Ladies and gentlemen, good morning or good afternoon. Welcome to the Second Quarter 2018 Earnings Release Conference Call and live webcast I'm Myra, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and RN-two colon operator. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Mr. Tate Sorenson, Group Vice President, Investor Relations. Please go ahead, sir.
Good morning, everyone. Thank you for joining our second quarter 2018 financial results conference call. Hosting the call today is Jean Marc Sherry, ST's President and Chief Executive Officer. Joining Jean Marc on the call today are Lorenzo Grande, President of Finance, Infrastructure And Services, and our Chief Financial Officer Marco Casas, 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 Key's most recent regulatory filings for a full description of these risk factors. Also, to ensure all participants have an opportunity to ask questions during the Q and A session. Please limit yourself to one question and a brief follow-up. I'd like to now turn the call over to Jean Marc Sharif, ST's President and CEO.
Thank you, Tate. Good morning, everyone. Thank you for joining us on our call today. I am very pleased to be here to talk with you together with my colleagues in my first earning results call. But leading ST.
So let's begin with an overview of our Q2 performance. Our second quarter results were solid and in line with our expectations. We had another quarter of double digit, year over year revenue growth. Balance across all product groups, regions and end markets. And we drove another quarter of improved performance across key financial metrics.
Looking at our Q2 business results, both revenues and gross margin were above the midpoint of the company outlook. We grew revenues 18% over 7th consecutive quarter of year over year, double digit set growth. The revenue growth was broad and balanced. This is important to achieving sustainable revenue growth. From an end market viewpoint, industrial was particularly strong during the quarter.
Our gross profit increased substantially, $911,000,000, up 24 over the year. Our gross margin was 40.2%, increasing 190 basis points year over year, largely driven by improved manufacturing efficiency and by a favorable mix shift toward higher value products. Operating expenses were $622,000,000, above our expectations, mainly due to one time non recurrent items that were not embedded in our Q2 expected launch. Importantly, our sales growth translated into operating leverage driving expansion of our operating income, margin and net income. ST's operating income increased 60% to $289,000,000.
Our operating margin improved 330 basis points to 12.7 percent and our net income increased 73% to $261,000,000. Turning to our cash and investments our profitable growth is driving improvements in our net cash from operating activities, with an increase of over 36% on a trailing 12 months basis. For the quarter, net cash from operating activities was $360,000,000 Free cash flow was negative $40,000,000 in Q2, mainly Q2 elements. A high level of CapEx in the quarter above the annual run rate of our expected 2018 CapEx range between $1,200,000,000 to $1,300,000,000 and change in working capital mainly due to inventory increase to support demand in Q3. We expect to return to to generate free cash flow with a higher net cash position compared to 2017.
Let's move to our product group performance. Starting with Automotive and Discrete. So during the second quarter, ADG revenues increased 15.2 percent year over year on a double digit growth for both automotive and power discrete. Operating profit increased by 20.8percentto84000000 and operating margin increased to 9.7% from 8.7%. On a sequential basis, ADG revenue increased 6.5 percent, revenue growth did not immediately translate into an improvement in operating profit and margin during the second quarter.
This is mainly due to some temporary manufacturing efficiencies, and extra cost in the supply chain. In terms of ADG's operating margin looking forward, we confirm that this will be in the low teens for the second half of twenty eighteen. Turning to the microcontrollers and digital access groups, MDG posted a strong year over year increase. With revenue up almost 28%. This double digit sales growth came from both microcontrollers and digital ICs.
In terms of profitability, MDG's operating margin shortly year over year to 20.3 percent from 11.7%. On a sequential basis, MDG's revenue increased for the 3% and its operating margin also expanded. Our microcontroller business remains the main driver of operating profitability. So digital business contributed to the operating margin improvements on a sequential and year over year basis. We confirm that MDG's operating margin will be above 20% for the second half of twenty eighteen.
Finally, Analog, MEMS and sensors, IMS revenues increased 10.7% over year on a double digit growth for both Imaging and Analog. In terms of profitability, IMS operating margin increased to 10.5 percent from 9.4%. On a sequential basis, IMS revenues decreased 6.4% as anticipated on lower smartphone activity. Analog Edmonds from reduced posted sequential increases. The improved product mix led to a sequential operating margin progression.
For MS, we anticipate second half for pricing margins to move into the mid teens as we benefit from revenue leverage, specifically from smartphone application. Let's now discuss all this performance translated in new business and product leadership across the end market we sell. In automotive, we serve most of the electronic applications in the car. With a particular focus on car and autonomous driving. In car electrification, during Q2, we continued to expand the design win pipeline for our silicon carbide products.
And we achieved an important galvanic installation technology design win for an electrical vehicle. Galvanic insulation is one of the focus areas for us in expanding our portfolio of differentiated high value products for industrial and for automotive. We also continued to win business in more traditional automotive application areas like braking, engine management, and body control. Industrial is a very broad area for us, with many customers and many different applications. Here, we focus on smart industry where we built on our leading position in general purpose, 32 bit microcontrollers and on our strong portfolio, or power, analog, sensor and connectivity products.
We also deploy our system solution expertise to deliver multiple products and complete solutions. Some examples this quarter include hours for a satellite tolling module and a custom power line model. Moving to personal electronics. Our main focus here is on smartphones. In Q2, we expanded our reach with customers in particular in Asia.
We had design wins for time of flight sensors, touchschemes scriprollers, motion sensors and protection devices. We also won a design win with our STM32 microcontrollers at a keep Japanese OEM for high definition televisions. This is an expansion for us into a new market that were traditionally difficult to penetrate. In communication equipment, computers and peripherals, we are leveraging our in house processes in a number of focused application areas. Examples this quarter, our design for fiber optics infrastructure with our biosimilars process, that is optimized for high frequency communications applications and an ASIC design for 5G infrastructure with a silicoid or decilator process that meets the latest cellular RF requirements.
Let's conclude with our Q3 guidance. We expect revenues to increase This would represent year over year growth of about 16.8%. By end market, in Q3, we expect sequential strong growth in personal electronics, We also anticipate solid growth in our automotive despite the fact that we will normally see some seasonality here. And we are sequential revenue growth to be driven by Imaging, Automotive And Power Discrete. We anticipate normal seasonality in Analog And Microcontrollers.
We anticipate a 3rd quarter gross margin at about 40%, This is in line with our communication at our Capital Market Day that in the second half of twenty eighteen, We see revenue growth as the main positive driver for the gross margin, substantially offset by the product mix evolution. As a result, we expect to maintain our current level of gross margin, which will drive gross profit increases in line with revenue growth. Adding together, the different ingredients, including OpEx discipline, we expect to So I would like to reconfirm deliver our 2018 objective of making another step forward in term of year over year revenue growth and profitability. Overall, we are on track with the goals set at our Capital Market Day in May, grew 2018 revenues between about 14% to 17% versus 2017. And in the second half of twenty eighteen, ADG operating margin to be in the low teens IMX operating margin to be in the mid teens, MDG operating margin to be about 20%.
We are also on track with our longer term goal of sustainable profitable growth, to continue to create shareholder value and to make history an even stronger player in the Semiconductor Industry. Now, we are happy to answer
you. Questions. The first question is from Aushal Santania from Credit Suisse. Please go ahead. Hi,
good morning. Two questions. First on gross margins, John, like, you mentioned that there is a there is some headwind, from product mix, as we go into Q3. Just can you give us some color as to, is it one particular product in a high end smartphone application or is it like multiple products, which is impacting gross margin headwind. And then secondly, on the inventory, we've seen inventory rise for a couple of quarters now by about more than $100,000,000.
So I just wanted to understand like, is it again, is it driven by just 1 or 2 specific projects or is it broad based inventory increase across different products? Thank you.
Thank you for the question. So I address it to Lorenzo and I will make a compliment, okay, if needed.
Good morning to everybody. Lorenzo Grande speaking about the Q3 gross margin. As we said that our Capital Market Day, we have, on the gross margin for Q3, definitely impact related to the product mix. In particular, as you know, we are growing significantly in the in Q3 and also in Q4 personal electronic, in particularly in smartphone. This growth, of course, from a point of view of gross margin, is not accretive.
Gross margins will be impacted by this ingredient of project mix. On the other side, we will have a positive effect related to improved manufacturing efficiency. That will substantially offset this negative impact. So that's why we are guiding in the range of 40% was already anticipated on our capital market day. Irrespective to the inventory.
In respect to the inventory, we grew our inventory. You know that we were smoothing somehow our production over Q2 to fulfill the demand in Q3. We have a strong demand definitely in personal electronic in the smartphone, but as well as also in automotive. We do expect to see a normalization of inventory and in Q3 and in Q4.
Did that answer your question, Nishal?
Yes, thank you. Thanks a lot, Lorenzo. Thanks.
Okay. Thank you. Next question, please.
The next question is from Alexander Peder from Societe Generale. Please go ahead.
Yes, good morning and thank you for taking my question. I would just have 2. The first one would be, if you come back a little bit on ADG margins that went down, despite the sequential revenue growth. So you mentioned some input costs, anything else going on in terms of mix and why exactly that is reversing in the second half And then secondly, more general question on how the current trade war rhetoric coming out of the U. S.
Could influence your perception of risk for the same industry as a whole for yourselves and for some of your key end markets, particularly in automotive?
Thank you for the question. So,
the first one will be answered by Lorenzo and I will take the second one. About the deterioration in ADG, let's say, not let's say, not that the improvement in ADG we actually you know that in ADG, both in automotive and power disc, we are encountering a very, very strong demand. This strong demand, let's say, to follow-up with this demand, we are investing significantly and we encountered during the quarter on temporary manufacturing inefficiency due to this increase of investment that we have done in order to follow that demand. Investment that are not yet at the full speed. And on top of that, we encountered also some cost in increased cost in the supply chain.
This temporary inefficiency will be fully reabsorbed in the course of Q3. And definitely also in the course of Q4. So we do expect actually, to recover in term of profitability ADG. And we confirm what we have said at the Capital Market Day that we do expect ADG to be in the locked in. In the second half of the year in term of operating margin.
About the second question, I have to say that at this moment, okay, the direct impact on our company is really negligible. However, like a global companies, we are monitoring the situation. 1st, we are very attentive about any potential impact on our own customers which is, let's say, a normal attention. But if the trend were Escalates, we are more concerned I have to say about the consequences that this can have on the global microenvironment. But I guess, okay, this is a common concern well spread across our piece.
At this moment, okay, I have no more to add on top of that.
Thank you.
The next question is from Sandeep Deshpande from JP Morgan. Please go ahead.
Yes, thank you for letting me on. My first question is regarding the automotive market and either your ramp up of silicon carbide Zama, can you comment on the ramp up of that revenue of silicon carbide revenue in the first half of the year and how you see that progressing in the second half? And secondly, with regard to the margin, can I ask a question on the currency that whether the currency shift that has taken place year on year is impacting your which is reducing to some extent your leverage associated with the operating margin? Thank you.
So thank you, Sandeep. So I answered the first question, and Lorenzo will answer some questions. So I really confirm, that we expect our revenue from, from silicon carbide to be about, okay, $100,000,000 in the 2018. And I have simply to say, we are on track. Second point, we are engaged, okay, with the key players in car electrification supporting carmakers with power modules on a worldwide basis.
Today, we have more than 25 projects in discussion, and I have to say that 85% are about silicon carbide. And as the industry, okay, has been adding capacity. So we are securing what is needed to serve our customers. In term of substrate for the short term. And we have several silicon carbide substrates and we are preparing our capital expenditure, okay, for the next quarters and months to support, okay, all the demand we have.
So in the nutshell, okay, Sandeep, we are really on track on silicon carbide and I confirm I am fully convinced it will be important game changer for the industry.
Thank you.
I think the second question was about expenses. The impact of the exchange rate in our expenses. If I look at the expenses, yes, indeed, let's say, if I look a year over year basis, last year, our expenses, our effective exchange of 'eighteen in Q2 was 'one hundred and nine. This year in Q2 has been 1.19 on the expenses. Of course, we have an impact and this impact is in the range of $30,000,000 $35,000,000 or something like that.
If I look forward, our effective exchange rate moving from Q2 to Q3 substantially flat because we stay at 1.19 with the current spot rate in the range of 1.17 If I look at Q4, we do expect that with the hedging contract that we have in place to be in the range of 118. And so I would say that moving forward, there will not be a significant impact on expenses related to the exchange rate in if we stay at this level of exchange rate.
And an absolute amount will the OpEx remain at these levels? How do you look at that?
Well, in term of expenses, you know, in Q2, our expenses came after $622,000,000, net expenses. This was a little bit higher than what we were anticipating because our range, if you remember, we were more in the range of 610 15. Q2 expenses were, I would say, impacted by a couple of one time events. Actually, we have a loss of credit in one of our jurisdiction plus some termination benefit costs related to a certain number of our former executives. These two impacts were not in our, let's say, guidance at the times.
And if I exclude these two to impact, I would say, that we were in the range that we were communicating. What it will be, the evolution of our expenses in the entering in the Q3 and in Q4. Moving in Q3, the expenses will be impacted by 2 negative. That's actually, let's say, and one positive. The negative on the negative side, there will be the impact somewhat salary increase and this was, of course, a factor in SINCE 7 in our motor.
And also by a one time expenses related to the social charges on vested share that are distributed to our employees that are accounted for the full year in Q3. Of the seasonality that in Europe, there are a lot of number of days of vacation. So we do expect in the range for for the next quarter between 6156620. When we move forward in Q4, we we expect a similar amount with the on one side, let's say, unfavorable calendar in better to Q3. That is offsetting by the benefit not to have any longer the social charges.
So at the end, we do expect a substantially to be in that range at Q3 and Q4.
Thank you.
Thank you, Sandeep. Next question please.
The next question is from Anthony Stoss from Craig Hallum. Please go ahead.
Good afternoon, gentlemen. If you wouldn't mind commenting about your biggest customer on the smartphone side, kind of on a year over year basis, your total content. I think in the last quarterly conference call, you talked about expectations of having more content than a year ago. So I just want to confirm that that's still the case. And then secondly, For Q4, can you confirm that you expect all three of your business segments to grow sequentially in the December quarter?
Thank you.
So, Tony, just as a clarification, I think we, our previous calls, with our largest customer at the time, we talked about having increased revenues, not necessarily content. So just a clarification there. And then let's answer that and then we'll come back to your second question, Tony, just as a clarification. So Jean Marc.
So can you guys. This is the one question exactly.
So, Tony was asking in terms of our largest customer and how that is evolving on a year over year basis.
On a year over year basis, we we do not comment at this level of detail, okay, with our major customer. Because first, we do not comment. However, okay, you know, that they will introduce, okay, prefolds. Okay. This is well known, well known everywhere.
And, they will announce it basically in September, and we would see. And our guidance in Q3 is encompassing, okay, this, this, this, the acknowledgement, And for the full year, okay, I confirm what I have said during my address, we see a year over year growth for ST from 14% to 17%. End of 2018 versus 2017, well across end market we address and product group And we are convinced that personal electronics end markets and our sensor will perfectly be in line with this, this target.
And Tony, on your second question, you were asking that for Q4, the if all the product groups were going to grow sequentially, is that was that your question? That's correct. That's correct. Okay. That's a Q3 call.
You have to wait for Q4.
Just checking to see if
you expect a normal seasonality.
I would say that, to speaking, that our expectation is to have a growth at the end, what we do expect for the year, I was mentioned by Jean Marcia, just a minute ago, was to be balanced across the various groups. So we expect, let's say, to growth in the range of 14%, seventeen percent with a growth that is quite balanced across our groups. For sure, let's say now guiding Q4 is a little bit too early.
Yes, I think Tony, as, as Jean Marc already got the question on the trade war and things of that nature, there's some uncertainty out there. So we'll just talk about Q3 on this call.
We simply want to be consistent and we are on track again with what we say at the lower capital market day in May. We will grow this year, okay, between 14% to 17% year over year.
Thank you, Tony.
Next question please?
The next question is from Janet Almenon from Liberum. Please go ahead.
Just back on the gross margin side, if I remember at your Capital Markets Day, you had pulled out both smartphones as well as the discretes as having a mix impact on your gross margin into the second half. And you were talking mainly about smartphones just now. So I was just wondering is this decrease also still having a negative impact from a mix point of view in the second half. And on those product segments, I was just wondering what the outlook is for gross margins going, let's say, over the next 12 to 18 months or so, is it likely that gradually you will be able to achieve some cost reductions those product areas, which is having the lower gross margin. And therefore, you could bring those gross margins up.
Or is it that you would be facing, let's say, price pressure there and the gross margins in those kinds of segments are going to be sort of structurally lower than some of the other businesses even on the longer term. And as a follow-up, you said you pulled out industrial as being specifically strong in Q2. I was just wondering what part of the industrial market that refers to? Was it broader? Was it predominantly sort of IoT products from the distribution channel or was it something from the larger industrial companies, etcetera?
So, thank you for all the questions. So Lorenzo will answer the first one. I will take the second one.
About gross margin, you are right. When we were at Capital Market Day, we underline the fact that the gross margin for our personal electronic, specialized image sensor and also power discretes are in average are below the average of the company. The Q3 revenues that need to be a strong contribution coming from these 2 product family. And as I said, in terms of gross margin, these are not accretive on the other side that there are the other products that are improving their product mix inside at the various family, contributing, let's say, to mitigate the gross margin impact on top, we also improvement in thermal manufacture. The gross margin of the company was enjoying.
If you look at quite a significant growth moving from last year to this year, mainly driven by manufacturing that now is running at full speed fully saturated. Moving forward, of course, we will work in order to have some improvement that will for sure, not a big step or, but it will be a continuous improvement as well as we will work on the product mix. Today, the market condition as such that we may, let's say, really work on the mix, we may work in order to optimize. And so we think that we can in somehow to have a mitigation related to maybe the growth of some product family that are not at the average gross margin of the company. Margin will come in a short and medium term, more from the leverage on the revenues than improvement in the gross margin.
So just to paraphrase what you said, if I look forward, can we assume let's say into 2019 that your higher gross, you would expect or try to achieve a situation where your higher gross margin products are growing faster than your lower gross margin products?
No, as I said, let's say, what we see in the short and medium term to stay in the range of the 40 share, let's say, in terms of gross margin.
So about your second question, I would like to say that from a sales channel side, It is really a broad range, okay, whatever I put distribution channel or key OEM, so we don't see a specific point to mention. As far as for the group, our concern, this is the same because, of course, I get you, you take note of our MDG, okay, growth year over year. So our STM 32, a contributor load okay, to this industrial end market growth. But I have to see an analog as well. And it's exactly happening what we expect, okay, leveraging our STM32, but our analog, strong portfolio in analog, strong portfolio in power discretes and sensors as well.
So simply to say that it is really broad range from both side, channel distribution and OT OEM, and product as well.
Understood. Thank you very much.
Thank you, Janardan. Next question?
The next question is from Jerome Rommel from Exane BNP. Please go ahead.
Good morning. Two questions. The first one is Lorenzo, how should we model the depreciation and amortization, going forward? I saw the increase in Q2 and with your strong CapEx you already spent Q1 and Q2. How should we model for the rest of this year for or maybe for the full year?
And maybe one question for Jean Marc. Could you update us on your manufacturing capabilities with the new fabs you have qualified with your phoneword and the ramp up in Singapore?
I take the question about the depreciation and amortization, Yes, sir, there will be an increase this year. We model in the range for the full year. We see this amortization and depreciation in the range of $787,000,000 that is definitely an increase in respect to last year. And for the 2nd half, it should be in the range around 200 to 110 per it answers your question.
So, about your second question. Well, first, about, about your technology transfer, Singapore. Singapore. Yeah. So we saw, Singapore, Gambocchio is the name of where the fab is located.
But clearly, they're on track. They're really doing a fantastic job. Of course, we know very well this fab, so there is absolutely no learning curve, okay, from ST, okay, to take back, okay, this fab in our industrial footprint. So they will be perfectly on track to continue to support us on our growth, both for STM32 low power microcontroller and STM 8 microcontroller. So this is really, really a good news.
They are supporting us as well on some power discrete and vertical intelligent power. And this fab will be a really instrumental, starting to support the overall revenue growth of ST starting Q4. About the our strategy to increase our, let's say, outsourcing for wafer fab, which currently are 20% more. As you know, we have decided to outsource, now technologies, for amended flash, more eighteen nanometer is already done and engaged. And we have decided 14 nanometer as well.
So let's say all the programs are agreed and the transfer are started and they will support ST, medium term growth in order to mitigate our capital expenditure. And as I told you during my various address, again, to support our next 3 year growth, ST is not intended to add any additional infrastructures on top of the pilot line in Agrade. And of course, I will also mention that we can add an additional capacity in coal but within the current infrastructure. So really, really, I am pleased to say that we are totally on track with our strategy to say, ST internal manufacturing focus on proprietary processes standard processes or advanced service processes are totally outsource and mix processes, derivative processes from servers or power, will be outsourced, fifty-fifty with the flexibility to go up to 80 or to go down 30 according to the market situation. So we are totally on track with this strategy.
Thank you.
Thank you, Jerome. Next question please.
The next question is from Andrew Gardiner from Barclays. Please go ahead.
Good morning, gentlemen. 2 quick ones. Firstly, just some of the address some of the cycle concerns a bit more. I was wondering if you could make a comment on inventory levels you see through the channel, particularly at distribution, whether there's any change there? And also on the Silicon Carbide wins you mentioned in Asia and Europe, can you explain where in the car these wins are?
Is it just charging? Is it inverter or is it both? Just a bit of detail around that would be helpful
if you can. Thank you.
So, thank you for your questions. So I am pleased to address the question to Marco Cassis.
Good morning. So on the first question about the level of inventory in the channel, I have to say that first of all, in Q2 with a high record level of sales to the distribution channel. And these means that our level of inventory now is very healthy. It's less than 3 months. And so we do not see any increase or dangers increase of inventory at distribution level.
For the silicon carbide, we cannot go too much in detail, but it is a
So usual usual subsystem, okay, you know, that silicon carbide, the performance spreads are instrumental between inverters and onboard charger. And ST, we address all the subsystem of the electrical car.
Okay, understood. Thank you guys.
Thank you, Andrew. Next question please.
The next question is from David Mulholland from UBS. Please go ahead.
Hi, thanks. Just two quick questions. Firstly, as you look into Q3, you made the comment that you expect sequential growth in automotive and I guess typically it can sometimes be a slightly softer quarter. And in the last couple of months, given what's happening with the new testing cycles and the tariffs potentially, have been some concerns what would happen from production. So can you maybe just drill in a little bit to what's giving you the comfort that sequentially the automotive business can grow And then secondly, on the can you possibly comment on your bookings performance in Q2?
What was the book to bill in the quarter and how that broke down by division by product area if possible?
So I take the first one about automotive confidence level and you take the second one. Okay. No, about the first one, we are really confident the demand is really strong on automotive. And again, whatever is a legacy part of the automotive application, so body, engine controls, braking, lighting, this kind of stuff. And electrification of the cars, you know, is really booming and pushing and connected car and ADAS as well.
As Lorenzo said a few minutes ago, we have prepared all our self, okay, second half, last year and 1st half this year to support, okay, this growth with our capital expenditure. So that's the reason why our capital expenditure icon fear will be in the range of $1,200,000,000 to $1,300,000,000, but is a bit front loaded in order to prepare this growth of H2 on the Automotive. So our confidence level is very high, okay, to see this end market and our ADG group to achieve a growth consistently, okay, with the overall objective of the company.
And coming to your question about the book to bill, this confidence is confirmed also from the order entry that see in a during the quarter and we continue to see our book to bill is above parity quite above parity is 1.1. So it's at least quite strong, I would say definitely in the area of ADG, in the area of power and discreteness. So we see actually are quite a strong and healthy demand that as on the line that make us confident that that in the third quarter Against the normal seasonality, we should see automotive really growth.
Can I maybe just follow-up and just specific on the seasonality into Q3, because guiding for growth sequentially in a quarter when normally a lot of the European customers' facilities take a bit of a break? I know last year you saw the ADG group up sequentially, but the 2 years prior, it's normally done. So specifically on Q3, what's different this year and what's driving that? Is it just the structural growth drivers coming through or what's driving the adverse seasonality as such in Q3?
So it is clear that for the fast growing and innovative application, the seasonality effect, do the playing, okay, because you are going so fast, that absolutely, okay, the car maker, the Tier 1, the do not slow down their demand. And then again, on the legacy, okay, we are releasing, okay, a strong growth in the legacy because also simply the per version of the semiconductor and electronic system. So the content of a of semiconductor especially, okay, with the smart switch, okay, enabled by our vertical intelligent power technology are really booming. So this year, we see a clear effect that first, the silicon content increasing in the legacy offset a lot of the seasonality effect. And the fast growing application definitively totally offsetting the seasonality effect.
So that's the reason why we are in this position to confirm that okay, on Q3 and H2 overall, we will see sequential growth on Automotive and at a year over year growth for the Automotive completely aligned with the overall objective of the company.
That's great. Thanks very much.
Thank you, David. Next question, please.
The next question is from Stephen Hori from ODDO.
Odo, so I have two questions, if I may. The first one is about the full year guidance that you have reiterated from 14% to 17%. I know it's a it's a call for Q3, but when you look at what it can make for Q4, it gives you anywhere between 1% to 11% of sequential growth in Q4. So if you could give us some more clarity on what you're seeing at the moment for Q4 would be very helpful. And also I have a question about the tax rate, which is particularly low at this moment.
So is there any explanation and what should we be looking out going forward? Thank you very much.
Lorenzo, you can Yes, maybe I take the 1 of the tax rate. You know that you're right, our tax rate is quite low, but you have to consider we have the use of the NOL that is substantially reducing significantly. Our tax rate. This probably if you consider, let's say, our level of tax rate ETR once the this NOL will be, let's say, a gross status or completely used And this year, we'll be looking forward probably in the next year. It will be more in the range of 15, 17 and our tax rate.
Next year, yes, probably sometime next year when we will learn.
Yes, thank you.
And about year over year growth guidance, more we confirm this guidance up to about 14% up to 17% clearly it is a result of the variable we control and variable, okay, we do not control, okay, I have a question, should we need to go about the overall trade war and so on. So today, we simply confirmed that, okay, we don't see, okay, Wix all for the market, we are very confident to grow on automotive as anticipated our personal electronic will grow in the second half. We already show a strong growth on industrial we will have simply a seasonal effect on Q3. But at this moment, okay, there is a, let's say, no reason, okay, to narrow this guidance and we confirmed, but we strongly confirmed the guidance, okay, to grow the company year over year about 14% to 17%. Okay.
And about the operating margin guidance improvement of 300 basis points. You talked about steady improvement, but are you confirming the number, the 300 basis points?
Yes. What we said at the market days that moving from H1 to H2, we envisage as something in the range of 3 60 basis point improvement in the operating margin. Still, we are on track. We work in order to get there. And I think that at this stage, we still have this in our in our view.
So at the end, we confirmed what was said a couple of months ago.
Okay. Thank you very much.
Thank you Stephan. Next question please.
The next question is from Amit Roshandani from Citigroup. Please go ahead.
Good morning, everyone. I'm a Taljundani from Citi, and thanks for taking my question. 2, if I may. My first question, again, comes back to the topic of near term demand trends. Could you maybe help us understand how the lead times have shaped up across different segments over the quarter?
Have they stabilized? Are they coming down or are they continue to stretch. And in that context, I would appreciate your thoughts on how are you thinking about where we are in the semiconductor cycle? What are the variables you are looking at to gauge the sustainability of the demand, for example, beyond the industrial side or any of the end markets. So that would be my first question.
And I have a follow-up
Okay. So, thank you for your questions. So, I am pleased to address to Marco Kettis. So, on the question about lead time, what we see is that lead time are now stable and, our effort is in giving a good service to our end customers. For the second part of the question, can you repeat?
It was on the variables of the cycle. Is that Is that correct, Amit?
Just in terms of how do you internally look at where we are in the cycle, the key variables look at and what how does that give you confidence on sustainability of demand?
Today, the visibility that we have on our market in term of growth of the market is in the range of 7%. About 7% of the growth of our market in year 2018. Next year, let's say, the last forecast in term of growth of the market is 5%. Where we stand in the cycle. We think that we so far, what we see is that we have a good and healthy demand, then difficult to say.
The projection are what I said, and we don't see signs for the time being of a release slowdown of the market.
So there is absolutely low weak signal about semiconductor market, at least on the end market we address. So automotive industrial, more gas and electronics okay, you know, this is a specific case with smartphone, showing us that something is happened. So today, we are really fully concentrated, okay, to serve our customer at the base of their demand for automotive, which is where the demand is very, very strong and for industrial where the demand is strong as well. Driven by secular demand, with the initiative, okay, for a better process control, better match not controlled, better facilities controlled. So we confirm that automotive and industrial are showing secular demand in electronics.
And at this moment, we don't see any weak signals.
Thank you for the color, gentlemen. And just very quickly, your unrelated follow-up, could you share your latest thoughts on M and A please? During, I think earlier this month, you made a move for Drochner Graphics. Just understanding how you're thinking about M and A at this stage. Thank you.
Well, I bought M and A, well, clearly, okay, for the goal, for this call to today, ST plan of record, to drive the company in a sustainable profitable growth. Okay, our our strategy is organic growth. And, we already said that we will make acquisition, a small acquisition in order to complete our strikes in STM32 in analog mainly. And here, the result acquisition is exactly okay, fitting with this strategy. Well, I bought other M and A, well, as I told you, okay, during the Capital Market Day, the team of ST, myself, we are engaged in the, let's say, strategic plan in operation, okay.
And as I told you, during the Capital Market Day, we will come back early next year and of course, M and A, okay, would be a subject we will cover. But today, I would simply to confirm, we are totally focused on H2 execution, organic growth and definitively, we have acquired and we could acquire specific small IPs or companies in order to make it stronger.
Thank you, Amit. Next question please.
The next question is from Francesca Pravetira from Marcos. Please go ahead.
Good morning, everybody. A question more general on duties and possible tariff that can be imposed and dis source the trade. Can you have a general comment on this issue in respect with position of STM. Thank you.
In respect to this, I think, I think Remark already touched this point in one answer before. As we said, there are two folds on one side, the direct impact for our company. About the tariffs. This is, of course, something business is not nice to have because there is some some impact even if this impact is quite the materiality of this impact is quite low because it's not really something that is significantly impacting us directly. Of course, there is some concern as I think everybody has in a situation in which, let's say, there is this uncertainty.
So far, as we said, not withstanding this uncertainty related to this, let's say, words, this kind of things that we don't see in our reference market any significant sign of But definitely, it's something that is not welcome in the sense that at the end, that may create a turbulence in the business. But so far, I confirm what, as well said, since now, for the moment, we don't see really any significant impact demand in automotive is still strong. And for what concern our company, yes, there is some impact there, but really on the materiality of this impact is very, very low.
Thank you.
Thank you, Francesco. Next question please?
The next question is from Gunther Holcelder from Baaderville. Please go ahead.
Just one follow-up question on the on the automotive market and the seasonal above normal seasonality you're seeing in the quarter. You know, he, in Germany, you know, there are some some issues in in car production, with Volkswagen Audi also, let's say, dispense, due to this WLTP, a new test process. So I understand that you're not seeing seeing any signs here for production cuts or postponements or did you are you saying the net impact is positive as you have other growth, which is offsetting this weakness or aren't you seeing any weakness at
Marco will take this. Again, we confirm that we do not see any slowdown sign of weakness in automotive actually is exactly the opposite. The demand is extremely strong and we are doing our best in order to cope with requirement from the market. So, we confirm again that absolutely there is no sign of slowdown during Q3 in automotive.
Okay. And maybe one follow-up question on all silicon carbide. You mentioned earlier confirm the 100,000,000 sales level for 2018. Can you, help us, to understand the down of this business? Can you say, you know, what's, approximately automotive?
What is renewables? What is industrial including EBA infrastructure to get an idea?
For this year, it's fully automotive.
Okay. Many thanks.
Thank you, guys. Next question please.
The next question is from Robert Sanders from Deutsche Bank. Please go ahead.
Yes, good morning. I'm sorry to come back to the 2018 full year guide again, but if you hit the midpoint of that guide, your year on year growth rate, which come down to 7% in Q4. Is there something about last year's Q4 that was unusually strong, for example, in automotive or industrial? That makes that quarter a tough comp? And I have a follow-up.
Okay. Yes. Okay. As we said, our guidance for the year is 14 between 14% 17%. If we will have this, let's say, an output is 9 quarters substantially.
So at the end of the month, you have to remember that the last quarter the last in Q4 last year was a quite strong quarter. So at the end, I think that we will have in next quarter still a growth, still a significant growth. You remember also that we said that we are struggling, let's say, with the level of CapEx between 1.2.3 to target somehow the high range of our the high end of our range, but fine. Yes, at the end, in Q4, we will see growth and we will see sequential growth, while significant sequential growth. And at the end, therefore, they are, we reconfirm that we will be we will be between 14, 17, and with the ambition to be maybe a little bit higher than any point.
Great. And just on microcontrollers, it looks like you're doing about mid-20s EBIT margins in that group, which is is a great performance substantially up year on year. And this group now represents 40% of profits. How do you see this the opportunity to grow your profitability further in microcontrollers maybe as the 32 bit mix rises or through production changes or day shrink? Thanks.
No, I don't to comment too much, okay, further, okay, 20, 2018, okay, what I can say, clearly, our micro Cola business, is addressing a mix of industrial applications. Which are, let's say, for sure based on our FTM32. But we address as well some personal electronics application. So overall, clearly, the gross margin is a result of the manufacturing efficiency and this end market and product mix, you know that microcontroller or supply chain is based on a well balanced internal and external manufacturing, okay. Today, we are clearly close to 5050, 50% internal, 50% external.
So 50% internal, as Lorenzo said, we have already done great achievements we have still opportunity of continuous improvement, but certainly not at the same pace, that in the past few quarters, because now our manufacturing is fully loaded. And then, okay, for the external manufacturing definitively, it is a link, okay, to the to the wafer price cost decrease, okay, we will have. But overall, this is the key ingredient mix between industrial, which are very strong where, you know, we want to focus, both local racing OEM and strong distribution channel. Personal products as well, but being very selective and manufacturing will continuously improve both internal and external, but certainly external, not, okay, achieving breakthrough as we have done during the past few quarters. So this is a element, okay, we are considering, to foresee our gross margin improvement on microcontroller.
Also definitively, you know, that we are today completing our portfolio of STM32 with industrial microprocessor. And clearly, okay, for the future, it will also be a booster consideration, okay, for our gross margin.
Great. Thanks, Jean Marc.
Thank you, Rob. Next question please.
The next question is from Lee Simpson from Stifel. Please go ahead.
Hi, good morning guys and thanks for squeezing me on at the end there. 3 quick ones, if I could. I'm just trying to get a handle on the importance of or packaging advantages you may have in Silicon Carbide, particularly for autos, as rivals seem to be dismissing the need for any new packaging technologies? Second question, I just wanted to clarify, did you say that the inventories reduce in absolute terms in Q3 and Q4 or we just see the DIOs come in a little? And then the 3rd question, it looks when you certainly scanned the 3DS space in smartphones that the market is now pivoting much more to Steddigo vision.
And we just wondered if if that's a trend that you could play into or if that was running counter to your normal time of flight focus? Thanks.
So, thank you for your 3 questions. So, Lorenzo will answer the inventory 1. And I will observe Silicon Carbide at the 3 d depths of it.
I go straight on the inventory then. I assume that you are referring to our inventory, right, not in the channel, the inventory as the inventory.
That's correct.
Yes. Well, what we see that, as we said, we prepare the growth for the second half. So in Q1 and in particularly in Q3, there was a quite significant increase in inventory. What we do expect is that we will increase in Q3 definitely the terms, so reduce significantly the number of days of inventory, we do not foreseen a significantly reduction, let's say, in the absolute value of the inventory in Q3. While in Q4, we do expect that to have some reduction.
So coming back to silicon carbide, but it is clear that for the application we address. So inverters and on more charger, the module is a package is a critical enabler. Well, it's simply ST, we apply our strategy we have the capability to design by ourselves custom design power modules. And to enable, let's say, competitive, silicon carbide powermoset. So This is what we have done and we are going now with the success, okay, I shared with you a few minutes ago.
Then if we address those applications and I repeat today, we have 25 projects and 85% 55% are on Silicon Carbide. And here, you have a various situation. It's either our custom designed module or a standard, a package, standard module, If it is standard package and module, we use OSAT. So, generally speaking, we observe if it is custom designed for our module, we are doing by ourselves. So you have all kind of configuration and this is simply okay, our strategy.
About pre distancing, about pre distancing, okay, clearly, we follow what we consider let's say our road map. So you know that ST, we address, proximity, hedging sensor But clearly, a time of flight, technology, which is based on what we call SPAD. So single photo of a large diode, okay, clearly the area of focus of ourselves and here we have accumulated millions and millions of pieces and we will continue to address successfully this market. Then on that 3 d sensing, you know, and it is not a secret that ST has been a key supplier or a pass finder on the structure on light. We have a road map.
We have all the technology blocks. We have all the capability to continue to sustain successfully customer who would like to continue on structural light or to adopt structural light. And here, again, in structured light, a part of the structured light is a component using time of flight. So there is a total synergy between the structural light and the time of flight of proximity of hedging faults. Now, okay, still on front facing, We know that in the near future, some solution could encompass a time of flight, a part of the subsystem, taking place of some component of the structure or light, ST is ready.
So we will address this market as well whatever is Android based, smartphone or other operating system. And then for world facing, we know that the critical enabler is a time of flight. And again, we have adequate feedback to support. So We are convinced about that and we are following our conviction and we will be and we are already successful on this front month.
Thanks so much. Thank you.
Thank you, Lee.
The next question is from Aditya Metuku from Bank of America. Please go ahead.
Yes, good morning guys. I have three questions. Firstly, just on the Automotive Group revenues across the board, can you confirm what was growth rate in the quarter, not just in ATG, but across the group as a whole? And then secondly, on On Silicon Carbide, there have been some news flow that Tesla is asking for price cuts to their suppliers. So how do you see this impacting you going forward?
And more generally, when you look at the silicon carbide market, can you give us some color on any pricing changes that you're seeing in this market. And finally, just on, as a follow-up to a question on modules earlier, You said that you're working with partners on standard modules and you're designing your own custom modules. So how is this different to your, to what happened with IGBT modules? I remember 4 or 5 years ago, you were trying to get into this space. You didn't really have a lot of traction there.
So why do you think this time it will be different?
Well, I take some question and Lorenzo will take the question about the growth. But on module for the, your last question, okay, clearly here, we have a key differentiating factor. Is a significant carbide because I repeat today ST is a unique supplier able to produce nice mass production on the silicon carbide. So we consume, okay, about 60% of the worldwide supply chain of raw material silicon carbide. Clearly, the key enabler in our success with a power module of using silicon carbide is the silicon carbide technology.
And as we have the capability to make modules custom design, okay, most of them make our success. So and in the future, we aim to continue with the same determination. Well, then I am very sorry, but I absolutely cannot and does not want to comment any commercial discussion or transaction, okay, about price with our customers, okay, it's, totally out of our, let's say, EBIT to do it. And, and then, okay, on the, on the silicon carbide pipes, small, more than a, let's say, a general statement, okay, you know, this technology is a innovative way. You know, this technology is going very fast.
All the actors worldwide have to invest imported, amount of CapEx to support the growth. And clearly, all the actors worldwide who will participate to this huge market because again, we are, I am convinced it will be a game changer. We have our mind that, okay, the price will be go down according to usual roadmap to support automotive and industrial market. So there is nothing new here. It is clearly in the world, let's say, medium, long term road map, for silicon carbide.
About the short term, okay, I do not want to cover it.
In respect to the last question if I want to understood that the question was about our trend of sales in automotive overall, as you know, we have revenues not only in ADG group, but is across others groups inside the company, both in AMS on in MTG. What we saw, what we see, let's say, today in the first half of the year, our growth was the range of 17% year over year H1 2018 compared to H1 2017. What we expect is to be substantially the same level for H2, even slightly improving So means that for the full year, we see a growth that will be higher than the average of the growth of the company. Definitely will be on the high side of our range, 17% is likely above Automotive. Strong.
17% in automotive? Did I hear you correctly?
Overall and let's say including all the sales in automotive in all the groups.
Understood. And just a quick follow-up to Jean Marc. So on Syk Moskowitz, you said that is the main advantage for you at this point. Can you give us some ideas to where your advantages are coming in the more space? Is it just any color there would be helpful
Thank you.
For silicon carbide?
Yes.
Well, for silicon carbide, you know, to today, in production, it is, let's say, we start with diodes that we have not spent. So this is a second generation. So we have adopted, okay, technology, architecture, which, let's say, help us to go very fast on the market. And we have co operated, okay, with an important partner in order to introduce the technology very fast. So clearly, no, we are accumulating a lower and a learning curve which definitively is providing a competitive advantage of ST first to develop the 3rd generation, okay, with trench.
And to be able to introduce soon, okay, this 3rd generation in production. So I say our, let's say, main competitive advantage based on the fact that we have taken we have developed and worked on innovation since a long time on silicon carbide. We have taken the risk to introduce very early in the market, thanks to our cooperation with an important partner And now we are ramping up successfully because ST is an ideal, okay, so we have manufacturing capability well recognized. We have the capability to fix very fast, okay, all the extrasac or intrasac issues we can face. And now, okay, our control of the technology is really a state of the art.
So we are pushing and this, let's say, early adopter and pathfinder attitude make ST now in a stronger position compared to the competition.
Thank you, Adi. We're going to move to our last question, please.
Today's last question is from Jean Marcumborechina from Equita. Please go ahead.
Yes, good morning. Just a quick, follow-up question. In terms of the OpEx, just to confirm if I understood correctly, So you will have about 10,000,000 you had about $10,000,000 of one off costs in Q2 and you will also have about $10,000,000 one off OpEx cost in Q3. So for the year, when we model for 2019, we should consider that in 2018, you had about 1,000,000 of costs, which are kind of not recovering in nature. Is that right?
Thank you.
Just to clarify, when I was commenting in Q2, next sense is yes, we added something in the range of $10,000,000 that is not current. When I was commenting in Q3, I said that in Q3, we have, let's say, a salary increase that, of course, is every year. It happens that we have, let's say, a one time related to the social charges on vested share. It means that these are the yearly expenses that it happened in Q3. So it's something that is a recurrent every year, but in Q3, let's say, and this is a significant than what they said.
I said that we are expected to have expenses in Q3 in the range of $615,000,000, $620,000,000 as similar expenses in Q4.
Okay. So this should be considered a kind of run rate?
Yeah. We will have in the index.
Okay. Thank you.
Thank you, John Marco. At this point, we'll go ahead and conclude our Q2 2018 earnings. Thank you.
Thank you.
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