NXP Semiconductors NV (NXPI) — Q2 2023 Earnings Call Transcript

Thank you, Norma and good morning everyone. Welcome to NXP Semiconductor’s second quarter earnings call. With me on the call today is Kurt Sievers, NXP’s President and CEO; and Bill Betz, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today’s call will include forward-looking statements that involve risks and uncertainties that could cause NXP’s results to differ materially from management’s current expectations. These risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on specific end markets in which we operate, the sale of new and existing products and our expectations for financial results for the third quarter of 2023. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP’s underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our second quarter 2023 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP’s website in the Investor Relations section at nxp.com. I would now like to turn the call over to Kurt.

Thank you, Jeff, and good morning, everyone. We really appreciate you joining our call today. I will start with a review of our quarter two results and then discuss our guidance for quarter three. Now let me begin with quarter two. Our revenue came in at the high-end of our guidance or about $100 million better than the midpoint with the trends in all end market segments performing better than our expectations. Taken together, NXP delivered quarter two revenue of $3.3 billion, essentially flat year-on-year, while we continue to maintain our distribution channel inventory strictly at a 1.6-month level, which remains well below our long-term target of 2.5 months. Non-GAAP operating margin in quarter two was 35%, 50 basis points above the midpoint of our guidance, so 100 basis points below the year-ago period. The year-on-year performance was a result of stronger gross margin, offset by higher R&D investments in support of our mid- and long-term growth targets. Now let me turn to the specific trends in our focus end markets. In Automotive, quarter two revenue was $1.87 billion, up 9% versus the year-ago period and near the high-end of our guidance. In Industrial and IoT, quarter two revenue was $578 million, down 19% versus the year-ago period and near the high end of our guidance. In Mobile, quarter two revenue was $284 million, down 27% versus the year-ago period and above the high-end of our guidance. In Communication, Infrastructure and Other, quarter two revenue was $571 million, up 15% year-on-year and at the high-end of our guidance. During the second quarter, we experienced incremental improvement across all regions with China also gradually improving quarter-over-quarter. Year-on-year growth was led by our Direct business. While our Distribution business continues to grow sequentially from the trough in Q1, though still down on a year-on-year basis. Now let me turn to our expectations for quarter three 2023. We are guiding quarter three revenue to $3.4 billion. This is down about 1% versus the year-ago period and represents sequential growth of about 3% at the midpoint. We do anticipate the following trends in our business. Automotive is expected to be up in the mid-single-digit percent range versus quarter three, ‘22 and up in the low single-digit range sequentially. Industrial and IoT is expected to be down in the mid-teens percent range versus quarter three ‘22 and up in the low-single-digit percent range sequentially. Mobile is expected to be down in the mid-teens percentage range versus quarter three ‘22 and to be up in the mid-20% range on a sequential basis. And finally, Communication, Infrastructure, and Other is expected to be up about 10% versus quarter three ‘22 and flattish sequentially. Our guidance for the third quarter contemplates maintaining the 1.6 month distribution channel inventory level and very consistent to our approach in prior quarters, we will manage sell-in to the channel tightly, so we may start to increase general inventory as and when we see consistent strength in channel sell-through for future periods. We are well positioned with on-hand inventory to satiate a possible rebound in demand as it emerges. Furthermore, we continue to experience higher input costs. Hence, we stick to our consistent pricing policy, which is to pass along the input cost increases to our customers, while not impacting our gross margin. From a more strategic standpoint, we focus on enhancing how we work with our suppliers and customers in order to enable long-term supply and demand assurance programs especially in the automotive and core industrial businesses. Now as we progress through 2023, we are gaining confidence that we will be able to return to predictable year-over-year growth of the business. Demand in the Automotive and Core Industrial businesses continues to be solid with only a few pockets of supply shortages persisting through year-end. Within the Mobile segment, we are seeing the expected strong seasonal trends in the premium portion of the market in quarter three. And our consumer IoT business appears to be accelerating from Q1. However, it does not show signs of a sharp rebound as of yet. And finally, in our Communications, Infrastructure segment, we see soft and lumpy demand in the cellular base station markets, offset by strength in our secured card and other businesses. So taken together our first-half results and our guidance for quarter three give us confidence that we are successfully navigating through the cyclical downturn in our consumer exposed businesses, while we do see continued strength in our Automotive, Core Industrial, and Communications Infrastructure businesses. We believe quarter one was the trough in our business. And we anticipate the second-half of 2023 will be greater than the first-half of this year and also that the second-half of 2023 will grow over the second-half of 2022. And this outlook does not contemplate a strong rebound in the consumer IoT business or the Android handset market nor does it assume the retail of the distribution channel to our long-term target of 2.5 months. So overall, we will continue to be very, very disciplined, managing what is in our control, and staying within our long-term financial model. And before I turn the call over to Bill, I'd like to take a moment and thank our automotive processor team for achieving a significant milestone for the enablement of software-defined vehicles. At the end of June, NXP announced the industry's first fully automotive specified safe and secure 5-nanometer computer. This is a 4 billion transistor multi-core NPU based on an innovative chip architecture that allows the up-integration of new functions and consolidation of existing functions. The vehicle of the future will utilize new software-defined platforms to allow easy upgrades and new features to be added throughout the vehicle's lifetime. Software-defined vehicles get more performant, more reliable, and more functional over time instead of degrading as is the case today. In order to achieve this capability, auto OEMs require both flexibility in their compute architecture as well as the opportunity to tap into a broad ecosystem of application developers. At the top of the compute hierarchy in the car is the vehicle computer that runs the vehicle score services and orchestrates functionality across domains deployed into new processes. With our S32 platform, NXP is the only semiconductor company that offers a complete portfolio to address a wide range of processing requirements across the entire compute hierarchy of the software-defined vehicle. The challenge that auto OEMs are facing with this transformation is the enablement of both software reuse and software scalability. NXP's S32 platform addresses that challenge by enabling software reuse both horizontally across domains as well as vertically from low-end controllers, all the way up to the high-performance vehicle computer. Over the last several years, we have engaged with and enabled multiple automotive OEMs in their journey toward the software-defined vehicle. We have continued to receive significant OEM awards, including the new 5-nanometer vehicle computer, which will help accelerate our automotive growth well beyond 2024. We are truly excited to be on this transformational journey with the automotive industry. And now I would like to pass the call over to you, Bill, for a review of our financial performance.

Well, thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q2 and provided the revenue outlook for Q3, I will move to the financial highlights. Overall, our Q2 financial performance was very good. Revenue was at the high-end of the guidance range and both non-GAAP gross profit and non-GAAP operating profit were above the midpoint of the guidance. Now moving to the details of Q2, total revenue was $3.3 billion, essentially flat year-on-year while $99 million above the midpoint of the guidance range. We generated $1.93 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58%, up 60 basis points year-on-year and 20 basis points above the midpoint of the guidance range. Total non-GAAP operating expenses were $771 million or 23.4% of the revenue, which is up $47 million year-on-year and up $43 million from Q1. This was at the high-end of the guidance range due to our planned annual merit expenses and higher variable compensation. From a total operating profit perspective, non-GAAP operating profit was $1.16 billion and non-GAAP operating margin was 35%. This was down 100 basis points year-on-year, though above the midpoint of the guidance range, which is a reflection of solid fall through on the combination of higher revenue and better gross profit offset by slightly higher operating expenses. Non-GAAP interest expense was $73 million with non-GAAP income tax provision of $108 million, consistent with improved profitability reflecting a non-GAAP effective tax rate of 16.6%. Non-controlling interest was $6 million and stock-based compensation, which is not included in the non-GAAP earnings, was $102 million. Taken together, this resulted in a non-GAAP earnings per share of $3.43 near the high-end of the guidance range. Turning to the changes in our cash and debt, total debt at the end of Q1 was $11.17 billion flat sequentially. The ending cash position was $3.86 billion, down $67 million sequentially. Q2 is the cumulative effect of capital returns, offset by lower CapEx investments, working capital needs, and cash generation during Q2. The resulting net debt was $7.31 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.44 billion. The ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 1.3 times, and the 12-month adjusted EBITDA interest coverage ratio was 18.2 times. During Q2, we repurchased $302 million of our shares and paid $264 million in cash dividends. Taken together, we returned $566 million to the owners in the quarter, which represented 102% of non-GAAP free cash flow generated during the quarter and 80% on a trailing 12-month period. Furthermore, subsequent to the end of Q2, we continue to execute our share repurchase program, buying an incremental $69 million of our shares through Friday, July 21. Now turning to working capital metrics, days of inventory was 137 days, an increase of two days sequentially and distribution channel inventory was 1.6 months or approximately 49 days. When combined, this represents approximately 186 days. Furthermore, we continue to be laser-focused on tightly controlling our channel inventory levels, while leveraging our balance sheet strength to hold product and die form for quick turnaround as demand materializes. We will only ship products into distribution that has a high likelihood of selling through in the current quarter or is being presaged if needed for specific customer deliveries in the next quarter, in alignment with any change in market conditions. Days receivable were 29 days, down two days sequentially, days payable were 63 days, a sequential decrease of five days due to the timing of material receipts. Taken together, the cash conversion cycle was 103 days, an increase of five days versus the prior quarter. Cash flow from operations was $756 million and net CapEx was $200 million or 6% of revenue, resulting in non-GAAP free cash flow of $556 million or 17% of Q2 revenue. On a trailing 12-month basis, this represents a 20% free cash flow margin. We continue to be focused on driving non-GAAP free cash flow margin to greater than 25%, a level we have demonstrated in the past and a level we believe we can achieve in the future. Turning now to our expectations for the third quarter. As Kurt mentioned, we anticipate Q3 revenue to be $3.4 billion, plus or minus $100 million. At the midpoint of our revenue outlook, this is down about 1% year-on-year and about up 3% versus Q2. Furthermore, given our manufacturing cycle times and the current demand environment, our guidance contemplates maintaining channel inventory at the 1.6-month level, though again, we may move this upward pending improved market conditions and customer requests. We expect non-GAAP gross margin to be flat sequentially at 58.4%, plus or minus 50 basis points as we continue to balance our mix and internal utilizations. However, we do see and expect higher input costs from our suppliers to continue. As a result, we remain focused on mitigating these higher input costs through a combination of productivity, and higher prices to our customers. Operating expenses are expected to be $785 million, plus or minus about $10 million, taken together non-GAAP operating margin will be 35.3% at the midpoint. We expect non-GAAP financial expense to be $67 million and non-GAAP tax rate to be 16.6% of profit before tax. Non-controlling interest will be $4 million, and for Q3, we suggest for modeling purposes you use an average share count of 261.3 shares and capital expenditures of 7% of revenue. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.60. In closing, I would like to highlight the key themes for this earnings cycle. First, from a performance standpoint, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model. Second, operationally the Q3 guidance assumes internal factory utilization in the low to mid-70s range similar to this past quarter and a level we expect to hold until internal inventory normalizes. Lastly, we continue to hold more cash on the balance sheet to enable greater flexibility. Options include reinvestment in the business, continued share repurchases, growth of the dividend, and reduced debt levels. Similar to last quarter, we continue to remain active repurchasing our shares. I would like to now turn it back to the operator for questions.

Hey, guys. Thanks for taking my question and let me be the first to extend my congratulations on good execution. You guys have been consistent in your communication about keeping distribution inventory low until you see better sell-out of the distribution channel. But per your 10-Q filing, your inventory sales were up 13.5% sequentially ended June quarter and I have to presume that sell-out of the distribution channel is up a commensurate amount. So what precisely are you looking at to define better sell? How does the distribution channel trigger taking up that inventory by $500 million?

Yes. Hi, good morning. Thanks, Gary also for the feedback. Yes, we have indeed and that's a good thing, increased our distribution performance in the second quarter, which is also why I said in my prepared remarks that we saw the trough in our consumer exposed businesses, which are the main users of that distribution channel already back in Q1. So we went up into Q2. However, at the same time, we do not see a real rebound in China, so I think that the main trigger point for us would be a rebound in China, which in our case would be relevant to the Android handset business, as well as to the consumer exposed IoT business. That hasn't really happened to the extent that we would consider it consistent and persistent enough in order to move up with distribution inventory. And that's why we try to confirm indeed that all the numbers we just gave you for the guidance contemplate a strict 1.6 again; still, we may move higher, but then we would also deliver more revenue accordingly in case we see that rebound in China coming. Today, it's not visible.

Thank you. That's helpful color. Kurt, I appreciate you dropping some breadcrumbs as to how we should think about the second half of the year and based on those breadcrumbs, we have to infer that your fourth quarter will be flat sequentially. Is that a proper read or is there a possibility it may be even some sequential growth in the fourth quarter?

Gary, I mean, I'll let you draw your conclusions about the fourth quarter, which we don't guide here. But clearly, what I did repeat, and I think I said this last earnings already that the second half is going to be larger than the first half. Now we are adding indeed that the second half is also going to grow over the second half of last year. We don't want to tell it closer than this at this point. It's just hard in the current environment to do so. But I think the key point here is that it is really based on two separate legs, which are very important to contemplate. One is consistent strength in the automotive core industrial and comms infra business pulling just continue to pull ahead. While at the same time, we left this trough in the consumer exposed businesses in Q1 behind us, which then also helps indeed in the second half to resume the growth, which I was describing. Now for the fourth quarter specifically, let's see when we get there how that goes.

Hi, good morning. And congratulations on the results, and then thanks for taking my question. Last quarter, you called out pockets of inventory at Tier 1s in the auto business from some golden screw issues. I mean, clearly, your results don't seem to indicate that this wasn't an issue at all. But could you provide an update on that situation? Did this resolve intra quarter or still sort of lingering and hanging out there but you're managing through it? I'd be curious to hear how you're seeing things now. Thank you.

Yes, good morning, Joshua. Indeed, it was last earnings that we mentioned that there were about two. Actually as we said European auto Tier 1s, which seem to have some over-inventory. In the meantime, this is all contemplated in the guidance you just heard. It is still a, I would say, an unstable situation, because in the meantime lead times have largely normalized. So we are back to a much more normal order pattern, which is good after 2.5 years of turmoil from supply challenges. At the same time, OEMs are asking for much more strict inventory targets from the Tier 1s, but that hasn't settled in all cases. So what we are seeing here is that in several cases, there is a bit of a tension situation between the OEMs, the auto OEMs and the automotive Tier 1s, and how much inventory they should actually hold. And that mixed with those golden screw leftovers is indeed leading to a somewhat uneven situation, which in the end, and that I mean I've seen this two, three times before in those cycles. It is now the normalization of what we've had over the past 2.5 years with not much more normal lead times. And in that sense, I think everything is contemplated. I'd say the situation has normalized relative to what I did say last time.

Thank you for all the color there. And then for my follow-up, I wanted to ask about a comment made towards the end of the prepared remarks. It sounds like you're going to hold utilizations in this 70% range until you get back inventory on books to their target range. Just want to confirm that target range is at 95-days from the Analyst Day. And so does that imply sort of sell-through greater than sell-in in the back half of the year? And you're confident you can keep margins at this level as utilization rates stay in the 70s? Thank you.

Yes. Joshua, this is Bill. Couple of questions in there mixed around. So first, let me talk about utilization. Do we expect those to be very similar in our Q3 in the mid to low-70s? And again, what we've guided is our improved mix a bit higher revenues offsetting those utilizations very nicely of everything we can see. On inventory, we expect inventory to go down from a day standpoint internally assuming the channel stays at the 1.6, right? So we're not counting on those 25-days to deplete our internal inventory. That'll be at a later date when we feel confident in the market. So remember, so we're holding about 25-days of extra inventory internally on our balance sheet and prepared for that. I think overall longer term, I would say we're more comfortable holding about a 105-days, I would call it a bit more normal than a 95-day target we said about a year and a half ago. We've learned a lot over the last couple of years, and it's just good to have a little bit more inventory, so you can really churn those any orders inside the quarter under lead times and be able to upside revenue. And clearly, we've demonstrated that the past two quarters by upsizing our revenue, having the material in our die bank and being able to fast turn them through our back-end and deliver. So the team is doing a great job here.

Thank you.

Hi, guys. Thanks for letting me ask a question. Kurt, first one for you, I just want to dig a little deeper into the automotive side. People have been waiting for another shoe to drop in that space for a couple of years' time. And you guys have been, kind of, flat to up solidly on a sequential basis and much better than that on a year-over-year basis for nearly four quarters now including your guide. So I just wanted to go into the covers, are you still limited by supply? If I put content together with some unit growth, you don't seem to be doing anything better than SAAR right now. So just if you could go into where supply and demand are relative to one another on thinking, any of those sorts of details would be great.

Yes, thanks, Ross. Good morning. I'm glad to respond, but first, let me address the initial part of the question regarding the potential decline in the automotive market. I believe that the situation has stabilized; we don't anticipate any significant downturn because things have largely normalized. There are only a few persistent areas of supply constraints remaining, and while they can be challenging for customers, they are relatively small from a revenue and order size perspective. The notion of an exaggerated backlog or significant inventory buildup is behind us, as we have been addressing these issues over the past three quarters. Overall, I find the state of the automotive industry to be surprisingly positive, especially when reflecting on the SAAR forecasts from earlier this year, which projected a growth around 3%. In our last quarter, we mentioned it was around 4%, and now S&P has updated it to 5%. These figures are consistent across different regions, indicating that SAAR is on a solid trajectory for this year. Although it is expected to reach 87 million units for the full year, this figure remains below the peak volume of 2019. What is more crucial is the proportion of electric and hybrid vehicles in that total. Our forecasts suggest that about one-third of the global market will consist of either hybrid or fully electric vehicles, representing a 31% year-on-year growth in those categories. This presents a tremendous opportunity for the semiconductor business due to increased content. The recent turmoil we have experienced in the supply chain, stemming from an extensive supply crisis, has now normalized. While the transition to stability has been somewhat uneven in various scenarios, things are moving toward normalcy. In terms of our growth metrics, our trailing 12-month growth is currently at 12%, with a solid outlook for Q3, which aligns well with our expectations. Historically, in the last decade, we have never had a quarter that strictly follows the math of SAAR plus content growth; fluctuations are typical from quarter to quarter. Now, with more normalized lead times, we believe things are in a favorable position.

Thank you for all that color Kurt. I guess for my follow-up, one on the gross margin side for Bill. You guys have done a great job. You're at the high-end of your long-term target for your last analyst meeting, and you've done that while mix is moving around and utilization is low to the extent we focus on the mix side of that equation, when you talk about mix being a tailwind, is that between your segments that you're referring to? And if it is, if those segments start to normalize at some point, your industrial IoT business grew very fast in this last quarter, you're guiding for the next quarter, the mobile business to come back, does mix become less of a tailwind? And if so, how do you handle that? And how does it show itself on gross margins?

Thank you, Ross. Let me provide additional insights into our gross margin performance for Q2. The recent guidance we shared addresses the upcoming quarters and even extends beyond the next year. For Q2, we performed slightly better due to our product mix. Regarding our distribution, it accounted for about 51% of our sales, improving from 48%. This long tail distribution includes higher margin, lower volume customers, which enhances our mix. However, it's still below the mid-50s we used to see. This situation is balancing well as we actively manage our internal inventory and adjust our foundry orders, which requires some time. We feel confident about this balance of factors. For Q3, we expect similar trends. As I mentioned in response to an earlier question, we are planning for inventory levels to drop below current figures to regain control and enhance our free cash flow. Looking beyond Q3 and into the next few quarters, we anticipate maintaining gross margins at the high-end of our model, around 58% with a variance of 50 basis points. I believe the mix will serve as a tailwind rather than a headwind since we are focusing on the long tail aspect of distribution, which we expect to positively impact us going forward. In the longer term, beyond next year, we aim to further expand gross margins driven by increased revenue. It's important to note that we operate on a 30% fixed cost structure. We expect productivity gains, especially as we increase our utilization rates towards optimal levels of around 85%. Our focus will be on fostering long-term customer relationships, especially those lower volume but higher margin businesses. Additionally, we anticipate that our new product introductions will contribute positively over time as they gain traction. Overall, we are optimistic about increasing gross margins in the long run beyond current levels, while the next couple of quarters should remain within the range we've just outlined.

Thanks, Bill.

Hi, everyone. I appreciate you taking my questions. My first inquiry is about the distributor sales. I'm a bit unclear because although the distributor sales didn't increase, the months remained the same, which indicates that the sell-out matched the increase in sell-in. However, that doesn't suggest a recovery. Could you clarify this? Additionally, what assumptions are you making regarding the distributor sales in Q3 for both sell-in and sell-out to maintain flat inventory levels for the month in Q3?

So, Stacy, let me take that one. So selling was up, sell-through was up that's the only way you can balance that 1.6.

Right.

So that's what the math is. In Q3, we expect, again, our distribution sales as a percentage of how we service our customers to be up again.

Okay. So how is that not a recovery though? I mean you didn't think that, that was a recovery. So this is like a few quarters now where it looks at the sell-through is going up.

We've talked about a normal steady recovery, but no sharp rebounds that many are anticipating specifically out of China.

Thank you for taking my question. Kurt, how is NXP's content different in a hybrid or full EV versus a traditional ICE vehicle? And I ask that because when I look at your automotive business, so you mentioned it's up about 12%, 13% in the first half, but it is slowing down towards, kind of, the mid-single-digit range in Q3. So, when we compare that against a SAAR production level that is quite decent, then we also add in some of the pricing tailwinds and some of the content tailwinds, wouldn't that suggest your automotive sales should be growing faster at this point? So just curious, how does that hybrid versus ICE mix play into how you look at your automotive sales growth?

Thank you, Vivek. Our involvement with electric and hybrid vehicles is significantly beneficial for us. This includes products specifically designed for electric drive systems, like battery management and gate drivers for inverter control. Additionally, a variety of other products are integrated into electric vehicles, as they usually feature more advanced electronics in areas like ADAS and comfort systems, making them highly beneficial for NXP. It's important to note that comparing a single quarter's SAAR to our revenue isn’t effective. The products we currently supply to vehicles were likely shipped two quarters ago or even earlier; it's a complex supply chain that has caused considerable challenges over the past two and a half years. Unlike the mobile sector, where shipments quickly lead to immediate placement in smartphones, the automotive industry operates on a different timeline. Thus, taking a longer-term view over multiple quarters provides a better perspective, especially now that the supply chain is stabilizing, which is encouraging. We are pleased with this progress because it seems the significant challenges are behind us. Furthermore, unlike the situation before the crisis, we can now establish much longer-term demand and supply agreements with our customers, giving us greater clarity on our future revenue and product needs.

Got it. Kurt, as the supply environment in automotive stabilizes, how are conversations with your customers evolving as you look ahead to the next three to four quarters? Are they less inclined to accept higher prices? Are they less inclined to take on and hold inventory than they did previously? How do you see this environment transitioning from a highly supply-constrained situation to one that is more normalized?

I need to reiterate what I mentioned in the previous call, as that perspective remains unchanged. Our pricing adjusts according to the rising input costs, and unfortunately, these increased costs are persisting this year. Therefore, NXP’s pricing, including Automotive, will rise this year. Looking ahead to next year, we are seeing similar indications of increasing input costs. There are a few elements of our input costs that appear to improve slightly for next year, but it's challenging to pinpoint the exact mix of our manufacturing and input costs for the future. If they increase again, and there are indications they might, we will adhere to the same policy we've been using. Our product, particularly in the automotive sector, is unique and typically not easily replaceable in the short term. The notion that it operates as a commodity product, where a price issue could lead to losing customers, does not apply in this industry. In fact, over the last couple of years, we have established a significant number of long-term agreements with our customers concerning demand assurance, which is advantageous for us, while also agreeing to supply assurance that benefits them, creating a balanced arrangement. This structure helps us avoid any short-term fluctuations that you might be concerned about.

Okay. Thank you, Kurt, very helpful.

Hi, thank you very much. I have two quick questions. The first one is on the automotive. And Kurt, I think you have been very clear on the solid outlook for Automotive. I just wanted to check on the order behavior that you have in Automotive in a way that you don't see anything on the P&L side, but I assume you have a significant backlog still to normalize? And what we are seeing in the auto OEM side is like the orders are coming down rather sharply also on the EV side of things, probably some macro impact there. But I just wanted to check with you if you see any impacts on the order behavior, although it doesn't impact your P&L, because of your backlog yet. Is there anything happening on these orders that you see coming through?

Hi, Francois. Thanks for the question. I appreciate it as it allows me to clarify some points. We have never worked with a backlog concept, which typically implies pent-up demand that needs to be addressed. Instead, we have established NCNR agreements with our customers to gain a long-term understanding of actual demand. Our focus is not on backlog but on true demand and how to effectively respond to it over time. Consequently, there is no positive or negative impact from any backlog, as we have already normalized that situation. While there may have been a slight backlog in the first quarter, that is now behind us. Regarding the negative macro impact on the automotive sector, I have a different perspective. I certainly acknowledge that the macroeconomic environment is unpredictable, and there are valid concerns about consumer behavior. However, looking at the current data, the SAAR for this year has seen consistent upgrades, now reflecting a 5% growth forecast according to third-party research, not us. The rate of electrification aligns with previous expectations, and I recently verified that dealer inventories in China are below long-term averages, as are those in the U.S. Only in Europe have inventories returned to normal levels. I completely agree that the macro situation is challenging, but auto consumption itself appears to be holding up well. Some OEMs may have been overly ambitious, but when we analyze the actual numbers month over month and quarter over quarter, there isn’t a decline.

Very clear. Thank you, Kurt for your answer. My quick follow-up would be on the pricing. Obviously, it's a concern for investors, at least a big focus. And we are seeing some, sort of, pockets of pricing pressure from local Chinese for a vast range of products. So I was wondering, you talked about the input cost increasing and that's putting the pricing up for your business. How do you see the behavior of some local Chinese or some discount that we see? It seems to be on the low-end side of the spectrum, but just want wondering if you see anything on your side? And maybe it would be great to have a quantification of how much of your business you would consider as low end versus high end, maybe would be very helpful?

Yes. A quarter ago, some of our peers appeared to have unsettled the market. I can share what we're observing. The only area where we notice increased pricing pressure is among low-end microcontrollers in China, which we identified some time ago. We're still seeing this because we communicate with our distribution partners and end customers there. However, this isn't where NXP aims to operate since our business philosophy focuses on differentiation through product value, performance, and specifications. While we may encounter some low-end or commoditized products from time to time, it's not typically where we engage. That said, it's not entirely absent, as commodities can emerge over time. I can't quantify it, but it remains quite limited because NXP's philosophy is not to compete on price.

Thank you. Thank you.

Yes, good morning. Thank you for taking the question. I guess, Kurt, I was hoping you could spend a little time discussing the trends that you're seeing in China, whether there's any green shoots at all, whether it's NIO and BYD or Android or other? Would love to hear your thoughts?

Yes, thanks, C.J. I hesitate to say we see a rebound, which many might have hoped for. The bottom line is that we do not see a rebound, and that is not reflected in any of our numbers or comments. However, I would like to highlight two points. We believe that our over-inventory issue with Android phones has been resolved. Therefore, if consumer demand increases, we will see it reflected in our numbers without any excess inventory holding us back. This observation is specific to NXP. Meanwhile, there is no significant increase in demand for Android, but our industry peers with more exposure to the Chinese handset market will likely provide more insights in their upcoming calls. On the automotive front, we have a strong presence with electric car companies, which I believe will be the leaders in China and possibly globally. I am uncertain about their global capabilities, but in China, companies like BYD and NIO are expected to gain market share, and we are well positioned with these companies as they tend to adopt new products more quickly than Western automakers. Consequently, our portfolio with these clients generally has higher average selling prices, allowing us to benefit more from their success compared to Western competitors. The electric automotive sector in China appears to be in a good position and is developing positively. Additionally, in the consumer IoT market in China, we experienced a nice sequential increase from Q1 to Q2, and our guidance for Q3 indicates further sequential growth in Industrial IoT, also driven by consumer IoT in China. However, I wouldn't label this as a rebound. We have not seen strong enough signals to justify refilling the channel at this point. Thus, the overall picture remains mixed, C.J.

Very helpful. As my follow-up, and I don't know if it's for Kurt or Bill, but Tier 2 foundry pricing has definitely weakened over the last few months. And just curious, are you seeing that potentially spread to the Tier 1s? And is that loosening up wafer pricing for you at all in any of your markets? Thank you.

Yes. So I would confirm that Tier 2s have shown that behavior, absolutely. The trouble is it doesn't help us much, because most of our Tier 1 and Core Industrial and Automotive customers don't want product from these sources. So for a larger majority of our input costs, that hasn't helped. Will it spread to the Tier 1 foundries? You go ask them, C.J. I don't know. I would be really stimulating here, which I can't. We don't have signs of that yet.

Very helpful. Thank you.

Hey Norma, we'll take one last question here today. Thank you.

Hey, thanks for squeezing me in. Maybe I'll just start by following on C.J.'s question, because you mentioned higher input costs. So I think it sounds like you're not getting breaks in the foundries, but I'm curious if you could just quantify where you're seeing the most pressure from rising input costs, external versus internal? And when does that start to layer in?

Blayne, this isn't new information. We've experienced significant input cost increases for about two years now. These increases come not only from our own costs but also from Tier 1 foundries, which are well-known companies. There has been public information about how much they have raised their prices for us and our competitors. This is why we have been forced to continuously increase our prices to our customers to offset these costs and maintain our gross margin performance. I can't predict when this situation will change, but it is important to note that Tier 2 foundries have already reduced their prices in some cases significantly. However, this has not yet affected Tier 1 foundries, and we haven't received indications that they will change their pricing.

Great. And I just want to ask you, Kurt, on lead times. You said a couple of times more normal ranges. I think if I remember right, last quarter, you still had a one-third that were greater than 52 weeks. So maybe just a little more color on what that more normal is, what your normal range is and all your products, for the most part, back into that normal range by that comment?

Yes, most of the products are. The positive aspect is that a significant portion of our business falls under the MT&R contracts, which means we are committed for the year. Therefore, for those products associated with these agreements, the lead time is 52 weeks as the orders have already been placed for the entire year. However, if we set that aside, I would say that most NXP products have typical lead times. We have very few outstanding issues, perhaps one or two internally and one or two from third-party foundries where we are still facing significant shortages. These shortages are concerning because any product that we cannot deliver to a customer is a significant issue. However, in terms of overall revenue impact, this is quite minimal at the moment. By the end of the year, these issues should be resolved completely.

Thank you.

All right. Then operator, I think I have to close the call here, and I want to thank you all for being on the call. In summary, our take is that we see clearly now that we left the trough of the consumer exposed businesses behind us in Q1, see good incremental growth from there sequentially, while Automotive, Homes Infra and Core Industrial continue to be very solid and that together lets us resume much more predictable growth going forward. And at the same time, we are confident to stick to our resilient margin pattern at the high end of our long-term guidance. With that, I want to thank you all and speak to you next. Thank you. Bye-bye.

Thank you very much.