Ladies and gentlemen, welcome to the Second Quarter 2019 Earnings Release Conference Call and live webcast. I'm Myra, 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 Celine Berthier, Group Vice President, Investor Relations. Please go ahead, madam.

Thank you, Myra, and good morning. Thank you, everyone, for joining our second quarter 2019 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 President and CEO. Jean-Marc Chery: Thank you, Celine. Good morning, everybody, and thank you for joining ST on our second quarter 2019 earnings call. Let me start with some opening comments. First, on Q2 and H1. So, our Q2 revenues at $2.17 billion came in above the midpoint of our guidance. Gross margin at 38.2% was slightly below due to product mix. Operating margin was 9% and net income was $160 million. For the first half, we delivered results in line with our guidance, with revenues of $4.25 billion, gross margin of 38.8%, operating margin of 9.6% and net income of $338 million. Second, on Q3. For the third quarter, we expect strong sequential revenue growth of about 15.3% at the midpoint, driven by engaged customer programs and new products in a softer than expected legacy Automotive and Industrial market. Gross margin is expected to be 37.5% at the midpoint, including 140 basis points of unsaturation charges. Regarding the full year 2019. We now expect net revenues to be in the range of about $9.35 billion to $9.65 billion. This level of revenues takes into account already engaged customer programs and new product introductions. It is still assuming improving market conditions in the second half in Automotive, Industrial and mass market, however, at a different pace compared with our prior expectations. For Industrial and the mass market, last quarter, we indicated that margin at the point-of-sales revenues was showing signs of recovery. That trend continued in May and June. However, this market recovery is taking longer than forecasted, particularly in Europe. For Automotive, we continued to see very strong demand in smart mobility application, driven by car electrification and digitalization. What has changed since Q1 and our Capital Market Day is a deterioration of market conditions in automotive with lower car registrations, particularly in China affecting our legacy Automotive products. We already moderated in April our 2019 CapEx plan to a range of $1.1 billion to $1.2 billion. We are not changing our plan here as we focus on our strategic programs supporting our future growth over the midterm. Now let's move to a detailed review of the second quarter. Net revenues decreased 4.2% year-over-year on lower sales of analog, microcontrollers and digital ICs. We saw year-over-year growth in Automotive and Power Discretes, MEMS and sensors. As planned, we returned to sequential growth in the second quarter with net revenue increase 4.7%. This performance was driven by specialized imaging sensors, RF products for front-end modules, silicon carbide MOSFETs and digital automotive. Detractors were general purpose analog, microcontroller and legacy Automotive products. Our gross margin was 38.2%, 30 basis points lower than the midpoint of our guidance reflecting unfavorable product mix. It included 80 basis points of unsaturation charges. Our net operating expenses were $632 million, in line with our seasonally higher expectation of about $625 million to $635 million for Q2. From a profitability perspective, operating margin was 9%, net income $160 million and diluted earnings per share $0.18. Turning to cash generation. Our net cash from operating activities was $324 million in the second quarter and $665 million for the first half. Our CapEx in Q2 was $372 million compared to $390 million in the year ago period. For H1, we invested $694 million in capital expenditures. Free cash flow was negative $67 million in Q2. We paid cash dividends totaling $53 million and share buybacks of $64 million. Now let's move to our third quarter outlook. For Q3, we are expecting strong sequential revenue growth of about 15.3% at the midpoint. Our sequential growth will be driven by engaged customer programs and new products in a softer than expected legacy Automotive and Industrial market. All product groups are expected to grow. At the midpoint of our guidance, this means we would be back to about the same revenue level as in Q3 2018. Our gross margin guidance at the midpoint is 37.5%, with an estimated 140 basis points of unsaturation charges. This represents a decrease of 70 basis points sequentially, mainly due to a higher level of unsaturation charges. On a year-over-year basis, the decrease is 230 basis points. We expect net operating expenses in Q3 to be between $620 million to $630 million. And let me now share with you some important business, market and product dynamics. And let's start with Automotive. In the first half, this part of our business increased about 10% year-over-year. We operated under two opposing dynamics. On the one end, a declining legacy Automotive business, in line with the year-over-year decline in the number of car registration worldwide, worse than expected. In China, specifically, we did not see a positive impact of the recent fiscal stimulus policies. And in Europe, demand for legacy Automotive products has been deteriorating during the second quarter. On the other end, we continue to see very strong demand in smart mobility applications, driven by car electrification and digitalization. In car electrification, we had a number of significant design wins during the quarter for electric cars and charging. This included a key component in an electrical vehicle inverter application as well as MOSFETs and power modules. We had a number of designs in onboard charging application at American, Korean and Chinese car makers and Tier 1. For silicon carbide products, we continue to increase revenues and the number of design-in activities with multiple customers. We now have 33 ongoing programs. This number includes both Automotive and Industrial programs, awarded or in production. We are on track for over $200 million of revenues this year. Car digitization for us includes application such as ADAS systems, V2X communication and embedded control units using powerful microcontrollers. Here we continue to expand our footprint. We won a design with a Japanese Tier 1 for our 32-bit MCUs for a new generation of ADAS system. Moving now to Industrial. Q2 was another quarter with softened market dynamics. The inventory correction at distributor that has been impacting our analog portfolio and general purpose microcontrollers for some time is still ongoing and even slightly stronger, reflecting shorter lead time for this product. We expect this correction to be over in the third quarter based on the positive sign we started to see since March for the point of sales at distributor worldwide, except in Europe. As we already shared with you, Industrial is a key area of focus for ST, where we plan to accelerate our growth. We target leadership in industrial embedded processing. Here, we introduced two new STM32 MCU families. The first one, with dedicated features designed for motor control and digital power application, is already in production at several Chinese industrial OEMs. The second one is a dual-core STM32 with record Cortex-core processing power. Furthermore, we introduced high-voltage motor driver ICs with embedded STM32 MCUs, leveraging our system capabilities to strengthen our analog offer. We won a number of designs across many industrial applications. For example, with metering and digital power solutions for LED lighting and power supply as well as in industrial power and energy management with numerous design wins for power discretes. Moving now to Personal Electronics. The global smartphone market is still forecast to decrease slightly. However, we are seeing an important positive trend of demand acceleration for 5G smartphones in Asia. In this end market, we confirm we target leadership in specific high-volume smartphone applications: sensors, secure solution, power management and RF products for front-end modules. And we also focus on the growing wearable and accessories market. During Q2, we had at least an Imaging sensor and/or a MEMS device in all of the top 10 smartphones currently on this market. We had multiple wins for motion and pressure sensors in the flagship model for many of the world's top smartphone and wearable manufacturers. We also continue to earn design wins and ramp shipments for our time-of-flight sensor, analog products and RF products for 4G front-end modules. This last point allows me to transition to communication infrastructure. I would like to conclude with a few words on our objective to capture opportunities in 5G with RF mixed signal technologies and products. During the quarter, we won multiple ASIC designs for 5G infrastructure, 5G smartphone and Wi-Fi routers. This thanks to our unique technology portfolio. To conclude my remark. During the second quarter, we executed in line with our expectations, returning to sequential revenue growth. For the third quarter, we expect to see a strong increase in sequential revenue growth at the midpoint of our revenue range. For the full year of 2019, we still plan for a strong sequential growth in the second half of the year compared with the first half. Our expected level of revenues takes into account already engaged customer programs and new product introductions. It is still assuming improving market condition in the second half in Automotive, Industrial and mass market, however, at a different pace compared with our prior expectations. Based upon our plans, sorry, we will maintain a solid capital structure, returning to positive free cash flow in the third quarter. Thank you for your attention. We are now ready to take your questions.

[Operator Instructions]. The first question is from Aleksander Peterc from Société Générale.

Yes. Just on the outlook, if I may, firstly. When you see now things being slightly softened in the second half in certain areas, is the timing of the recovery unchanged but the balance is lower than expected? Or it's also the recovery a little bit later than you initially planned? And then secondly, if you could comment maybe a little bit on the unused capacity charges for the unsaturation charges. Why are we still seeing an increase in these charges in the third quarter despite the strong sequential growth? If you could go into more detail on that. Jean-Marc Chery: So, I will take the first question and Lorenzo will take the second question. About the outlook, well, first of all, I would like to confirm that what is interesting to us is totally are under control, so it means all the programs related -- key program related to customer, our new product introduction are fully under control and will ramp according our expectation and our plan. Then what is not under our control and extrinsic to ST, so mainly market condition for Industrial -- and when I say legacy Automotive, it means it is linked to, let's say, usual thermal combustion engine-based car. For sure, it is related to the car registration. What year? Okay, for these two markets, for Industrial, it is more, let's say, a slight pushout of the recovery and a lower amplitude of the recovery. So again, what I discussed to you during my speech, we confirm that we do believe that in H2, we will see a recovery but at a softer pace than anticipated during the first quarter. So, a smooth pushout and with a lower amplitude. Now on the Automotive market, well, it is totally related to the car registration. Well, you know that at the end of H1, worldwide, we see something is around minus 7% car registration versus the last year and especially forecast total for the full year of minus 5%. So certainly, okay, the plan, slight recovery in H2, and here, with the similar profile, certainly you pushout more recovery starting September other than July and August, and with a lower amplitude than expected.

Jean-Marc, thanks. I will take the second question about unsaturation. As you have noticed in the second quarter, we were hit in our gross margin by 80 basis point of unsaturation. This is including front-end saturation for our fabs as well as in saturation in some lines that we're having in the back-end. Why we will continue to add on saturation also in the second half? This is not something new. I was anticipating this already in our Capital Market Day. You see that in the first half, we started with production, especially in Q1, very -- keeping our fab quite loaded. This has increased our inventory. I was anticipating this in our call in Q1. And today, our inventory are in the range of 125, 130 days. So, what we will do is in the second half of the year to reduce our production or withstanding, let's say, the significant increase in our revenues. And this will be aimed to bring our inventory back to a level of number of days that will be closer to between 190 days.

The next question is from Matt Ramsay from Cowen.

Yes. I think from my side, one of the things that I would love to hear is some perspective on the margins. As in the auto business, obviously, there's been weakness globally that you just highlighted, but you guys have quite a bit of products ramping. And so, I'd really like to understand the weakness you are seeing maybe by geography. Obviously, a lot of us have heard and seen data that shows China is weak. And maybe you made some comments in your prepared statements about Europe. But any comments that you could give us on a global basis on your auto outlook for the back half of the year and what you're baking in for a recovery potentially by region would be really helpful. Jean-Marc Chery: So, I take the question and certainly, Marco Cassis will complement it. Well, it is a -- when not -- the first time, so today, so overall, car registration worldwide is minus 7%. And clearly, China is minus 12%, minus 13%. So, there is, let's say, a stronger impact in China. Then in Europe, there is an impact as well and in USA. So, there is a slight decrease in car registration. So, this is from a fact based point of view, number of point of view. Well, then from qualitative point of view, it is clear that ST, again, end of H1, our growth in Automotive overall is 10%. So, it is clearly demonstrating that our strategy on car electrification and car digitalization is paying back because our microcontroller, our ADAS, our power MOSFETs, silicon carbide base, our IGBT are really growing, and clearly, our ASIC based on the ISO analog technologies are impacted by the car registration. So, this is the overall picture. Now to give more color about the car industry. Well, we do believe that the car industry is passing through important change where the balance between thermal combustion engine base they could produce and electrical vehicles, means battery based, hybrid, plug-in hybrid and mild hybrid, will change during the next few quarters. But again, ST is very well positioned to capture this product mix change. So, this is the situation. So, Marco, you want to add something more?

Yes. Hello. This is Marco. One, as Jean-Marc has said, the major detractor in terms of car registration has been China, with only one bright spot, which is Japan. And we do see that the recovery that was expected in the second part of the -- in terms of car registration in China is not going to materialize. And this at the end is going to have a notable impact during the year of minus 5% in terms of car registration. Considering that we have an exposure in the range of 70% in the legacy Automotive, clearly, this has an impact also in our Automotive business.

Great. Just as a follow-up. AMS peak having consensus by a pretty wide margin and the seasonal pattern in that business is a bit different than we saw in the second quarter of last year. Obviously, some new products. So, I just wanted to maybe understand a little bit under the covers if it's just a different pattern with the large smartphone customer or if there's something else going on from a seasonality perspective in AMS. Jean-Marc Chery: Well, I will not comment. This is an idea for our competitor. We prefer to comment ST. Well, again, as I said during my comments, ST, we have a strategy to focus on higher-growing application, high-volume application: sensor, secure solution, power management, so wireless charging, memory and RF products for front-end module. [indiscernible] as I said, we think the top player is a top player, the three big one and the other Chinese player mainly. So, the result of ST in Q2 is a mix of, let's say, this attachment rate to the smartphone. However, this is what we disclosed to you on our press release and my speech. Clearly, in Q2, the performance of growth which was higher than the midpoint of our range is mainly related to specialized imaging product.

The next question is from Andrew Gardiner from Barclays.

Just had a sort of follow-up related to that last question and then another one perhaps around trade war. Just you mentioned, Jean-Marc, that the biggest single driver of the upside in the quarter relative to the guidance was specialized image sensors. I mean are you seeing -- has that changed your view on the overall demand for that type of product over the course of the year? Or are we perhaps just seeing it a little bit earlier in second quarter, and therefore, perhaps a slightly lesser ramp in the second half of the year? And then also, just sort of more broadly speaking, trade war in particular related to Huawei. It doesn't seem like you have seen any impact from sort of the U.S.-based suppliers limiting their shipments into Huawei and then potentially Huawei has a knock on impact to you guys in that regard. And it certainly seems like some of the U.S. companies are now starting to ship again. So, I just -- if you have any further insight as to what's happening with that key customer would be helpful. Jean-Marc Chery: So, as I said, if we change slightly our guidance -- our expectation for the year, so from 9.45, 9.85, $150 million less at the midpoint is mainly related to the Automotive market, so our legacy product and Industrial. It is not linked to our, let's say, key programs at -- key engaged programs with customer and if you remember, well, we discussed to you at our Capital Market Day, it is clear that the smartphone programs are part of these key programs. So, for the full year, we maintain, let's say, our expectation, slightly above, okay, but no more than that. Now about the trade war and the customer you asked me the question. Well, here I can only say one thing -- two things. First of all, I repeat ST's strategy is to focus and be a leader on sensor secure solution, power management and RF product for front-end modules whatever are the customers. Specifically, to Huawei, of course, we will comply with the rules and regulation associated with sales. The company is appearing on the entity list, including Huawei and its affiliates. However, even so, due to the nature of our supply chain, we are able to continue supplying our product to Huawei and its affiliates. And Huawei is part of the top customer we are targeting with our strategy. More than that, difficult for me to comment.

The next question is from Sandeep Deshpande from JPMorgan.

Yes. Jean-Marc, if you look at your guidance in the third quarter, this 15.3% sequential growth is the highest you have guided to in the third quarter in the last two decades. So, it's even better than what it was in 2009. So maybe can you help us break it down into existing customers, new customers or products, so that we understand where this growth is coming from? And in terms of the mix from this growth, how should we be looking at the mix from the growth given that your product mix had some negative impact on the gross margin in 2Q? Is this kind of mix that you see in 3Q going to continue? And does it have a positive or negative impact on mix, which is excluding, of course, impact of underloading? Jean-Marc Chery: So, for the Q3 revenue guidance, more clearly, it includes the same, let's say, profile than the expectation for the second half. It is clearly a part of our, let's say, key programs with engaged key customers. And clearly here, the key driver for these programs are specialized imaging sensor and analog. Then as we said, as we have seen some positive sign of recovery in the distribution channel, mainly in Asia, with two very positive KPI. First positive KPI is the positive trend increase in the point of sales of distributor cumulated with inventory decrease. So that's the reason why a second driver of the growth in Q3 will be the microcontroller. So, this is the three main contributor to the growth in Q3. It is specialized imaging sensor, analog related to key programs and microcontrollers related to distribution channel addressing Industrial and mass market. So, this is the Q3 outlook. Then for the second question, I...

About the mix, the impact on the mix on the gross margin for the next quarter. In Q2, the gross margin came at 38.2%, and now what we are seeing is 37.5%. These 70 basis points are 60 basis point related to the increase of unloading at the end because we moved from 140 to -- from 80 to 140. So, the main reason is related to the unloading, the decrease in term of gross margin. When I look at the mix substantially, this will not be a detractor. There will be some price effect, these kinds of things, but not really a big detractor on moving from -- sequentially from the gross margin of 38.2% to 37.5%.

The next question is from Achal Sultania from Crédit Suisse.

Just a question on your RF business for front-end smartphones and also the 4G, 5G infrastructure business. Can you just help us understand what are the -- what is the rough size of both these businesses separately? And when you talk about these ongoing wins on new projects, revenue ramping in this area, is this all like new design wins because you did not have much presence in 4G and now you are basically getting more presence in the 5G space? Or is it just driven by incremental demand right now and things will normalize? Just trying to understand how much it is market-driven versus content driven. Jean-Marc Chery: Well, it is more driven by content because, again, on 4G, we leverage our portfolio, which is basically based on RF mixed signal technology like BiCMOS 55, RF-SOI. And for the 5G, we see a real acceleration of the demand. Clearly, compared to our expectation entering the year, the mix is changing. Overall, the number of phones will be slightly decreased, but clearly, the mix is changing. There is really an acceleration of the 5G, certainly related to the current deployment of the 5G infrastructure in China. We know that there is a big program in China to deploy a base station and all the related infrastructure to accelerate the 5G deployment. And as a matter of consequence, there is also an acceleration of the 5G device set. And ST here is well positioned with our technology, mainly in 300-millimeter at 65-nanometer and will contribute to H2. Now, okay, we never comment the detailed number and weight of this contribution, but you see the importance, qualitative and trend, I would like to disclose with you.

The next question is from Amit Harchandani from Citigroup.

Amit Harchandani from Citi. Firstly, if I may, you talked about certain improving data point of sales at distributors. At the same time, your inventories are high, which you're looking to run down. Could you maybe walk us through potentially how lead times are looking like at this stage? And how the visibility or lead times have shifted over the course of the quarter and potentially exiting into July, what do you see out there? And what is the degree of confidence do you have that whatever remaining improvement you are assuming should be coming through in the second half of the year? And then I have a follow-up. Jean-Marc Chery: Will you take it, Lorenzo? Or not?

You refer to the market in distribution?

Broader market, distribution as well as your direct business, the lead times across your family, then visibility exiting the June quarter and the level of confidence in the second half market recovery.

Maybe Marco will take this.

Yes. What we are seeing, as was already by Jean-Marc, is the market is acknowledging a return to, let's say, more normal and standard lead time, which means distribution is entering orders according to this new level of lead time. So, I think the market is stabilizing towards a more normal situation with an exception still present which is on the power portion of our portfolio.

Okay. And in terms of the OpEx and the gross margins, I know you're not necessarily guiding for Q4 at this stage, but given the mix effect we have seen in Q3 and potentially R&D which looked a bit higher in Q2, could you give us a sense for how we should think about gross margins and OpEx landing for the full year?

Well, in term of OpEx, as I said already sometime, we do think that the average quarterly level of our OpEx, it will be between $620 million, $630 million. So, it means that if you will take the full year OpEx for the company, you divide it by four, you will have, let's say, a number that will fall between $620 million, $630 million. And in the OpEx, we include net OpEx including other income and expenses. So, at the end, having the guidance of Q3, Q4 is easy to be computed where we will land. In term of gross margin, well, you're right. We don't give guidance for the following quarter. What I said at the Capital Market Day when we met together there, I was indicating that at midpoint of our guidance, at that time, it was $9.65 billion, we will be in the range of 38% of gross margin for the year. Today, we have lowered a little bit our guidance. It's now more in the range of $9.5 billion in term of revenues. In term of gross margin, I substantially confirm these numbers. Maybe, it will be few 10 basis points lower, but it will be in the range of 38% for the year. So, I -- there is no significant change in respect to this number.

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

Also wanted to follow up on gross margins. In the most recent goals for the company, you've talked about getting to 40% gross margins and staying there. You're coming up a little bit light now on that goal. Can you now kind of suggest that 40% is out of the range for even 2020 calendar year? Or when do you think you can get back to 40% gross margins? Secondly, it seems like you're not reducing CapEx in light of gross margins coming down and revenues falling short. Why or what gives you the confidence to keep CapEx elevated? And what markets are you spending most of your CapEx on?

With respect to the gross margin, as I was saying before, for this year, actually, we don't change substantially our view. Now our gross margin will be substantially in the range of 38% at midpoint of our guidance. Our target is, yes, to be at 40%. 40% can be achieved with substantially no level of unloading. This is our view. And we've said that we are running our optimized loading. We did confirm that this is our view, our target. And for sure, now to give an indication on 2020 is a little bit premature, if you allow me. But definitely, this is where we would like to position the company in a short, medium term, not in 10 years or so instead. In term of CapEx, as you know, a significant portion of our CapEx is related to strategic initiatives. These strategic initiatives are not 100% linked to the market. Of course, we are modulating our CapEx in respect to how our level of revenues and how, let's say, the company is moving. We have already revised the level of our CapEx entering in the second quarter, lowering our previous guidance. At this stage, we think that the level of CapEx is still appropriate in order to fulfill the need of the company. So, there is no, in our view, need to reduce the CapEx at this stage. Jean-Marc Chery: However, I would like just to give some color about 2020 and recall some important points by verticals. It is clear that for the automotive market this year and mainly in China and in Europe, under, let's say, the legacy car, I have not spoken about the electrical vehicles, has been, let's say, put under a kind of turmoil related to the impact of the WLTP and the China 6 in this country. And you know that the carmaker, the difficulty we have in term of sign is they do no respect the target of 2021 in term of CO2 laws. So, it is clear that it has created, okay, some turmoil in end of 2018 and this year in 2019, and with collateral effect, saw some inventory correction. Now we do believe that starting Q4 this year and, let's say, in 2020, the situation will improve. I don't say we'll come back to full number, but this situation will improve. On the reverse, it is clear that the mega trend related to electrical vehicle, whatever they are, battery, mild hybrid, hybrid, plug-in hybrid, will continue to grow. And it is clear that the digitalization of the car will continue to grow. So, we expect, okay, the automotive industry next year, first, will move out positively from this difficult situation in 2019 and will show, okay, some good sign of recovery. Now going to industrial market. Well, again, industrial market has been, in a certain extent, as well impacted by the automotive industry this year, okay? We have seen some factory automation investment push out, and it cannot be pushed out forever. We have seen some other verticals in this market slightly impacted and with, let's say, inventory correction related to the overall mood and mainly impacted by the trade war between USA and China. As a matter of fact, the inventory correction is ending, okay? We forecast that inventory correction will be end in Q3. And starting Q4, we will go back to normal POS, POP, through distribution channel, and end demand visible to us without any filter from the inventory. So, this is what we are seeing for 2020. Now then to personal electronics and smartphone, what we describe as an acceleration of the 5G deployment, mainly in Asia, mainly in China, and the related 5G device will continue to accelerate in 2020. We know that the overall smartphone will be basically flat or slightly decreased, but the content will continue to increase. So all in all, I would like to say that too early to say about 2020 in term of number, but mega trend are there, positive trend are there, which make confidence ST to continue to grow in 2020 and to go towards the objective we have shared with you at the Capital Market Day to achieve in the midterm USD 12 billion of revenue.

The next question is from David Mulholland from UBS.

I just wanted to ask on some of the design win commentary that you gave in the -- in Automotive. I think you mentioned you won a key component in electric vehicle inverter, but could you just clarify what component that was? Is that IGBT inverter, silicon carbide MOSFETs, or is it for gate drivers? And then also on the onboard charging applications, if you can just clarify if those are silicon or silicon carbide? And then on some of the commentary you made in the consumer space and smartphone space, in terms of Time-of-Flight, we've obviously started seeing for 1D ranging sensors a bit more commentary coming out of one of your competitors [indiscernible] around this. I'm just wondering if you could comment on to how you see the competitive landscape in Time-of-Flight for ranging and then also your positioning for Time-of-Flight if we start using it for 3D sensing purposes as well.

Yes. Okay. Marco speaking here. I will take your first question about inverter, onboard charging, et cetera. Of course, there, we are selling all our portfolio. So, depending on application, we are selling our silicon carbide, but of course, we are selling also IGBTs, and we are also selling also gate driver when that is necessary, so our analog portfolio. So surely, for inverters, the lion share part is silicon carbide, but we are selling all the portfolio. Jean-Marc Chery: Well, about specialized imaging also, again, I will not comment on our competitor, but I will comment, okay, the visibility we have and what ST is doing. Well, it is clear that you know that ST is a key player in the 3D sensing for the face recognition. Since 2017 second half, the unique foolproof technology is based on what we call structured light where ST is a key player, and we are still, let's say, growing in this kind of application. In parallel, components in the smartphone, there is clearly some other components like ambient licensing or, let's say, Time-of-Flight based proximity sensor or autofocus assist or ranging sensor. And clearly, okay, I repeat that we have accumulated a huge volume in this Time-of-Flight and we continue. That's the reason why, as I told you, in the top 10 smartphones on the market today, we have either a special imaging sensor, including this Time-of-Flight or a main sensor. Also, we disclosed to you during the recent quarter that now ST is important player on imaging licensing on the smartphone or, let's say, other wearable application. Now in term of trend of the industry, it is clearly that one trend we are seeing is introduction of indirect Time-of-Flight for the wall-facing camera first, which certainly will be, let's say, a future competitive solution to address the depth map sensing. Now ST here, I confirm to you that we have a very strong road map with a very competitive and high-performing product that we will deliver to the market, whatever in iOS or Android phone. So, this is, let's say, the dynamic specific to ST we have on this application for the smartphone.

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

Yes. Quick question on the capacity utilization rate and the outsourcing that you achieved in Q2. And just a follow-up on the guidance for the full year and specifically for Q4. We still have a huge range between the low end and the high range, so there's a lot of difference, specifically for Q4. How come that just with one more quarter, you still you have such uncertainties for Q4? Jean-Marc Chery: So, Jerome, so Lorenzo will take the first part of the question and I will be pleased to take the second one.

About the utilization, in Q2, our utilization rate of our front-end fabs was in the range of 83%. It was down in respect to the 88% that was in Q1. We do expect -- as you know, there is an increase in our unloading charges in the next quarter, and the expectation is to be in the range of 76% for Q3 in term of utilization rate. Talking about our weight in foundry, where we stand. In Q2, we were in the range of 70% of the value of production, total value of production for the front end. That is similar to the level of Q1. In Q3, we will be a little bit increasing this for two reasons. One, because there is a decline on the overall, let's say, production value in front end, and the second reason is that some of our engaged customer programs are exposed to foundry, and so there is some increase in foundry due to the fact that there is increase in the revenues of these engaged customer programs. Jean-Marc Chery: So, about the second part of your question, well, it is clear that we have a very high level of confidence to execute properly the midpoint of our guidance for Q3. Then about the range, well, first of all, I guess it's not that we have reduced the range compared to the Capital Market Day. This is simply because now we are fully confident about what is under our control. So, the good execution of our programs and the perfect execution of the robust order supply chain. That's the reason why we narrowed the range from plus/minus 200 to plus/minus 150. Then about the plus minus 150, well, I would like to comment that it is, for us, adequate with risk and opportunities we are facing in the second half of this year. As I disclosed, if I can give only some color but not weight about these risks and opportunities, starting by verticals. Well, again, on Automotive, you know that on Automotive we shared with you that for the time being, the overall market will decrease 5% expected full year 2019 versus year-to-date minus 7%. So, it means -- okay, means we will see a slight recovery. However, we know that this recovery and especially in Europe will be perceived after the summer period because you know that in Europe, we have seasonality effect related to the summer period on car industry. So, you know that the visibility confirming that we will have a slight recovery in H2 will be perceived in September, not yet. So, on Industrial, clearly, on Industrial related to our distribution channel and with our device, well, we have a very good confidence level on the microcontroller on Power Discrete. On fuel discrete, we have still, let's say, important inventories. And here, we have not seen yet sign of a recovery, so it is also something which is adjusting ourself. Now -- and then you know that there is overall situation between USA and China, which is not yet totally solved. And if you go back one year ago, if you remember well, ST has been one of the first companies detecting some sign related to the collateral effect of this trade war. Now we expect that this trade war will be sooner or later, let's say, mitigated, and basically, we need a little bit time. Well, then last but not the least, personal electronics. Well, you know like me that a new device will be introduced in September with the launch of a potential production. This is business as usual. Nowhere -- no better than usual. But you know that there is a probability of forecast change in Q4 as we faced last year when you see new introduction of device. So, all in all, accumulating this three vertical analysis, we do believe that the current range we disclosed today is well adequate, taking risks and opportunities, of course, based on a very high level of confidence to execute, particularly our Q3 midpoint.

The next question is from Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: Yes. One on your 5G market opportunity. You target more than 50% market share in supply for base stations mid-term. Do you have the design wins already in your hand today? And what kind of market size opportunity are we talking about here, please? Jean-Marc Chery: So, Marco will take it.

Yes. Okay. So, I think you have mainly related to the -- our collaboration with MACOM. So, what we can say in this moment is that we acknowledge the change of management at MACOM and we are continuously working with them and develop the market with them. So, we have no further update from this point of view. Sébastien Sztabowicz: Okay. And one follow-up, if I may, on imaging because it seems that on imaging, finally, Sony seems to be a little bit more aggressive on 3D sensing. I know that they are very well integrated apparently in this opportunity. Have you seen any change in the competitive landscape in imaging 3D sensing right now? Jean-Marc Chery: No, no. I confirm to you that we are in competition -- for the time, you have only one unique solution for face recognition 3D sensing, it is the structured light. The other, let's say, architecture in term of system are, let's say, less foolproof. Well -- and again, this is what we confirmed. We said to the Capital Market Day and we know that in the near future, certainly, architecture like structured light improved and indirect Time-of-Flight will be in competition. ST addressed the two technology architecture. And for sure, certainly, Sony is more addressing the indirect Time-of-Flight kind of architecture, and we will be in competition. But we do not see, let's say, dramatic or material change in the dynamic for the short term.

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

Yes. Two questions. Firstly, I just wondered if you could give us some color within your guidance for 3Q and 4Q what you expect for the three different divisions. And secondly, obviously, we've seen Infineon buying Cypress recently. I just wondered if you could give any -- give your thoughts around how you expect competition to change in the general-purpose microcontroller landscape and what your own thoughts are on getting involved in an industry consolidation. Jean-Marc Chery: Yes. You take the first one, I'll take the second one.

Okay, Jean-Marc. For the first one, about some color on our guidance for the current quarter in term of divisions. As we said, the driver of the growth will be the specialized image sensor, the microcontroller and the memories, MMS, and we will have a significant increase in revenues also in analog, while also power and discrete will contribute to the growth with a lower pace. So, at the end, when you look in term of not product, but in term of division, AMS will be the driver of the growth, the stronger driver, followed by MDG where we have a significant increase in our microcontroller revenues in the next quarter. And then there will be some growth at lower pace also in ADG, but as we were commenting during this hour, a little bit limited due to the Automotive legacy products that are not contributing to the growth. Jean-Marc Chery: So, about your second question, of course, I will not comment specifically Cypress acquisition from Infineon. What I can say from the recent past, from ST side, clearly, we have always seen Cypress competitive on MCU for Automotive but not key competitor in the field of general-purpose MCU. What is very important for general-purpose MCU is related equipment, the wide product portfolio, so from ultralow power MCU addressing IoT kind of business to the high-performing MCU addressing the industrial market. What is important is to complement this MCU portfolio with industrial MCU. And in term of trend, based on this strong ecosystem, it is clearly a new capability to offer general-purpose embedded processing solution with security features and connectivity features. Well, this is what ST is doing. This is where ST is accelerating. And we acknowledge that Infineon has acquired Cypress, but up to now, Cypress, for us, was visible on the Automotive MCU, not too much on general-purpose application.

Understood. And just any color on your own involvement in consolidation in the space?

He meant M&A. Jean-Marc Chery: M&A? Well, the M&A, of course, we are monitoring, okay, the value trend. But ST, I confirm that our, let's say, strategy and our business model today is based on organic growth. I can classify organic growth plus, means, okay, ST will certainly in the future, let's say, acquire small companies, making our product portfolio stronger, completing our IP portfolio in order to accelerate our growth on industrial market, automotive, as it is the main focus of our application strategy as I disclosed to you at the Capital Market Day.

The next question is from Janardan Menon from Liberum.

Two short ones. One is on your gross margin and your capacity utilization trends towards the end of the year. You said you want to bring your inventories down to the sort of 90-, 100-day level, and so your utilization is coming down to 76%. If you assume that demand over the next few quarters is in line with your current expectations, would you be beginning to move up your loading level sometime in Q4? And if so, what is the time frame to cover that 140 basis points of hit on your gross margins from underloading? Can we assume that sometime in either Q1 or Q2 next year that would be completed based on your current visibility and expectations for inventory reduction? The second one is you've alluded to specialized image sensors, microcontrollers and analog as your key drivers into the second -- the growth into Q3. I understand the specialized image sensors, the microcontrollers. I'm just a little bit confused as what exactly your meaning by analog and the strong growth. What is driving that strong growth into Q3? Could you give us a little bit more color on what kind of products exactly are you talking about? Is this the RF product? Or is there some other some other product involved? Jean-Marc Chery: So, I take this question and Marco Cassis will complement, and then Lorenzo will answer the first question. When we speak about analog, basically, it covers two parts of our growth. There is one part related to key projects with engaged customers. Well, it is addressing one of the key focus of ST on the smartphones, I call it power management. And the second part, so it is kind of a technology basic design. And so, second part of analog is the continuous growth addressing the industrial mass market for metering, for motor control. So -- because motor control is one of the key applications we are focusing on where ST addresses full solution with the driver of the power, the other processing solution, and of course, okay, the power MOSFETs. So, this is the analog part of power and energy control solution. So, Marco, do you want to address the...

Yes. To be a little bit -- this is Marco speaking. To be a little bit more specific, we'll have also growth related to seasonality of our disc drive where our analog is present and is growing H2 over H1 and plus some specific power management projects that we start during the second part of the year. Jean-Marc Chery: So now Lorenzo, you can...

About the unloading, yes, for sure. Then as we said, unloading -- the question is how will be the evolution moving toward Q4, if I well remember the question. In Q4, still, we will have a material level of unloading, even if less than in Q3. Overall, to give you an idea, the midpoint of our yearly guidance, so for the second half, it's at $5.25 billion. The unloading overall should impact our gross margin in the range of 100, 110 basis point. So, it means that the fab utilization will be still at a low level. We do see progressively entering next year in the first half the situation coming back to normal loading for our fabs.

So, it probably will be around Q2 before you reach optimal levels of loading?

Well, it's a little bit early to say, but yes, at the end, I do expect that in Q2 next year we will be back to the normal level of loading for our fabs.

And Myra, in the interest of time, unfortunately, time is running. I think we have time for one more question.

Okay. The last question is from Johannes Schaller from Deutsche Bank.

Yes. In your long-term plan, you've obviously made some assumptions on revenue contribution from 3D sensing specialty imaging from various customers. And now it looks like there's a lot of change. For example, apple has just recently pulled a large project for 3D sensing with Nanoco, which supplied quantum dot chemicals. There's a lot of movement here. Can you very broadly, not talking about a specific customer, but very broadly, give us an update since your Capital Markets Day, anything on your assumptions on imaging or 3D sensing, the road maps in particular have changed based on kind of what is embedded in your long-term targets? And I have a quick follow-up. Jean-Marc Chery: So, I take the question and if Marco want to comment, he will take it. Now compared to what we said, again, at the Capital Market Day, there is no change in the way we see the trend of this specific application on the front face for -- of the phone, so for face recognition and on the wall-facing. It is clear, as I told you, okay, during the call that for the time being, the structured light for the front-facing is a technology, okay, again, since H2 2017 and certainly will continue for a while. As we disclosed to you, we do believe that at a certain moment of time, indirect Time-of-Flight base architecture will certainly come up on this kind of application. Presently, as far as the performance is, let's say, consistent with the structured light. Presently, okay, some advantages in form factor or something like that. Well, this trend, okay, is confirmed and ST will compete overall on both architecture. And then you know that as, let's say, generic trend for semiconductor, the challenge will be always to reduce the form factor to improve the sector offering and to reduce the cost of ownership. Then on the wall-facing, it is clear that indirect Time-of-Flight based solution will be certainly the winning architecture. And again, okay, here, you will see maybe this year and certainly next year introduction of this kind of technology. For the short term, I mean this year, it is not revenue for ST, but we are offering a solution for 2020 and beyond and we will be a key competitor in this market. Now then other competitors like ambient licensing or, let's say, ranging sensor based on direct Time-of-Flight will continue as the RGB camera will have more and more pixel and you need to have to focus assist and this kind of stuff. So, no major change, no change compared to what we said at Capital Market Day.

Very clear. And just a very brief follow-up. You talked also about your MSC controller, plus embedded secure element and embedded SIM going into production now in the second half. You haven't really brought it up as a big driver, I think, on this call for H2 revenues. Just how should we think about the ramp of this product and the contribution this year and the next? Jean-Marc Chery: No, no. This solution is part of the key program and engaged program for H2.

With this, I think that this conclude our Q2 earnings call. Thank you very much all for your attention. If you have some follow-up questions, don't hesitate to reach out to the Investor Relation team. And with this, have a nice end of earning season for all of you. Jean-Marc Chery: Bye, bye.

Thank you. Bye.

Bye.

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