working capital, mainly due to inventory increase to support demand in Q3.

We expect to return to a positive free cash flow for the third and fourth quarter and for 2018 to generate free cash flow well above the dividend paid during the year.

Our goal is to exit 2018 with a higher net cash position compared to 2017.

Let's move to our product groups' performance, starting with Automotive and Discrete.

So during the second quarter, ADG revenues increased 15.2% year-over-year on a double-digit growth for both Automotive and Power Discrete.

Operating profit increased by 20.8% (sic) [28.8%] to $84 million, and operating margin increased to 9.7% from 8.7%.

On a sequential basis, ADG revenue increased 6.5%.

Revenue growth did not immediately translate into an improvement in operating profit and margin during the second quarter.

This is mainly due to some third-party manufacturing efficiencies and extra cost in the supply chain.

In terms of ADG's operating margin looking forward, we confirm that this will be in the low teens for the second half of 2018.

Turning to the Microcontrollers and Digital ICs Group.

MDG posted a strong year-over-year increase, with revenue up almost 28%.

This double-digit sales growth came from both Microcontrollers and Digital ICs.

In terms of profitability, MDG's operating margin increased sharply year-over-year to 20.3% from 11.7%.

On a sequential basis, MDG's revenue increased 4.3%, and its operating margin also expanded.

Our microcontroller business remains the main driver of operating profitability.

The digital business contributed to the operating margin improvement on a sequential and year-over-year basis.

We confirm that MDG's operating margin will be about 20% for the second half of 2018.

Finally, Analog, MEMS and Sensors.

AMS revenues increased 10.7% year-over-year on a double-digit growth for both Imaging and Analog.

In term of profitability, AMS operating margin increased to 10.5% from 9.4%.

On a sequential basis, AMS revenues decreased 6.4%, as anticipated, on lower smartphone activity.

Analog and MEMS revenues posted sequential increases.

The improved product mix led to a sequential operating margin progression.

For AMS, we anticipate second half operating margins to move into the mid-teens as we benefit from revenue leverage, specifically from smartphone applications.

Let's now discuss how this performance translated in new business and product leadership across the end market we sell.

In Automotive, we sell most of the electronic applications in the car, with a particular focus on car electrification and autonomous driving.

In car electrification, during Q2, we continued to expand the design win pipeline for our silicon carbide products.

And we achieved an important galvanic isolation technology design win for an electrical vehicle.

Galvanic isolation is one of the focus areas for us in expanding our portfolio of differentiated, high-value products for Industrial and for Automotive.

We also continue to win business in more traditional automotive application areas, like braking, engine management and body comfort.

Industrial is a very broad area for us with many customers and many different applications.

Here, we focus on smart industry where we beat on our leading position in general-purpose 32-bit microcontrollers and on our strong portfolio of power, analog, sensor and connectivity products.

We also deploy our system solution expertise to deliver multiple products and complete solutions.

Some examples this quarter include our satellite tolling module and the custom power line modem.

Moving to personal electronics.

Our main focus here is on smartphones.

In Q2, we expanded our reach with customers, in particular in Asia.

We have design wins for Time-of-Flight sensors, touchscreen controllers, motion sensors and protection devices.

We also won a design win with our STM32 microcontroller at a key Japanese OEM for high-definition televisions.

This is an expansion for us into a new market that was traditionally difficult to penetrate.

In communications equipment, computers and peripherals, we are leveraging our in-house processes in a number of focused application areas.

Example this quarter, our design for fiber optics infrastructure with our BiCMOS process that is optimized for high-frequency communication application; and an ASIC design for 5G infrastructure with the silicon or decelerator process that meets the latest cellular RF requirements.

Let's conclude with our Q3 guidance.

We expect revenues to increase about 10% at the midpoint on a sequential basis.

This would represent year-over-year growth of about 16.8%.

By end market, in Q3, we expect sequential strong growth in personal electronics.

We also anticipate solid growth in Automotive, despite the fact that we will normally see some seasonality here.

And we are expecting normal seasonality for Industrial.

By product, we expect sequential revenue growth to be driven by imaging, automotive and power discretes.

We anticipate normal seasonality in analog and microcontrollers.

We anticipate the third quarter gross margin at about 40%.

This is in line with our communication at our Capital Market Day, that in the second half of 2018, we see revenue growth as the main positive driver for the gross margin, substantially offset by the product mix evolution.

As a result, we expect to maintain our current level of gross margin, which will drive gross profit increases in line with revenue growth.

Adding together the different ingredients, including OpEx discipline, we expect to continue to make steady year-over-year progress at the gross profit, operating profit and net income levels.

So I would like to reconfirm our top priority: deliver our 2018 objective of making another step forward in term of year-over-year revenue growth and profitability.

Overall, we are on track with the goals set at our Capital Markets Day in May: grow 2018 revenues between about 14% to 17% versus 2017; and in the second half of 2018, ADG operating margin to be in the low teens; AMS operating margin to be in the mid-teens; MDG operating margin to be about 20%.

We are also on track with our longer-term goal of sustainable profitable growth to continue to create shareholder value and to make ST an even stronger player in the semiconductor industry.

Now we are happy to answer to your questions.

Thank you.

(Operator Instructions) The first question is from Achal Sultania from Crédit Suisse.

Two questions.

First, on gross margins.

Jean-Marc, you mentioned that there is some headwind from product mix as we go into Q3.

Just, can you give us some color as to -- is it one particular product in high-end smartphone application or is it like multiple products which is impacting gross margin headwind?

And then, secondly, on the inventory, we've seen inventory rise for a couple of quarters now by about more than $100 million.

So just wanted to understand, like, is it again -- is it driven by just 1 or 2 specific projects?

Or is it broad-based in inventory increase across different products?

Thank you for the question.

So I address it to Lorenzo, and I will make a complement, okay, if needed.

Good morning to everybody.

Lorenzo Grandi speaking.

About Q3 gross margin, as we said at our Capital Market Day, we have on the gross margin for Q3 definitely impact related to the product mix.

In particular, we are growing significantly in Q3 and also in Q4 in personal electronic, in particular in smartphone.

This growth, of course, from a point of view of gross margin, is not accretive.

Gross margins will be impacted by this ingredient of product mix.

On the other side, we will have a positive effect related to improve manufacturing efficiency that will substantially offset this negative impact.

So that's why we are guiding in the range of 40%, as was already anticipated on our Capital Market Day.

In respect to the inventory, in respect to the inventory, we grew our inventory.

You know that we were smoothing somehow our production over Q2 to fulfill the demand in Q3.

We have a strong demand definitely in personal electronic, in the smartphone as well as also in automotive.

We do expect to see a normalization of inventory in Q3 and in Q4.

Did that answer your question, Achal?

Yes.

The next question is from Aleksander Peterc from Societe Generale.

I just have 2. The first one would be, if we can go back a little bit on ADG margins that went down despite a sequential revenue growth.

So you mentioned some input costs there.

Anything else going on in terms of mix and why exactly that is reversing in the second half?

And then secondly, more general question on how the current trade war rhetoric coming out of the U.S. could influence your perception of risk for the semi industry as a whole, for yourselves and for some of your key end markets, particularly in automotive.

Thank you for the question.

So the first one will be answered by Lorenzo, and I will take the second one.

About the deterioration in ADG, let's say, not the improvement in ADG, you're right.

We actually -- you know that in ADG, both in automotive and power discrete, we are encountering a very, very strong demand.

This strong demand, let's say, we -- to follow up this demand, we are investing significantly.

And we encounter, during the quarter, some temporary manufacturing inefficiency due to this increase of investment that we have done in order to follow the demand, investments that are not yet at full speed.

And on top of that, we encounter also some costs in -- increased costs in the supply chain.

This temporary inefficiency will be fully reabsorbed in the course of Q3 and definitely also in the course of Q4.

So we do expect actually to recover in terms of profitability for ADG.

And we confirm what we have said at the Capital Market Day that we do expect ADG to be in the low teens in the second half of the year in term of operating margin.

About the second question, I have to say that, at this moment, okay, the direct impact on our company is really negligible.

However, like global companies, we are monitoring the situation.

First, we are very attentive about any potential impact on our own customers, which is, let's say, a normal attention.

But if the trade war escalates, we are more concerned, I have to say, about the consequences that this can have on the global macro environment.

But I guess, okay, this is a common concern well spread across our peers.

At this moment, okay, I have no more to add on top of that.

The next question is from Sandeep Deshpande from JPMorgan.

My first question is regarding the automotive market and your ramp-up of silicon carbide.

Jean-Marc, can you comment on the ramp-up of that revenue -- of silicon carbide revenue in the first half of the year and how you see that progressing in the second half?

And secondly, with regard to the margin, can I ask a question on the currency, that whether the currency shift that has taken place year-on-year is impacting your OpEx, which is reducing, to some extent, your leverage associated with the operating margin?

Well, thank you, Sandeep.

So I answer the first question, and Lorenzo will answer second question.

So I really confirm that we expect our revenue from silicon carbide to be about, okay, $100 million in 2018, and I have simply to say we are on track.

Second point, we are engaged, okay, with the key players in car electrification, supporting carmakers with power modules on a worldwide basis.

Today, we have more than 25 projects in discussion, and I have to say that 85% are about silicon carbide.

And as the industry, okay, has been adding capacity, so we are securing what is needed to serve our customers in term of substrate for the short term.

And we have several silicon carbide substrates.

And we are preparing our capital expenditure, okay, for the next quarters and months to support, okay, all the demand we have.

So in a nutshell, okay, Sandeep, we are really on track on silicon carbide.

And I confirm, I am fully convinced it will be important game-changer for the industry.

I think the second question was about expenses, the impact of the exchange rate in our expenses.

If I look at the expenses, yes, indeed, let's say, if I look at on a year-over-year basis, last year, our expenses -- our effective exchange rate in Q2 was $1.09.

This year, in Q2, has been $1.19.

On the expenses, of course, we have an impact, and this impact is in the range of $30 million, $35 million or something like that.

If I look forward, our expected exchange rate moving from Q2 to Q3 is substantially flat because we stay at $1.19, with the current spot rate in the range of $1.17.

If I look at Q4, we do expect that with the hedging contract that we have in place to be in the range of $1.18.

So I would say that moving forward, there will not be a significant impact on expenses related to the exchange rating if we stay at this level of exchange rate.

And in absolute amounts, will the OpEx remain at these levels?

How do you look at that?

Well, in terms of expenses, in Q2, our expenses came at $622 million net expenses.

This was a little bit higher than what we were anticipating, because our range, if you remember, we are more in the range of $610 million and $615 million.

Q2 expenses were, I would say, impacted by a couple of one-time events.

Actually, we have a loss of credit in one of our jurisdiction, plus some termination benefit costs related to a certain number of our former executives.

These 2 impacts were not in our, let's say, guidance at this time.

And if I exclude these 2 impacts, I would say that we were in the range that we were communicating.

What it will be the evolution of our expenses entering in the Q3 and in Q4?

Moving in Q3, the expenses will be impacted by 2 negative effects, let's say, and one positive.

The negative -- on the negative side, there will be the impact of annual salary increase, and this was, of course, a factor in us in ['17] in our model; and also by one-time expense related to the social charges, unvested shares that are distributed to our employees that are accounted for the full year in Q3.

On the other side, on Q3, we will have the positive impact of the seasonality.

You know that in Europe, there are a lot of -- a number of days of vacation.

So we do expect in the range, therefore, for the next quarter between $615 million and $620 million.

When we move forward in Q4, we expect a similar amount with, on one side, let's say, unfavorable calendar in respect to Q3.

That is offsetting by the benefit not to have any longer the social charges.

So at the end, we do expect substantially to be in that range at Q3 and Q4.

The next question is from Anthony Stoss from Craig-Hallum.

If you wouldn't mind commenting about your biggest customer in the smartphone side, kind of on a year-over-year basis, your total content, I think in the last quarterly conference call, you talked about expectations of having more content than a year ago.

So I just want to confirm that, that's still the case.

And then secondly, for Q4, can you confirm that you expect all 3 of your business segments to grow sequentially in the December quarter?

So Tony, just as a clarification, I think we, on our previous calls with our largest customer at the time, we talked about having increased revenues, not necessarily content.

So just a clarification there.

And then let's answer that, and we'll come back to your second question, Tony, just as a clarification.

So Jean-Marc?

That's okay.

Can you clarify the second question exactly?

So Tony was asking in terms of our largest customer and how that is evolving on a year-over-year basis.

On a year-over-year basis?

No, we do not comment at this level of detail, okay, with our major customer because, first, we do not comment.

However, okay, you know that they will introduce, okay, free phones.

Okay, this is well-known everywhere.

And they will announce it basically in September, and we will see.

And our [organize] in Q3 is encompassing, okay, this acknowledgment.

And for the full year, okay, I confirm what I have said during my address.

We see a year-over-year growth for ST from 14% to 17% end of 2018 versus 2017, well across end market we address and product group.

And we are convinced personal electronics end markets and our sensor will perfectly be in line with this target.

And Tony, on your second question, you were asking, for Q4, the -- if all the product groups were going to grow sequentially.

Is that -- was that your question?

That's correct, Tait.

That's correct.

Okay.

That's a Q3 call.

You have to wait for Q4.

Just checking to see if you expect a normal seasonality.

I would say that, Lorenzo speaking, that our expectation is to have a growth.

At the end, what we do expect for the year, it was mentioned by Jean-Marc just a minute ago, was to be balanced across the various groups.

So we expect, let's say, to grow in the range of 14%, 17%, with a growth that is quite balanced across our groups.

For sure, let's say, now guiding Q4 is a little bit too early.

Yes.

I think, Tony, as Jean-Marc kind of got the question on the trade war and things of that nature, there's some uncertainty out there, so we'll just talk about Q3 on this call.

No, we simply want to be consistent.

And we are on track, again, with what we say at our Capital Market Day in May.

We will grow this year, okay, between 14% to 17% year-over-year.

The next question is from Janardan Menon from Liberum.

Just back on the gross margin side.

If I remember at your Capital Markets Day, you had pulled out both smartphone as well as the discretes as having a mix impact on your gross margin into the second half.

And you were talking mainly about smartphones just now.

So I was just wondering, is discrete also still having a negative impact from a mix point of view in the second half?

And on those product segments, I was just wondering what the outlook is for gross margins going, let's say, over the next 12, 18 months or so.

Is it likely that, gradually, you will be able to achieve some cost reduction in those product areas which is having the lower gross margin and, therefore, you could bring those gross margins up?

Or is it that you would be facing, let's say, price pressure there, and the gross margins in those kind of segments are going to be sort of structurally lower than some of your other businesses even on the longer term?

And as a follow-up, you said you pulled out industrial as being specifically strong in Q2.

I was just wondering what part of the industrial market that refers to.

Was it broad or was it predominately sort of IoT products from the distribution channel?

Or was it something from the larger industrial companies, et cetera?

So thank you for the questions.

So Lorenzo will answer the first one, I will take the second one.

About gross margin, you are right, when we were at Capital Market Day, actually, we underlined the fact that the gross margin for our personal electronic, specialized image sensor and also power discrete are in average below -- are below the average of the company.

The Q3 revenues, let me debrief, have strong contribution coming from these 2 product family.

And as I said, in term of gross margin, these are not accretive on the other side as there are the other products that are improving their product mix inside the various family, contributing, let's say, to mitigate the gross margin impact.

On top, we have also improvement in term of manufacturing.

The gross margin of the company was enjoying, if you look, quite a significant growth moving from last year to this year, mainly driven by manufacturing that now is running at full speed, fully saturated.

Moving forward, of course, we will work in order to have some improvement that will, for sure, not a big step, but it will be a continuous improvement as well as we will work on the product mix.

Today, the market condition, as such, that we may, let's say, really work on the product mix.

We may work in order to optimize that.

And so we think that we can somehow to have a mitigation related to maybe the growth of some product family that are not at the average gross margin of the company.

Anyway, as we said, the progression in terms of operating margin will come in short and medium term, more from the leverage on the revenues than improvement in the gross margin.

So just to paraphrase what you said.

If I look forward, can we assume, let's say, into 2019 that your higher gross -- you would expect or try to achieve a situation where your higher gross margin products are growing faster than your lower gross margin products?

No.

As I said, let's say, what we see in the short and medium term is to stay in the range of the 40% share, let's say, in terms of gross margin.

So about your second question, I would like to say that from a sales channel side, it is really a broad launch.

Okay.

Whatever our distribution channel or key OEMs, so we don't see a specific point to mention.

As far as for the group are concerned, this is the same because, of course, I guess you take note our MDG, okay, gross year-over-year, so our STM32 contribute a lot, okay, to this industrial end market growth, but I have to say analog as well.

And it's exactly happening what we expect, okay, leveraging our STM32, but our analog, strong portfolio in analog, strong portfolio in power discretes and sensor as well.

So simply to say that it's a really broad launch from both side channel distribution and our key OEM and end product as well.

The next question is from Jerome Ramel from Exane BNP.

Two questions.

The first one is, Lorenzo, how should we model the depreciation and amortization going forward?

I saw the increase in Q2.

And with your strong CapEx, you already spent in Q1 and Q2, how should we model for the rest of this year and maybe for the full year?

And maybe one question for Jean-Marc.

Could you update us on your manufacturing capabilities with the new fabs you have qualified with your foundries and the ramp-up in Singapore?

I take the question about the depreciation, amortization, Jerome.

Yes, there will be an increase.

This year, we model in the range -- for the full year, we see this amortization and depreciation in the range of $780 million, $785 million.

That is definitely an increase in respect to last year.

And for the second half, it should be in the range around $200 million, $210 million per quarter.

Does it answer your question?

Yes.

So about your second question, well, first, about your technology transfer...

Singapore.

Singapore, yes, sorry.

Singapore, Ang Mo Kio is the name of -- where the fab is located.

Well, clearly, they're on track.

They are really doing a fantastic job.

Of course, we know very well this fab, so there is absolutely no [longing], care, okay, from ST, okay, to take back, okay, this fab in our industrial footprint.

So they will be perfectly on track to continue to support us on our growth, both for STM32 low-power microcontroller and STM8 microcontroller.

So this is really a good news.

They are supporting us as well on some power discrete and Vertical Intelligent Power.

And this fab will be really instrumental, starting to support the overall revenue growth of ST starting Q4.

About our strategy to increase our, let's say, outsourcing for wafer fab, which currently are 20%.

Now as you know, we have decided to outsource now technologies for embedded flash.

180-nanometer is already done and engaged.

And we have decided 40-nanometer as well.

So let's say, all the program are agreed and the transfer have started.

And that will support ST medium-term growth in order to mitigate our capital expenditure.

And as I told you during my various address, again, to support our next 3-year growth, ST is not intent to add any additional infrastructures on top of the pilot line in Agrate.

And of course, I would also mention that we can add an additional capacity in Crolles, but within the current infrastructure.

So really, I am pleased to say that we are totally on track with our strategy to say ST internal manufacturing focus on proprietary processes, standard processes or advanced CMOS processes are totally outsourced.

And mixed processes, derivative processes from CMOS or power will be outsourced 50-50, with the flexibility to go up to 80 or to go down 30 according to the market situation.

So we are totally on track with this strategy.

The next question is from Andrew Gardiner from Barclays.

Just 2 quick ones.

Firstly, just some -- to try and address some of the cycle concerns a bit more.

I was wondering if you could make a comment on inventory levels you see through the channel, particularly at distribution, whether there's any change there.

And also, on the silicon carbide wins, you mentioned in Asia and Europe.

Can you explain where in the car these wins are?

Is it just charging?

Is it inverter?

Is it both?

Just a bit of detail around that would be helpful, if you can.

So thank you for your question.

So I am pleased to address the question to Marco Cassis.

So on the first question about the level of inventory in the channel, I have to say that, first of all, in Q2, we had high record level of sales through the distribution channel.

And this means that our level of inventory now is very healthy, less than 3 months.

And so we do not see any increase or a dangerous increase of inventory at distribution level.

For the silicon carbide, we cannot go too much in detail, but it is...

So usual subsystem.

Okay, you know that silicon carbide to power MOSFETs are instrumental between inverters and onboard charger, okay.

And at ST, we address all the subsystem of the electrical car.

The next question is from David Mulholland from UBS.

Just 2 quick questions.

Firstly, as you look into Q3, you made the comment that you expect sequential growth in automotive.

And I guess, typically, it can sometimes be a slightly softer quarter.

And in the last couple of months, given what's happening with new testing cycles and the tariffs, potentially, there have been some concerns what would happen from production.

So can you maybe just drill in a little bit to what's giving you the comfort that, sequentially, the Automotive business can grow?

And then, secondly, on the -- can you possibly comment on your bookings performance in Q2?

What was the book-to-bill in the quarter and how that broke down by division -- by product area, if possible?

So I take the first one, about automotive confidence level, and you take the second part?

Yes, okay.

Okay.

No, about the first one, we are really confident.

The demand is really strong on automotive, and again, whatever is the legacy part of the automotive application, so body, engine controls, braking, lighting, this kind of stuff.

And electrification of the car, as you know, is really booming and pushing, and connected car and ADAS as well.

As Lorenzo said a few minutes ago, we have prepared ourselves, okay, second half last year and first half this year, to support, okay, the growth with our capital expenditure.

So that's the reason why our capital expenditure, I confirm, will be in the range of $1.2 billion to $1.3 billion, but it's a bit front-loaded in order to prepare this growth of H2 on automotive.

So our confidence level is very high, okay, to see this end market and our ADG group to achieve a growth consistently, okay, with the overall objective of the company.

And coming to your question about book-to-bill.

This confidence is confirmed also from the order entry that we see in -- during the quarter, and we continue to see.

Our book-to-bill is above parity, it's quite above parity, 1.1.

So it is quite strong, I would say, definitely, in the area of ADG, in the area of power and discrete.

So we see actually a quite strong and healthy demand that has underlined that make us confident that in the third quarter, against the normal seasonality, we should see automotive really grow.

Can I maybe just follow up, and just specifically on the seasonality in the Q3, because guiding for growth sequentially in a quarter when normally a lot of the European customers' facilities take a bit of a break.

I know last year, you saw the ADG group up sequentially; but the 2 years prior, it's normally down.

So just specifically on Q3, what's different this year, and what's driving that?

Is it just the structural growth drivers coming through?

Or what's driving the adverse seasonality, as such, in Q3?

So it is clear that the fast growing and innovative application, the seasonality effect do not play, okay, because you are growing so fast that absolutely, okay, the carmaker and the Tier 1, they do not slow down their demand.

And then again, on the legacy, okay, we are really seeing, okay, a strong growth in the legacy because also simply, the pervasion of the semiconductor and electronic systems, so the content of semiconductor, especially, okay, with the smart switch, okay, enabled by our vertical integration power technology, are really moving.

So this year, we see a clear effect that, first, the silicon content increasing in the legacy offset a lot the seasonality effect.

And the fast-growing application definitively are totally offsetting the seasonality effect.

So that's the reason why we are in this position to confirm that, okay, on Q3 and H2 overall, we will see sequential growth on automotive, and the year-over-year growth for automotive completely align with the overall objective of the company.

The next question is from Stephane Houri from ODDO.

This is Stephane Houri from ODDO.

So I have 2 questions, if I may.

The first one is about the full year guidance that you have reiterated, from 14% to 17%.

I know it's a call for Q3, but when you look at what it can make for Q4, it gives you anywhere between 1% to 11% of sequential growth in Q4.

So if you could give us some more clarity on what you're seeing at the moment for Q4 would be very helpful.

And also, I have a question about the tax rate, which is particularly low at this moment.

So is there any explanation?

And what should we be looking at going forward?

So Lorenzo, you can address the tax rate.

Yes.

So maybe I take the one on the tax rate.

You know that you are right, our tax rate is quite low, but you have to consider that we have the use of the NOL.

That is substantially reducing significantly our tax rate.

This probably -- if you consider, let's say, our level of tax rate, ETR, once this NOL will be, let's say, exhausted, completely used, and this will be, looking forward, probably in the next year, it will be more in the range of 15%, 17%, our tax rate, the ETR.

For next year?

Next year, yes, probably yes, sometime next year, one that we will have.

And about the year-over-year growth guidance, now we confirm this guidance up to -- about 14% up to 17%.

Clearly, it is a result of the variable we control and variable, okay, we do not control.

Okay, I have a question a few minutes ago about the overall trade war and so on.

So today, we simply confirm that, okay, we don't see, okay, a weak signal for the market.

We are very confident to grow on automotive.

As anticipated, our personal electronic will grow in the second half.

We already show a strong growth on industrial.

We will have simply a seasonal effect on Q3.

But at this moment, okay, there is, let's say, no reason, okay, to lower this guidance.

And we confirm -- but we strongly confirm the guidance, okay, to grow the company year-over-year about 14% to 17%.

Okay.

And about the operating margin guidance improvement of 300 basis points, you talked about steady improvement.

But are you confirming the number, the 300 basis points?

Yes.

What we said at the Capital Market Day is that moving from H1 to H2, we -- and these are just something in the range of 360 basis point improvement in the operating margin.

Still, we are on track.

We work in order to get there.

And I think, at this stage, we still have this in our view.

So at the end, we confirm what we said a couple of months ago.

The next question is from Amit Harchandani from Citigroup.

Amit Harchandani from Citi.

Two, if I may.

My first question, again, comes back to the topic of near-term demand trend.

Could you maybe help us understand how the lead times have shaped up across different segments over the quarter?

Have they stabilized?

Are they coming down or they continue to stretch?

And in that context, I would appreciate your thoughts on how are you thinking about where we are in the semiconductor cycle.

What are the key variables you are looking at to gauge the sustainability of the demand, for example, on the industrial side or any of the end market?

So that would be my first question, and I have a follow-up.

Okay.

So thank you for your question.

So I am pleased to address to Marco Cassis.

So on the question about the lead time, what we see is that lead times are now stable, and our effort is in giving a good service to our end customers.

For the second part of the question, can you repeat?

It was on the variables of the cycle.

Is that correct, Amit?

Just in terms of how do you internally look at where we are in the cycle, the key variables you look at and what -- how does that give you confidence on sustainability of demand?

Today, the visibility that we have on our market in term of growth of the market is in the range of 7%, about 7% of the growth of our market in year 2018.

Next year, let's say, the last forecast in terms of growth of the market is at 5%.

Where we stand in the cycle?

We think that we -- so far, what we see is that we have a good and healthy demand, then difficult to say.

The projection are what I said, and we don't see signs for the time being of a really slowdown of the market.

So there is absolutely no weak signal about semiconductor market, at least on the end market we address.

So automotive, industrial, personal electronics, okay, this is a specific case with smartphone, showing us that something has happened.

So today, we are really fully concentrated, okay, to serve our customer at the best of their demand for automotive, which is -- where the demand is very, very strong; and for industrial where the demand is strong as well, driven by secular demand with the initiative, okay, for a better process control, better methods control, better facilities control.

So we confirm that automotive and industrial are showing secular demand in electronics.

And at this moment, we don't see any weak signals.

And just a, very quickly, unrelated follow-up.

Could you share your latest thoughts on M&A, please?

During, I think, earlier this month, you made a move for Draupner Graphics.

Just understanding how you're thinking about M&A at this stage.

Well, about M&A, well, clearly, okay, for the call, for this call, today, ST plan of record to drive the company in a sustainable, profitable growth, okay, our strategy is organic growth.

And we already said that we will make acquisition, a small acquisition in order to complete our strengths in STM32, in analog mainly.

And any of the results acquisition is exactly, okay, fitting with this strategy.

But about other M&A, well, as I told you, okay, during the Capital Market Day, the team of ST, myself, we are engaged, let's say, a strategic plan elaboration.

Okay.

And as I told you during the Capital Market Day, we will come back early next year.

And of course, M&A, okay, will be a subject we will cover.

But today, I would simply to confirm, we are totally focused on H2 execution, organic growth.

And definitively, we have acquired and we could acquire specific small IPs or companies in order to make us stronger.

The next question is from Francesco Previtera from Akros.

A question more general on [yields] and the possible tariff that can be imposed and distort the trade.

Can you have a general comment on this issue in respect with the position of STM?

The tariff.

In respect to this, I think Jean-Marc already touched this point in one of the answers before.

As we said, there are twofold.

One, on one side, the direct impact for our company about the tariffs.

This is, of course, something this is not nice to have because there is some impact even if this impact is quite -- the materiality of this impact is quite low because it's not really something that is significantly impacting us directly.

Of course, there is some concern, as I think everybody has, in a situation in which, let's say, there is this uncertainty.

So far, as we said, notwithstanding this uncertainty related to these, let's say, commercial wars, these kind of things, we don't see in our reference market any significant sign of -- but definitely, it's something that is not welcome in the sense that, at the end, that may create a turbulence in the business.

But so far, I confirm what was said since now.

For the moment, we don't see really any significant impact.

Demand in automotive is still stronger.

And for what concern our company, yes, there is some impact, but really, the materiality of this impact is very, very low.

The next question is from Guenther Hollfelder from Baader-Helvea.

Just one follow-up question on the automotive market and the seasonal -- above normal seasonality you're seeing in the quarter.

In Germany, there are some issues in car production with Volkswagen, Audi, also Mercedes-Benz, due to this WLTP new test process.

So I understand that you're not seeing any signs here for production cuts or postponements, or did you -- are you saying the net impact is positive as you have other growth which is offsetting this weakness, or aren't you seeing any weakness at all?

Marco will take this.

Again, we confirm that we do not see any slowdown or sign of weakness in automotive.

Actually, it's exactly the opposite.

The demand is extremely strong, and we are doing our best in order to cope with the requirements from the market.

So we confirm again that, absolutely, there is no sign of slowdown during Q3 in automotive.

Okay.

And maybe one follow-up question on silicon carbide.

You mentioned earlier or confirmed the $100 million sales level for 2018.

Can you help us to understand the breakdown of this business?

Can you say what's approximately automotive, what is renewables, what is industrial, including EV infrastructure, to get an idea?

For this year, it's fully automotive.

The next question is from Robert Sanders from Deutsche Bank.

Sorry to come back to the 2018 full year guide again.

But if you hit the midpoint of that guide, your year-on-year growth rate would come down to 7% in Q4.

Is there something about last year's Q4 that was unusually strong, for example, in automotive or industrial, that makes that quarter a tough comp?

And I have a follow-up.

Will you take it, Lorenzo?

Okay.

Yes, okay.

As we said, our guidance for the year is 14% -- between 14% and 17%.

If we will have this, let's say, amount is 9 quarters substantially, so at the end, the amount -- you have to remember that the last quarter -- the last -- in Q4 last year was a quite stronger quarter.

So at the end, I think that we will have in next quarter still a growth, still a significant growth.

You remember also that we said that we are struggling, let's say, with the level of CapEx between $1.2 billion and $1.3 billion to target somehow the high range of our -- the high end of our range, but fine, yes, at the end.

In Q4, we will see growth and we will see sequential growth, quite significant sequential growth.

And at the end, for the year, we confirm, we will be between 14%, 17%, and with the ambition to be maybe a little bit higher than the midpoint.

Great.

And just on microcontrollers, it looks like you're doing about mid-20s EBIT margins in that group, which is a great performance, substantially up year-on-year.

And this group now represents 40% of profits.

How do you see this -- the opportunity to grow your profitability further in microcontrollers maybe as the 32-bit mix rises or through production changes or die shrink?

No, I don't want to comment too much, okay, for sales, okay, 2018, okay.

What I can say, clearly, our microcontroller business is addressing a mix of industrial applications which are, let's say, for sure, based on our STM32.

But we address as well some personal electronic application.

So overall, clearly, the gross margin is a result of the manufacturing efficiency and this end market and product mix.

But then you know that microcontroller supply chain is based on the well-balanced internal and external manufacturing.

Okay?

Today, we are clearly close to 50-50, 50% internal, 50% external.

So 50% internal, as Lorenzo said, we have already done great achievement.

We have still opportunity of continuous improvement, but certainly, not at the same pace than in the past few quarters because now, our manufacturing is fully loaded.

And then, okay, for the external manufacturing, definitively, it is a link, okay, to the wafer price cost decrease, okay, we will have.

So overall, this is the key ingredient mix between industrial, which are very strong where we want to focus both, okay, addressing OEM and through strong distribution channel; personal electronics as well, but being very selective; and manufacturing will continuously improve both internal and external.

But certainly, internal, not okay achieving breakthrough, as we have done during the past few quarters.

So this is a level, okay, we are considering to foresee our gross margin improvement on microcontroller.

Also, definitively, you know that we are today completing our portfolio of STM32 with industrial microprocessor.

And clearly, okay, for the future, it will also be a booster consideration, okay, for our gross margin.

The next question is from Lee Simpson from Stifel.

Three quick ones, if I could.

Just trying to get a handle on the importance of packaging or packaging advantages you may have in silicon carbide, particularly for autos, as rivals seem to be dismissing the need for any new packaging technologies.

Second question, I just want to clarify, did you say that the inventories reduce in absolute terms in Q3 and Q4, or we just see the [DIOs] come in a little?

And then the third question, it looks -- when you certainly scanned the CdS space in smartphones that the market is now pivoting much more to stereo vision.

And we just wondered if that's a trend that you could play into, or if that was running counter to your normal Time-of-Flight focus?

So thank you for your 3 questions.

So Lorenzo will answer the inventory one, and I will answer silicon carbide and the 3D depth of field.

I go straight on the inventory then.

I assume that you are referring to our inventory, right, and not in the channel, the inventory -- ST inventory?

Correct?

That's right.

Yes.

What we see that -- as we said, we prepare the growth for the second half.

So in Q1 and, in particular, in Q3, there was quite significant increase in inventory.

What we do expect is that we will increase in Q3 definitely the turns, so reduce significantly the number of days of inventory.

We do not foresee significantly a -- significant reduction, let's say, in the absolute value of the inventory in Q3.

While in Q4, we do expect to have some reduction.

So coming back to silicon carbide, it is clear that for the application we address, so inverters and on more charger, the module -- the package is a critical enabler.

But simply ST, we apply our strategy.

We have the capability to design by ourself custom-design power modules and to enable, let's say, competitive silicon carbide power MOSFET.

So this is what we have done, and we are going now with the success, okay, I shared with you a few minutes ago.

Then if we address other application, and I repeat today, we have 25 projects, and 85 -- 55% are on silicon carbide.

And here, you have various situation.

It's either custom-designed module or solar package, solar module.

If it is solar package and module, we use OSAT.

So generally speaking, [we ourself].

If it is custom-design power module, we are doing by ourself.

So you have all kinds of configuration, and this is simply, okay, our strategy.

About 3D sensing, about 3D sensing, okay, clearly, we follow what we consider, let's say, our roadmap.

So you know that ST, we address proximity ranging sensor.

But clearly, Time-of-Flight technology, which is based on what we call SPAD, so single-photon avalanche diode, okay, clearly, the area of focus of ourself.

And here, we have accumulated millions and millions of PCs, and we will continue to address successfully this market.

Then on depth 3D sensing.

You know and it is not a secret that ST has been a key supplier or pathfinder of the structured light.

We have a roadmap.

We have all the technology blocks.

We have all the capability to continue to sustain successfully a customer who would like to continue on structured light or to adopt structured light.

And here, again, in structured light or part of the structured light is a component using Time-of-Flight.

So there is a total synergy between the structured light and the Time-of-Flight of proximity imaging sensor.

Now, okay, still on front-facing.

We know that in the near future, some solution could encompass Time-of-Flight, part of the subsystem, taking place of subcomponent of the structured light.

ST is ready.

So we will address this market as well, whatever is on the weight-base smartphone or other operating system.

And then for [war spacing], we know that the critical enabler is Time-of-Flight.

And again here, we are adequate for that to support.

So we are convinced about that, and we are following our conviction.

And we will be and we are already successful on this format.

The next question is from Adithya Metuku from Bank of America.

I have 3 questions.

Firstly, just on the Automotive group revenues across the board, can you confirm what was the growth rate in the quarter, not just in ADG, but across the group as a whole?

Then secondly, on silicon carbide, there've been some news flow that Tesla is asking for price cut to their suppliers.

So how do you see this impacting you going forward?

And more generally, when you look at the silicon carbide market, can you give us some color on any pricing changes that you're seeing in this market?

And finally, just on -- as a follow-up to a question on modules earlier.

You said that you're working with partners on standard modules and you're designing your own custom modules.

So how is this different to your -- to what happened with high-g modules?

I remember 4 or 5 years ago, you were trying to get into this space.

You didn't really have a lot of traction there.

So why do you think this time it will be different?

Well, I take some questions, and Lorenzo will take the question about the growth.

Growth?

Yes, yes.

Well, on module, for the -- your last question, okay, well, clearly, here, we have a key differentiating factor in the silicon carbide because I repeat today, ST is a unique supplier, able to produce mass production on silicon carbide.

So we consume, okay, about 60% of the worldwide supply chain of raw material silicon carbide.

Clearly, the key enabler in our success with a power module using silicon carbide is the silicon carbide technology.

And as we have the capability to make modules, custom-designed, okay, both of them make our success.

So -- and in the future, we aim to continue with the same determination.

But then, I am very sorry, but I absolutely cannot and does not want to comment any commercial discussion or transaction, okay, about price with our customers.

Okay?

It's totally out of our, let's say, habit to do it.

And then, okay, on the silicon carbide price.

More than, let's say, a general statement, okay, you know this technology is an innovative one.

You know this technology is growing very fast.

All the actors worldwide have to invest important amount of CapEx to support the growth.

And clearly, all the actors worldwide will participate to this huge market because, again, we are -- I am convinced it will be a game-changer.

We have our mind that, okay, the price will be -- go down according the usual roadmap to support automotive and industrial market.

So there is nothing new here.

It is clearly in a world, let's say, medium, long-term roadmap for silicon carbide.

About the short term, okay, I do not want to comment.

In respect to the last question, if I well understood that the question was about our trend of sales in automotive overall.

As you know, we have revenues in automotive, not only in ADG group, but is across other groups inside the company, both in AMS and in MDG.

What we saw -- when we see, let's say, today, in the first half of the year, our growth was in the range of 17% year-over-year, H1 2018 compared to H1 2017.

What we expect is to be substantially the same level for H2, even slightly improving.

So it means that for the full year, we see a growth that will be higher than the average of the growth of the company.

Definitely, we'll be on the high side of our range, 17%, slightly above.

Automotive is strong.

17% in automotive, did I hear you correctly?

Yes.

Overall, let's say, including all the sale in automotive in all the groups.

Yes, understood.

And just a quick follow-up to Jean-Marc.

So on SiC MOSFET, you said that is the main advantage for you at this point.

Can you give us some idea as to where your advantages are coming in the MOSFET space?

Is it -- just any color there would be helpful.

For silicon carbide?

Yes.

Well, for silicon carbide, today, in production, it is, let's say, we start with diodes, then we have MOSFET, so this is a second generation.

So we have adopted, okay, a technology architecture which, let's say, help us to go very fast on the market.

And we have cooperated, okay, with an important partner in order to introduce the technology very fast.

So clearly, now we're accumulating a know-how and a learning curve, which definitively is providing a competitive advantage of ST, first, to develop the third generation, okay, with trench and to be able to introduce soon, okay, this third generation in production.

So I say our, let's say, main competitive advantage is based on the fact that we have taken -- we have developed and worked on innovation since a long time on silicon carbide.

We have taken the risk to introduce very early in the market, thanks to our cooperation with an important partner.

And now we are ramping up successfully because you know ST's at the AGM, okay, so we have manufacturing capability well-recognized.

We have the capability to fix very fast, okay, all the extrinsic or intrinsic issues we can face.

And now, okay, our control of the technology is really state-of-the-art, so we are pushing.

And this, let's say, early adopter and pathfinder attitude make ST now in the stronger position compared to the competition.

Today's last question is from Gianmarco Bonacina from Equita.

Just a quick final question.

In terms of the OpEx, just to confirm if I understood correctly.

So you will have about 10 -- you had about $10 million of one-off cost in Q2, and you will also have about $10 million one-off OpEx cost in Q3.

So for the year, when we model for 2019, we should consider, I think, 2018, you had about $20 million of costs which are kind of nonrecurring in nature.

Is that right?

Just to clarify.

When I was commenting Q2 net expenses, yes, we have something in the range of $10 million, so that is not recurrent.

When I was commenting Q3, I said that in Q3, we have, let's say, salary increase.

That, of course, is -- every year, it happens.

We have, let's say, a one-time expense related to the social charges, so unvested share.

It means that these are the yearly expenses that happen in Q3.

So it's something that is recurrent every year, but in Q3, let's say, and this is significant.

And what I said is that we expect to have expenses in Q3 in the range of $615 million, $620 million, similar expenses in Q4.

Okay.

So this should be considered a kind of run rate?

Yes, we will agree in that.

Thank you, Gianmarco.

At this point, we'll go ahead and conclude our Q2 2018 earnings.

Thank you.

Thank you.

Thank you.

Ladies and gentlemen, the conference is now over.

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Goodbye.