意法半導體 (STM) 2018 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the third quarter 2018 earnings release conference call and live webcast.

I am Moira, the Chorus Call operator.

(Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Ms. Tait Sorensen, Group Vice President, Investor Relations.

Please go ahead, sir.

Good morning.

Thank you, everyone, for joining our third 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 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 now like to turn the call over to Jean-Marc, ST's President and CEO.

So thank you, Tait.

Good morning, everybody, and thank you for joining ST on our earning calls today.

So let me begin with some high-level comments.

ST is on track to deliver a year of strong growth in revenues, operating profitability and earnings per share.

We are focused on driving sustainable profitable growth, and our third quarter is another step forward in our progress.

Importantly, revenue growth and operating leverage are translating into expansion of profitability.

Based upon our results and outlook, we anticipate net revenues in 2018 to grow about 16% at the midpoint.

This means we are outpacing the 2018 growth of the market we serve, in line with our expectations that we shared with you at our Capital Market Day back in May.

Now let's move to our financial highlights.

We had a very good third quarter.

Our results were very much as expected, and we see a solid fourth quarter ahead of us.

Third quarter net revenues increased 18% year-over-year, a strong growth for imaging, power discrete and automotive products.

On a sequential basis, ST's revenues increased 11.2%, 120 basis points above the midpoint of our guidance on higher-than-expected sales of imaging products.

Our gross profit increased by about 19% year-over-year to over $1 billion.

On a sequential basis, gross profit increased by about 10%.

Gross margin was 39.8%, 20 basis point above the year-ago period.

Net operating expenses came in at $605 million.

Operating income, operating margin and net income all grew substantially, both year-over-year and sequentially.

The increase in profitability translated into strong growth in our net cash from operating activities, which was up over 18% on a trailing 12-month basis to almost $1.8 billion.

Our free cash flow in the quarter was $114 million, back to a positive level compared to the second quarter, as we had expected.

For the first 9 months, free cash flow was $170 million, comparing favorably with our cash dividends year-to-date of $162 million.

I confirm that we will have a positive free cash flow for the fourth quarter much higher than our dividend and that we will exit 2018 with a higher net cash position compared to 2017.

Now let's look at our results by product group, beginning with our Analog, MEMS and Sensors Group.

During Q3, AMS revenues reached $899 million, an increase year-over-year of 36.7% on triple-digit growth in imaging and growth in analog and MEMS.

AMS operating profit grew about 82% to $157 million and its operating margins extended over 400 basis points to 17.5%.

For AMS, we had anticipated second half 2018 operating margins to move into the mid-teens as we benefit from revenue leverage, specifically from smartphone applications.

In Q3, we exceeded that operating margin target.

Moving to our Automotive and Discrete Group.

ADG's revenue increased 16.3%, just above $900 million, on growth in both Automotive and Power Discrete.

ADG's operating profit increased 36.2% to $116 million.

Its operating margin increased year-over-year to 12.8% from 10.9%.

For ADG, we had anticipated second half 2018 operating margins to move into the low teens.

Indeed, we made good progress in Q3.

As you know, other ST organizations also serve the automotive market.

Overall demand for our automotive product continue to be strong, and we confirm that we expect ST's Automotive business to grow above the company average for 2018 at about 17% year-over-year.

Finishing our product group discussion with Microcontroller and Digital ICs group.

MDG's revenues increased 2.5% year-over-year.

On a sequential basis, revenues decreased 8.1%.

As we have anticipated early in September, we have seen a softening of the market in China.

This, coupled with shorter lead time in microcontrollers, translated into some inventory correction.

MDG's operating income was $119 million in the third quarter, representing an operating margin of 16.6% compared to 18% in the year-ago period.

This was principally due to less favorable mix between microcontrollers and other products.

On a year-to-date basis, all product groups are well balanced and posted double-digit revenue growth.

Operating margin for all the product groups improved on the first 9-month basis compared to the year-ago period.

This brings me to our performance in the 4 end markets we serve.

A common theme across these markets is our capability to introduce and ramp innovative products, often based on ST proprietary technologies and often first to market.

Our ability to have the right products available in high volumes translates into long-lasting customer relationships and ultimately translates into long-lasting growing revenues.

Recent examples include our success in imaging and in silicon carbide.

Our coverage in automotive is very broad.

We have an offer for most of the car electronic applications where the silicon content continue to grow much faster than car units.

We have 2 areas of particular focus.

The first is car electrification.

Here, we continue to win designs with our silicon carbide products for onboard chargers as well as charging station applications.

As you know, silicon carbide is a strategic priority for ST and our aim is to be the leader here.

We are well positioned.

Together with industry leaders along the supply chain, we bring radical innovation to the automotive market.

As a consequence, we are now working on more than 30 silicon carbide projects across the world with carmakers and Tier 1 suppliers.

We are ready to capture an important part of this market, which is estimated to be about $3 billion in 2025.

The second area is autonomous driving where we won a power management slot for 77-gigahertz radar system.

Our business in automotive sensors, a key component of autonomous car, also continued with positive momentum this quarter with a number of new wins.

Another strategic area for us, industrial with tens of thousand of customers and hundreds of applications where we offer leading-edge products, complemented with our system solution approach.

We sell products from all our portfolio such as power and analog, microcontrollers, sensors and connectivity.

Some examples of applications behind the design wins this quarter include logistics tracking, industrial lighting, washing machines, medical power supplies, factory automation, predictive maintenance, metering and solar panel.

In personal electronics, our main focus is on smartphones where we push to increase content per device.

During the quarter, we had a number of design wins with our Time-of-Flight sensors, motion sensors, power management ICs and low-voltage motor drivers.

We also began ramping production of 2 new products in secure MCUs with a new embedded SIM program at a top smartphone manufacturer and in imaging with a new generation of ambient light sensor for a major player.

We also had success in smartwatches with sensors and our ultra-low-power microcontroller.

In communication equipment, computers and peripherals, we leverage our in-house processes on very specific application areas.

During the quarter, we won a design with our BiCMOS technology for an RF chip for cellular base station infrastructure as well as a socket inside a power subsystem for 5G networking equipment with our BCD technology.

We also won multiple sockets for computer power management using a combination of our BCD and VIPower technologies.

Now let's move to our Q4 outlook.

In the fourth quarter, we expect net revenues to increase about 5.7% sequentially, translating into year-over-year growth of about 8% at the midpoint.

The key driver of our sales growth sequentially will continue to come from Imaging, Automotive and Power Discrete while Microcontrollers will still face tough market conditions in China and some inventory correction.

We anticipate a gross margin of about 39.8% at the midpoint.

In term of operating margin, we are overall on track with our second half 2018 target just with slight differences in term of product group dynamics.

For ADG, we confirm the low-teen operating margin target.

For MDG, the product group is performing below expectations due to the less favorable mix between microcontrollers and other products.

Therefore, we expect an operating margin in the second half similar to the results in Q3.

For AMS, the product group is performing above expectations, moving toward the high teens.

So we see sequential improvement for our gross profit, operating income and margin and for net income.

Based on this outlook, we expect our full year 2018 revenues to grow about 16% over last year.

Importantly, this revenue growth will come with substantial improvements in our profitability at the operating and bottom line.

We are now available to answer to your questions.

(Operator Instructions) The first question is from Stephane Houri from ODDO.

I guess my first question would be about your feeling about the end demand in the market because everybody is worried that there is deflation in the market.

Yesterday -- last night, Texas Instruments did confirm that there was some slowdown in the markets.

So could you drive us through your different businesses and tell us what you see?

If I remember well, last time, you talked -- publicly, you talked about some weakness at distributors in China.

Could you be a bit more specific on the different markets you serve?

Jean-Marc speaking.

So let's look at the demand and the booking.

Well, about the demand, more clearly, our industrial OEM, the demand is solid.

In Automotive, very strong.

The backlog is really very strong, and you know that, okay, some areas we are still, okay, seeing some shortage, so we have a strong backlog in Automotive.

The new phone platform, customer demand is well on track with our current visibility.

And I confirm that the China mass market is softening, so we are seeing, okay, a POS flattening.

And of course, okay, when you have specifically in China this kind of softening, acknowledging that the lead time of our microcontroller are shortening.

More clearly, we see it is not more a reaction and some slight inventory correction.

So this is overall what we see in term of demand.

In term of booking, which is, let's say, providing a kind of dynamic, well, in Q3, the level of booking was good, but it was less strong than the first half of this year.

Again, except Automotive and Power Discrete where again the supply chain is still stretched with really some shortage.

But the reason of this overall, let's say, booking less strong than H1 is again now we see, and this is what I said late August, early September, it is clean from inventory replenishment and acknowledge some shorter lead time on some device, okay, especially microcontroller.

And again, we are seeing on the China mass market a market softening, and especially for microcontroller.

So this is the color I can give to you for markets ST address.

Okay.

And I know it's very early, but can you tell us or share with us what you start to see for -- as dynamic for 2019?

Now the dynamic we are seeing, this is the one I just shared with you a few second ago.

The next question is from Aleksander Peterc from Societe Generale.

I'd just like to come back a little bit on this microcontroller slowdown, particularly in China.

Could you perhaps share with us which industries in particular or which end markets are seeing a slowing?

And also, is this just a kind of a couple of quarters at worst a slowdown here?

Or is there anything more serious brewing?

The end market and I then certainly I will ask Marco to complement.

End market addressed with distribution channel is basically mainly industrial, but you know is quite wide, okay, from a white goods consumer, industrial, drones, this kind of stuff.

We also see some automotive commodities aftermarket.

So this is basically in term of end market after the distribution channel, the one which are showing some sign of softening.

So Marco, you want to...

Yes, I will add just a little bit of color.

What we have seen is different from the quarter before.

We have seen the POS flattening.

Let me underline that year-over-year still we have the double-digit growth, but the POS has been -- is growing mainly due to the fact that the end markets are a little bit cautious, and due to that, we have a kind of inventory correction.

But overall, in the channel, we have a level of inventory, which is still healthy, under 3 months, except, of course, the combination of effect of short lead time and inventory replenishment plus POS now in China not growing, but staying flat.

So overall, I think the situation is under control and we have again some softening, but nothing extremely particular.

Okay.

Can I just have a quick follow-up on the smartphone demand there.

Obviously, you had a strong third quarter.

And so going into the fourth quarter build, on the smartphone side, you see demand being stronger than expected or even a bit better perhaps?

No.

This is what I said, with the strong visibility we have, the customer demand for the new phone platform are really well aligned with our expectation.

And as you know, our supply chain is very robust and is able to fulfill this customer demand.

The next question is from Jerome Ramel from Exane BNP Paribas.

Just a question on the inventory correction you are seeing.

To the best you can see, how long do you think it will take to see lead time to get back to normal and to get a kind of inventory level where this should be in the supply chain?

And I've got a follow-up.

Jerome, okay, this is what I say in a while, too.

Okay, so we will grow 5.7% sequentially, 8% year-over-year, so overall 16%.

And we see that, in Q4, we still see some inventory adjustment for microcontroller.

More often, it's mechanical.

It will depend on the dynamic in 2019 and the POS and it's very mechanical, okay?

So I think it's early to say.

Do you follow, Jerome?

Yes.

How should we model the OpEx for Q4?

Lorenzo speaking.

How to model the OpEx for Q4?

Firstly, in Q3, our OpEx came a little bit lower than expected.

If you remember, entering in Q3, I was modeling OpEx in the range of $615 million, $620 million.

Actually, the actual Q3 came at $605 million.

This is lower than expected.

This is mainly due to seasonal effect that was better than planned -- than anticipated.

In Q4, we expect some increase compared to Q3.

This increase is mainly due to longer quarter and some unfavorable effect of the seasonality.

Anyway, I confirm substantially what I said entering in Q3 that in the second half, in average, between Q3 and Q4, expenses will stay in the range of $615 million and $620 million as average.

So it means that, with some lower expenses in Q3, a little bit higher expenses in Q4, but the average per quarter in the second half will be in that range.

The next question is from Sandeep Deshpande from JPMorgan.

Two questions, if I may.

Firstly, Jean-Marc, I mean, in terms of the end market, I mean there are various worries about the end market in the auto space as such, for instance.

I mean you are saying that you are going to grow more than your overall growth in 2018 in the auto market.

Do you have visibility into 2019 in terms of the auto growth?

Is there where you're going to see weakness?

Or is it that you do not see that cuts coming through in the supply chain at all at this point?

And the second question I have is regarding your gross margin guidance into the fourth quarter.

I mean, you've got revenue growing significantly from the first -- from third quarter to the fourth quarter.

Probably just a lot of that incremental revenue has to do with imaging and a bunch of that imaging is built in your own factories.

Given the visibility in your own factories, why are you not seeing an improvement in the gross margin from Q3 to Q4?

Or are there some other impacts there?

So I will take the first question and Lorenzo the second one.

Well, Sandeep, I confirm that, okay, on automotive, we still see a very strong and healthy demand and we have basically no significant impact from carmakers and Tier 1 recent announcement.

Absolutely no material impact.

Our backlog is very strong.

We have a very, let's say, good visibility across the next quarter.

So that's the reason why we are very confident in automotive.

As I said, this year, we will grow better than the company average.

I also disclosed that, okay, on the retail market, okay, for infotainment, in China, we see some little -- softer, but it's really to be transparent among ourselves.

The supply chain is really still is pressured for many component and many technologies.

So as a takeaway, the dynamic for Automotive for ST is really strong and we are confident with our capability to continue to grow on a sustainable way.

About gross margin.

About the gross margin, you saw that, in the Q3, our gross margin came at 39.8%, 20 basis points lower than our midpoint.

This was mainly impacted by different weight in the product group mix in term of revenues.

What we see moving from Q3 to Q4, the drivers in the revenue will be definitely our Imaging, Sensors, together with Automotive and Power and Discrete.

In this respect, we do not see significant improvement moving from Q3 to Q4 in the gross margin where the manufacturing efficiency substantially will offset the decline, the normal price pressure that we see.

So at the end there, we model a gross margin that will remain flat moving from Q3 to Q4.

The next question is from David Mulholland from UBS.

Just going back on the commentary you gave on bookings.

I wondered if you could just quantify what the actual book-to-bill in the quarter was.

I think, in Q2, you'd said it was 1.1.

And then just, secondly, as you've progressed through October, you've already said a few times you haven't seen any kind of impact in autos.

But do you have any thoughts at this stage?

Obviously, it also depends on what happens in Imaging, but how we should think about kind of seasonality in the business as we head into Q1?

Would be really helpful just to have some understanding of that at this point.

On booking, I will answer.

As Jean-Marc already said, we still saw a very good level -- a good level of bookings in Q3 even if it was less strong than before.

Because as already said, it's clean of the inventory replenishment effect and our customers acknowledged that we have shorter lead time than previous quarter.

So we stay positive on the revenues evolution for the years, and this is the booking evolution that we see during Q3.

So David...

I'm going to get a quantification of that as in more than 1.0 book-to-bill or 0.9 book-to-bill in Q3 or...

Book-to-bill, I can answer it.

Book-to-bill in the third quarter was below parity.

Was above parity in -- and this is mainly driven by a low level of our book-to-bill in the area of the microcontroller and as well we are explaining before, especially in China.

So we are slightly below the parity.

So David, on your second question was, did I read it right, Imaging seasonality?

Was that correct?

Well, I guess, mainly overall seasonality, but I assume a lot of that is going to be driven by Imaging.

So just some idea on how you're thinking about seasonality into Q1, but I suspect one of the big drivers will obviously be Imaging.

No, as usual, okay, we do not want to share, okay, what we see in Q1 because, okay, remember what happened this year.

Okay, it's really, okay, useless to give a number.

We will see, okay, like December or early January what will be, okay, our Q1 visibility.

We take lesson from this year.

So we'll tell you in 3 months, David.

The next question is from Johannes Schaller from Deutsche Bank.

The first one, just some of your competitors in power have talked about better pricing developments quite a little bit over the last few months because of the ongoing supply shortage.

So I was just wondering if you could give us a bit of an update on what you're seeing on the pricing side in power.

And I also I do have a follow-up.

Yes, I can confirm -- this is Marco speaking.

I can confirm that due to the strike situation on the supply in power, we can confirm that we see upside on the price levels.

And is that something that will gradually come through over the next quarters?

Or is that already mostly in the run rate?

It will come in the next quarters.

Okay.

And as a follow-up, I mean, you talked about the microcontroller weakness in China.

Could you give us a bit of a sense what you see for some of the other end markets for STM32 and the MDG business more broadly, so outside of China?

U.S. and Europe.

Yes.

I think, in Europe, there was the seasonality due to the -- during Q3 during the summer vacation, let's say.

But we do not see -- so there was some slowing there.

But the major problem that we see on MCU is also due to the size of the business that we have in China is mainly related to China.

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

Maybe you can help us with your Q4 revenue guide by division.

Clearly, AMS is going to be up quite a bit.

What do you expect both ADG and MDG to be up or down sequentially?

And then also what levers can you pull, either via slowing wafer starts?

And in CapEx for 2019, any thoughts on if things continue to be softer, what levers can you pull to help try to keep gross margins intact?

About the revenue dynamic in Q4, what we do expect is that to -- as what I was saying before, definitely AMS will be the driver of the growth and that will be followed by ADG where we see strong demand both in Automotive and in Power and Discrete.

What we see for -- sorry, for ADG, Automotive and Power and Discrete.

What we see for MDG, the Microcontroller and Digital, we see some slight decline, but at much lower pace in respect what it has been sequentially moving from Q2 to Q3.

We see -- we continue to see weakness in the -- as we said, in the distribution market in China, but at this stage, we do not think that it will be a stronger decline.

There will be still a decline in any case.

Definitely, Imaging is driving our revenue next quarter.

Automotive and Power and Discrete are contributing to the growth.

Second question was about the level of CapEx for this year, right?

And gross margin levers, levers to keep gross margin.

Let's say in term of gross margin, what we said that we are guiding in term of to stay at 39.8% in Q4.

And as we said, this level of gross margin will be -- we will be around 40% in the few quarters, I think, with the up and down depending also on the seasonality.

In respect to the CapEx, we do expect for 2018 to be in the range of $1.25 billion.

The next question is from Achal Sultania from Crédit Suisse.

Just a question on -- so I guess, like when I look at last year, we had the same situation in Microcontroller where the lead times were exceptionally long and you had very strong growth in Microcontrollers.

And now we are exactly seeing the same situation in Power Discrete where you're still saying that the market being soft, lead times are still stretching or very high.

So can you help us understand what gives the confidence that we go into '19 and Power Discrete we don't see a similar situation evolving what we saw with Microcontrollers this year, like any drivers just to help us to understand what's different, maybe just longer lead times, longer-duration projects.

Anything around those would be helpful.

We -- again, sorry, we are not commenting on '19.

We are focusing on Q4 and I think you have all the information about what are going to be our growth driver for Q4, which are again Automotive, Power and Discrete and Imaging.

Yes, but my point was like what -- like how should we think about Power and Discrete and how is it different versus MCU going forward?

Like obviously, I'm not telling you to guide for 2019, but how should we think about that business like -- and what's different versus MCU?

In this moment, we still see a very strong demand plus we have a strong positioning in new technologies like silicon carbide.

So I think the overall position of our offer to the market is extremely appealing and it is supported by a very strong backlog.

While in MCU, as you said, we enjoyed a very strong first half.

Unfortunately, the overall situation of China has driven to a POS that has not been developing as expected, which has created the necessity of an inventory correction that we do believe is temporary and will go back in the near future to growth.

And also, we cannot -- the Power Discrete are well spread across all the end market we address.

So as Marco said, for sure, the electrification of the vehicle is growing now very fast, so -- and is a secular demand in power.

So industrial, clearly, everywhere you have electrical motor, okay, you have power or you have power all around.

But also, in personal electronics around charger, in computer with power supply, in computer peripheral, okay, also we have said in autonomous driving.

So really, there is a difference, okay, between power that, okay, the spread of this device, of course, all the end market is very wide and with very strong growth driver like the electrification of the vehicle.

So this is, okay, what I can share with you now.

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

Two questions.

Firstly, I just wanted to hear your views on POS demand in China.

When you look at this demand, can you give us some color on how it compares to what you saw in late 2015 or maybe in early 2013?

I'm trying to get a sense for how this could play out as you look out into 2019.

And then, secondly, question is -- second question is for Lorenzo.

Just on OpEx trends into 2019 given where FX is and the hedging you have in place, any color you can provide on that would be very helpful.

I will take these.

I do not have the numbers here, but just to give you an overall picture.

We are coming from many quarters of POS sequential growth.

What is changing in China now is that we see a flattening of these POS.

So the POS are, in this moment, not growing anymore.

And this is, again, linked to the -- due to this, again, the inventory grew according to a forecasted POS, which is not materializing with -- calling for an inventory correction, which is ongoing -- which was ongoing strongly in Q3 and still ongoing in Q4.

About expenses, in term of expenses, as you know, we have already commented sometime that we believe that the structure of the company has today substantially suitable for the ambition in term of growth that we want to have.

So I do not expect to have a significant increase apart the impact of the normal inflation, salary increase.

In respect to your question on the exchange rate, definitely, if the spot rate will remain in the range of 1.16, 1.15, today, our effective is more in the range of 1.18.

This will give us some benefit.

So all these put together, I would say that expenses should stay substantially flat to slightly increasing in the next year.

Understood, very clear.

Just -- if I could, just a quick follow-up on POS demand.

I mean, when you look at it, do you ever compare internally on what this looks like versus 2015 or 2013?

And if you do, any color you can provide around that?

Apologies for belaboring this point.

The difference between what we are seeing in 2015.

Well, here, I think, okay, many important point.

It is, clearly, we can call it a softening or deceleration because we are -- the POS overall year-over-year is still growing 10%, which is important.

So 10% growth year-over-year.

Now we are seeing in Q3 a POS flattening.

And again, for ST, the mechanical impact, some slight inventory correction.

So our revenue are slightly below that, the reason why Microcontroller, MDG, we decreased minus 8%.

So what we can describe is the current situation.

Current situation is a soft deceleration, still good growth year-over-year, but a sequential flattening of the POS.

We saw mechanical adjustment in term of inventory replenishment or adjustment, which is, for us, back to normal situation and no more than that.

So this is the main difference compared to 2015.

The next question is from Andrew Gardiner from Barclays.

I had another one on the automotive space, please.

This is sort of normally the time of year when you'd be having discussions with the OEMs and the Tier 1s about their plans for next year.

Given what -- at least what the investment community clearly is concerned about in terms of the automotive space, can you give any sort of further detail sort of qualitatively on expectations from those partners in terms of volume and content and price into next year?

You've already commented that pricing, particularly on the power area, is a little bit better.

But some of those other levers on the Automotive revenue line into next year would be helpful.

I understand your question, but I guess you understand that this is really difficult for me.

I cannot disclose, okay, the meeting we had at sales level or at my level with Tier 1 Europe and in U.S. Again, what I really want to confirm to you that our current visibility is really, really good per mention in the semiconductor content in car is increasing tremendously and for sure, will, let's say, offset completely some slight adjustment in term of car unit.

So as a consequence, the forecast demand provided from the Tier 1 are totally consistent with this visibility.

And we see in front of us in our end a strong backlog and a very strong pipeline of new product coming within the planning horizon of product development.

Now about the price negotiation and so on, okay, I'm sorry I must not comment.

I'm very sorry for that.

Understood, I had to try.

Just perhaps another one on silicon carbide.

You mentioned a few wins in the recent quarter.

Can you give us a better sense as to when those might start to ship?

I presume it's not next year, but in terms of 2020, '21, sort of how you're thinking about the ramp over time.

Now this is clearly with the usual product development, lead time and incubation, okay, it will be more impact on 2020 and beyond for ST.

But for the time being, I confirm that, this year, we will execute and we will achieve our USD 100 million revenue from silicon carbide.

Our manufacturing machine is performing well, according expectation.

And these turnkey projects are simply consistent with our ambition to be a leader of the silicon carbide market.

And we know that with this market, we'll grow very fast.

Okay, for the time being, we have visibility to see USD 3 billion in 2025 and we want to perform this market consistently with our current market share, generally speaking, Automotive, well above 30%.

The next question is from Janardan Menon from Liberum.

I'm sorry, I just want to go back to this POS distribution channel for Microcontrollers.

So if I understand you right, you are saying that your POS has flattened since around August, September and continues to be flat whereas you had expected growth.

But you're guiding up for an 8% fall quarter-on-quarter in Q3, you're guiding to a lower level of a decline in Q4, and that's because the channel cleared more inventory in Q3 and now you think that there is less inventory to be cleared in Q4 and therefore the decline into Q4 will be less than Q3.

Is that understanding correct?

Yes, you are correct plus you have to consider the lead times are also shortening, so we'll add some terms coming during the quarter.

Okay.

And what gives you that confidence that the further correction of inventory in the channel in Q4 is going to be less than Q3.

What visibility do you have as to how low the channel wanted -- would want to take down inventories in the current face of demand?

It's a visibility that we do have because we are on the field.

And second is, again, it's mechanically the level of inventory has been down to a more reasonable level consistent with the growth we have.

So we have a turn of inventory slightly above 4. It means, okay, below 3 months of stock overall, so which we consider, let's say, something close to normal.

So that's the reason why, okay, we consider the inventory adjustment in Q4 will be well below the one we faced in Q3.

Understood.

And just going to the sensing business.

Can you just give us an update on what you're seeing in 3D sensing design wins and how you would expect that market to evolve for you outside of the big ramp that you have in the second half of this year?

Well, clearly, I repeat, for ST, there is today short, medium term, really 2 kinds of market we are really leading is proximity sensing and a ranging sensor based on our, let's say, Time-of-Flight technology.

So we have accumulated hundred of million pieces shipped.

And here, we continue to really perform well and we will continue to perform.

Then, I guess, it is very clear for everybody now, okay, ST is really focusing on the structured light and the key component part of the bill of material of the structured light, okay, working very closely with our customer.

And we want to improve continuously the performance of this system through our component -- through the performance of our component and we are really focusing on it, and we have really a strong ambition to continue to perform as we have done in the recent past quarter.

Saying that, we can also offer more component part of the structured light.

As I mentioned a few minutes ago, as you have seen, we have a wonderful case on ambient light sensor, which is really a good performance.

I am very, very pleased about that.

So now ST is positioning itself as a strong competitor on ambient light sensing, and ambient light sensing is part of the bill of material of structured light.

So we will also have the ambition to have more content in the structured light.

Then coming to the real sensing, more certainly, here, you know that the winning architecture is certainly embedded on Time-of-Flight, either indirect or direct Time-of-Flight.

We have a stronger, let's say, hallmark to address all the market whatever is on the win market or other operating system.

And here, we see more, let's say, ramping business opportunities second half 2020 and beyond.

And ST, we are targeting, okay, to participate this market timely with this perspective.

Just one small follow-up.

Your ambient light sensor, is it all design win?

Is it already shipping in the second half of this year?

Is that to ship next year?

No, no.

It's not already shipped.

It is a design win with an important smartphone maker.

The next question is from Gianluca Bertuzzo from Intermonte.

I have just one on the tax rate.

A question on the end market has already been answered.

We have seen a very low level of tax rate in the third quarter.

Could you help us modeling the level for the fourth quarter and maybe also for what you see for the next year?

Yes, I take your question about tax rate.

You're right, in Q3, our tax rate is particularly low and this is due to 2 discrete items.

Anyway, modeling next quarter, it will be similar in term of tax rate.

It will be slightly above.

When we move to next year, I would like to remind you that we are enjoying now the positive impact of NOLs that will not be any longer there moving in the next year.

So next year, if you have to model the tax rate, these will be in the range of 15%, 17%, so there will be an increase in tax rate moving next year.

The next question is from Guenther Hollfelder.

First, a question follow-up again on the Power Discretes.

If we just focus on distributors in China, you mentioned here weakness in some of the areas like white goods and others, so microcontrollers.

Also just focusing on distribution channels in China, you're not seeing any slower demand for Power Discretes units there?

On Power Discrete, we still see a strong demand.

Okay.

And your internal inventories, do you expect then a further increase then at the end of the fourth quarter due to these inventory corrections in Microcontrollers and other issues?

You talk about -- sorry, you talk about our inventory in MCU...

Yes.

Our inventory in ST.

No, for what concern inventory in ST, we do expect in Q4 to have some reductions in term of inventory, and we do expect that we have a significant improvement in what concern the terms.

So we do not expect that.

We see that moving from Q2 to Q3, there has been a slight increase and an improvement in terms that was already anticipated entering in Q3.

Now we do expect to stay -- to reduce -- slightly reduce our inventory and significantly improve the terms of our inventory.

Maybe as a final question from my side.

You mentioned some weakness in Automotive in the aftermarket in China.

So I assume this is mainly related to the infotainment segment?

Yes.

Yes, you're correct.

The next question is from Amit Harchandani from Citigroup.

Amit Harchandani from Citi.

Firstly, if I may, just to get -- go back and just clarify on the AMS segment and the outperformance of the margin.

Could you just reconfirm if you think the outperformance versus your expectations was driven by volume, pricing or was it mix?

I ask this because there have been some concerns around pricing pressure exerted by big smartphone makers on the component suppliers.

And then I have follow-up.

No, I take the question.

Lorenzo.

About the performing better in AMS is mainly thanks to better performance that we then expected in manufacturing.

And you see that, overall, in respect our guidance in the second half of this year, we -- substantially we are in line with the Automotive and Discrete group.

We are -- due to this lower level of revenues than expected, a little bit handled our guidance in MDG, in the Microcontroller and Digital Group while we are better in AMS mainly driven by better-than-expected performance in manufacturing.

There are no different impact related to different pricing or things like this.

Overall, our expectation is to meet in the second half what we were expecting at our Capital Market Day and so on.

But I think margin in the second half increasing in respect to the first half of about 360 basis point with a little bit different mix among the 3 groups.

That's helpful, Lorenzo.

Secondly, if I may, obviously there's ongoing backdrop of the trade wars between U.S. and China.

From your perspective, how are you thinking in terms of your supply chains and your own operations in China?

At this stage, are you evaluating any potential realignment or change in supply chain?

Just trying to understand where you stand in terms of how you are thinking and assessing the impact of the ongoing trade wars.

First of all, I have to confirm what I already said some time talking about this topic.

For us, of course, it's not welcome this kind of things, but it's not a strong -- a big material impact for us.

We have some impact, definitely, but it's not very big.

Anyway, through that, we are somehow slightly readjusting our supply chain in order to secure that.

For some customer, we may ship from maybe in different location where they need, let's say, where they ask to have the parts.

Overall, I repeat that there are no major impact, no major change in our supply chain.

And for the company, this impact is really not so material.

And then just, finally, going back to Automotive.

A lot of talk about trends in China, but could you broadly confirm that there has been no material shift in the demand trends for you worldwide when it comes to the Automotive business inside and outside China?

So again, what we are seeing is that our backlog is extremely strong.

We -- of course, there has been here and there some reduction in terms of volumes in terms of cars.

But the provision of the semiconductor is such that what with the backlog we have, we confirm what we already say that we will grow in Automotive this year in the range of 17%.

Thank you, Amit.

At this point, we'll turn to Jean-Marc for some closing comments.

So before we close this session, I thank you, okay, everybody, for all the question and debate.

Before we close, I would like to advise you on some changes to our Investor Relations department.

So after 18 years in Investor Relations at ST, so Tait Sorensen has informed our company about his desire and willingness to step down from his position in order to prepare for other professional opportunities within ST.

Well, Tait remains committed to the Investor Relations department during this period of transition.

He will support the Investor Relations team for some time to ensure a flawless transition.

And in the meantime, I am very happy to announce that Celine Berthier has been promoted to the Head of Investor Relations effective immediately.

I trust you all know and respect Celine as she has been with ST Investor Relations for overall 11 years, and I am sure that you will join me in wishing them both all the best for the future.

However, I would like to take opportunity to thank personally Tait because we spent so many time together visiting you, visiting investors across the world during period, which were not so easy for us.

And I have always appreciated the cooperation spirit of Tait, and I have to say it is more than a colleague, it is a friend.

So thank you for your attention.

So we will now close our Q3 call, and looking forward to see you soon.

Bye-bye.

Thank you, everyone.

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