Good morning ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 NXP Semiconductors’ Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to Mr. Jeff Palmer. Thank you, please go ahead, sir.

Thank you, Jerome. And good morning, good afternoon everyone. We hope you are all safe and healthy. Welcome to the NXP Semiconductors second quarter 2020 earnings call. With me on the call today Kurt Sievers, NXP's CEO and President; and Peter Kelly, our CFO. The call today is being recorded and will be available for replay from our corporate website. The 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 continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the third quarter of 2020. 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 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 2020 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. Now I'd like to turn the call over to Kurt.

Thanks very much Jeff and good morning or good afternoon everyone. We really appreciate you joining the call today. Now let me turn to our results. Our Q2 revenue was modestly better than the midpoint of our original guidance. Our Automotive business was significantly impacted by the COVID-19 caused factory shutdowns of our customers. So we did experience better than anticipated trends, and sequential growth in all of our other end markets. We are encouraged by the positive trends we experienced in China and the sales out of our distribution channel did improve sequentially. Taken together, NXP delivered revenue of $1.82 billion, $17 million above the midpoint of our original guidance range. Non-GAAP operating margin was 20.7%, about 170 basis points above the midpoint of guidance. We experienced slightly higher revenue with a higher proportion of distribution channel sales. We did deliver better gross margin because of a positive product sales mix. And all of this combined with tight control of our operating expenses resulted in better than expected operating profitability. Now turning to the specific trends in our focused end markets. In automotive, revenue was $674 million, down 35% versus the year ago period and showing us 32% sequential decline. In industrial and IoT, revenue was $435 million, up 12% versus the year ago period and up 16% sequentially. In mobile, revenue was $255 million down 14% versus the year ago period, up 3% sequentially. And please note the year-on-year comparison in mobile was impacted by the sale of the voice and audio business. And lastly, communication infrastructure and other revenue was $453 million down 9% year-on-year and up 12% sequentially. Now, before I’m turning to the specifics of our Q3 expectations, I'd like to make a few important comments. Our revenue guidance range for Q3 is again wider…

Thanks, Kurt. And good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during the quarter and provided our revenue outlook for the third quarter, I'll move to the financial highlights. In summary, our second quarter revenue performance in total was a little better than planned. Our Industrial & IoT end market along with common infrastructure showed significant strength. Our shipments into the mobile end market were about where we plan and our automotive revenue was significantly weaker than planned as OEMs and Tier 1 suppliers in Europe, North America and Japan closed their factory for extended periods. You'll note a proportionate sales through distribution versus direct were significantly higher reaching a record 58% given the strength in China and the weakness in automotive, which is more of a direct – more a direct business end market. So moving to the details of the second quarter. Total revenue was $1.82 billion, down 18% year-on-year and $17 million above the midpoint of our guidance. We generated $892 million in non-GAAP gross profits and reported a non-GAAP gross margin, 49.1% down 420 basis points year-on-year and 110 basis points above the midpoints of guidance. Gross margins were better than expected because of the mixed swing towards distribution and an overall richer product mix. Total non-GAAP operating expenses were $516 million, down $25 million year-on-year and better by $29 million from the first quarter. This was $7 million better than the midpoint of our guidance because of lower payroll expense. From a total operating profit perspective, non-GAAP operating profit was $376 million and non-GAAP operating margin was 20.7% down about 820 basis points year-on-year, but 170 basis points higher than guidance due to better gross margin and lower operating expense. Non got financial expense was $92…

[Operator Instructions] Your first question comes from the line of John Pitzer with Credit Suisse. You may now ask your question?

Yes, guys. Thanks for, let me ask the questions. Congratulations on the solid results, given the challenging environment. Kurt, I guess, as we look at the company that as you mentioned in your preamble, there's a lot of companies specific drivers. And I guess I want to try to get a better understanding what, when you look at the auto growth you expect in the calendar third quarter, to what extent is that coming from the growth areas of the business versus the more mature parts of the auto business? And a similar question on the industrial IoT. Great sequential growth in the June quarter, you're guiding for that to sustain in the September quarter. I'm just kind of curious to what extent is this the benefit you're getting of taking that Marvell asset and running it through kind of your stronger distribution channel?

Yes. Thanks, John. Good morning. First of all a lot of good questions, but let me maybe stop with saying, because it really holds for both for auto and industrial IoT that indeed it all looks like that Q2 was the trough, and now we are moving up from here. And the moving up is indeed a mix of company-specific growth in both segments, by the way, in auto and in industrial IoT and obviously also a recovery of the market. In industrial and IoT, very, very clearly, the – and I think we did also a press release on this. The WiFi is fixed portfolio from Marvell, which we launched in April is actually helping. We have also now successfully integrated the WiFi portfolio into our microcontroller and applications processor software development kits, which makes it really easy for customers. So yes, we do see early traction from that combination. So it is a factor in the continued very nice growth in industrial IOT. Clearly, industrial IoT has another strong sector, which is China. So the good growth in Q2 in industrial and IoT has been carried largely from a Chinese footprint perspective. And that also continues into Q3. Now in auto, things are a little bit different. In auto, clearly, Q2 was completely abnormal since we had these factory shutdowns, specifically from the OEMs in Europe and the U.S. And as we explained in the last call, we really wanted to make sure that we wouldn't create too much excess inventory at our customers, not only at distribution, but also at the direct customers. And that's actually the reason why the business has decreased more than we would have anticipated, but we just didn't want to follow any excess inventory building. But now this is nicely returning. So we see pretty good momentum in auto actually into Q3. And it is indeed a mix between OEMs and Tier 1s getting back to production. So we assume that by the end of Q3, production levels across the world in automotive should be back to 80% of the pre pandemic period. So that's a pretty solid return through Q3. But it's also that RADAR and our cluster business just gets steam again with new design wins, which are taking traction.

That's helpful. And then as a quick follow-up for Peter, just on the gross margin line. You're guiding for good sequential growth in the calendar third quarter, but you also mentioned you're trying to keep a cap on inventory build. I'm kind of curious as to what that means for utilization Q2 into Q3? And then just remind us, most of what you make or shipped this quarter you made last quarter. So as the utilization impact, if you get a benefit in Q3, is that really going to show up in Q3 gross margin? Or how do we think about Q4 gross margin?

Okay. Several questions there. So first of all, utilization in Q3 is about – on average, about 400 basis points lower than Q2. So clearly, that has an impact. I'm trying to take about to go from 120 days to 130 days, I think it's about, I don't know, $70 million of inventory out of the system. So one of the reasons utilization is down is we're inshipping from inventory to keep it under control. We do have this – so I – sorry, utilization is running about, I think, about 50%, maybe a little bit less. We do have this rule – accounting rule that when – and it's a little bit complicated because we do it by factory, and its six months trailing utilization. But when utilization is below 70%, we accelerate the fixed cost right now. So both Q2 and Q3 suffer from an accelerated fixed cost write-down in that you don't carry it forward through inventory. But on the other hand, assuming Q4 is okay and utilization starts to come up a little bit even if it doesn't get to the 70% level, which you probably won't. We'd expect to see some small benefit. And as time goes on, we'll be able to put more and more of the fixed costs into inventory. So typically, utilization in the current quarter impacts the next quarter. But in the current environment, because utilization is so low, you take a hit, not all of it, but you take most of it in the current quarter.

Your next question comes from the line of Vivek Arya with Bank of America Securities. You may now ask your question.

Thanks for taking my question. Kurt, just one follow-up on the auto segment. I think you mentioned at the end of Q3, production levels will be back to 80%, I believe, you said off of their normal trend. But when I look at your automotive sales at the $800 million guidance, I think that will be up to 70% of its prior peak. And I understand these things are not always coincident. But I'm curious, how do you look at the unit and the content recovery from here? Because this year, we all understand it's tough. When I look at some of the IHS forecasts for next year, they are looking at auto units perhaps being up double digit. And I know the visibility is low. But if they are up double digits, what does – can that conceptually say about your orders business, given the trend that you have seen so far play out this year?

Yes. Vivek, let me, first of all, comment to the current quarters, I would say, so the past two quarters and the next quarter. That is actually all pretty much in check. So according to IHS, the car production in Q1 was down year-on-year, 22%. Our business was only down 4%. In Q2, car production according to IHS was down year-on-year, 45%. We were down as at just around 35%. So we've been doing really a lot better in these first two quarters. Now I don't claim this is all market share gains or something, but part of this is indeed some inventory they've been building in the first half, like always, which will come down in the second half. But actually not too much, which is why I think latest mid through end Q3, we should be totally in balance again, such that the 80% car production at the end of Q3 is – I think that has a reasonable hit with our revenues. If you think about the fact that in Q1 and Q2, we've actually grown well, well ahead of the car production. Now a little bit more bigger picture, Vivek. So first of all, yes, I definitely believe the algorithm, which we've spoken about, that the semiconductor auto market should be like 3% to 4% ahead of SAR. We think that absolutely holds, also through this pandemic and out of the pandemic. And our target to outgrow that by 1.5 times also stands. Now I don't know what the car production next year is exactly going to do. IHS actually, I think there's something like, I think, 13% or 14% growth. And yes, with the algorithm, Vivek, we should be then nicely growing ahead of this in our business. So it doesn't work by the quarter, but over a year or year or two, it absolutely stands. And I mean I also haven't – I haven't really seen a lot of massive platform delays or something. So I believe the new wins we have in our growth areas are all-in tax and also come on time. So I have, say, a relatively solid portion of optimism when I think about automotive for the second half of this year, but then certainly going into next year.

Got it. Very helpful. And then, Kurt, for my follow-up, comms infrastructure is interestingly now your second largest business after autos. And I imagine one of your more profitable or perhaps the most profitable business, which is why I think your – I think, Peter, you mentioned about that mix effect going into Q3. I'm curious, how do you think about the growth prospects and leverage to 5G? Because when I recall back to the Analyst Day, I think this was supposed to be a segment with kind of more modest growth prospects versus others. So how do you think about the leverage to 5G? When will you start to see those benefits? Because we are seeing very strong global deployment of 5G. So just talk to us about comms infrastructure just because it's now such a large segment for you and obviously an important contributor to your gross margins? Thank you.

So it's certainly a large and important segment, but I mean the relative size to the others, obviously, in this abnormal period. It's really every quarter. So I mean it's kind of – Q2 certainly wasn't a normal quarter from a revenue's perspective. But anyhow, going forward, clearly the 5G deployment is a key factor. But not everything is shiny, Vivek, to be fair. So the one thing is that, clearly, you know there is one large Chinese company, which is a big carrier of the Chinese deployments. And nobody really knows what the export control regulations will do relative to this customer. So I mean, that's at least one factor on the horizon, where we always have to be a bit, say, cautious instead of being overly optimistic. And the other one is that more recently, the – we are working on our gallium nitride product, as you know, which has higher output powers, which is actually very, very attractive across the customer base. The only issue is that we are late relative to the demand. So I wish we had a faster expansion of our capacity. So we have a little bit of a delay here against the demand, which causes us, I'd say, some delay against the opportunity. But overall, I'm absolutely with you. We have a very, very strong position here across LDMOS all the way through gallium nitride to silicon germanium in that space. But the market But the market is bumpy. It has always been bumpy. It remains bumpy for the factors I've just quoted.

Your next question comes from the line of Stacy Rasgon with Bernstein Research. You may now ask your question.

Hi, guys. Thanks for taking my question. I wanted to ask about the commentary in your, at least with said improve expectations for improved sales trends through the second half of the year, I want available this debt actually imply that you do see Q4 growing sequentially off of Q3. And if so, can you give us some feeling for what end markets might be driving that?

Well typically Stacy good morning. Clearly the only guide the next score and that next quarter is a 10% sequential growth. And yes I made this statement. So what I would say is we see no reason why Q4 should not be growing over three. And the one I would call out, which is probably pulling this the most is going to be automotive.

Got it. Thank you. For my follow-up, I wanted to ask about the industrial strength. A lot of companies have been seeing relatively strong traction in this market in the wake of the pandemic, but there's also been some concerns around potential customer overbuilt in California. I know you've been trying to be cautious, not just with your district channel, but also with some of your customers. Maybe that was more than audible, maybe also with industrial to try to reduce their own demand forecasts, to try to control that. I guess what are you doing along those lines and how confident are you with the industrial upside that we're seeing right now actually is sustainable versus just being pulled forward?

Yes. Thanks, Stacy. That's a good question, indeed, because I believe, especially in the current environment, this is a – is a very, very important part of the controls, which we can execute on our business. And the distribution inventory is indeed the most relevant factor in our industry and IoT business, because a large portion of that business is actually going through distribution. And as we've spoken about a lot of times we remain super disciplined on the 2.5 months, actually we had a score again of 2.4 months of inventory in the last quarter. And I think I said in my prepared remarks that we could have shipped 145 million more in this, in this last quarter. And a solid part of this would probably have been in Industrial and IoT. And this is our way to make sure that we don't over ship into this market. So my do anything we can see, which I know I say through the distribution controls on the, on the inventory, which we have enhanced, we have a pretty good handle on this. There isn't that much direct business and industrial

Your next question comes from the line of Craig Hettenbach with Morgan Stanley. You may now ask your question.

Yes. Thank you. Question for Kirk just on ultra wide band. Can you talk about the breadth of design activity and how you see kind of your exposure, the next couple of quarters and autos versus smartphones?

Yes. Thanks, Craig. That's I'm glad you are asking. I definitely believe we are very, very much on track with building the ecosystem in, in neutral wipe, across mobile and auto. And I think we have kind of signposted now for a year already that this year in 2020, we would get started in a more material way in Mobile. And that is indeed one of the factors which is driving our sequential growth in mobile in Q3. And I mean, let me say that much. It's a, it's a flagship product in a, in an Android space company, which is ramping with our ultra-wideband. So from a revenue and unit perspective, clearly Mobile is now outpacing automotive to start with, but that it's been planned that way because we first have to roll out the mobile ecosystem and then the secure car access – mobile secure car access application is going to follow in the next year. We are shipping already a very small amount of ultra-wideband into automotive today, but it's still coming in the more conventional or traditional form factor of a key. So it's a more secure of doing car access. But with android now going out in a larger scale in mobile, we will have – and we'll see this also with auto OEMs next year in car races.

Got it. Thanks. And just as a follow-up on Industrial, I know the Marvell connectivity business had a lot of industrial exposure. So can you just talk to some of the strength you're seeing in industrial? How much of that is perhaps the legacy NXP business versus the impact of just Marvell starting to kind of ramp with you?

Peter or Jeff, you – I think you can dissect the at least in a very rough way, the Marvell from our original industrial business. But let me first of all say, Craig, it is really the combination, which makes the difference. Because we do leverage our leading position in apps processes and LCUs to pull-through the connectivity; so it becomes more and more difficult actually to talk about the two things in a separate way because they are just getting more and more combined going forward.

Yes. Kurt, I guess, I'll take that. So Craig, as you know, we're not going to break out Marvell individually every quarter. But I will say in Q2, the Marvell WiFi business was a not quite a double-digit percentage of the overall industrial business, but it was a very high kind of single, low double-digit percentage of the overall industrial and IoT business. Just within that one end market, but we're not going to break out Marvell in aggregate.

Your next question comes from the line of Ross Seymore with DB. You may now ask a question.

Thanks guys. So, let me ask some questions. Wanted to ask the first one on the inventory side of things. And this might go into the spirit of leaving no good deed on punished, but I just want to think about how you look at inventory strategically and how your customers are considering it. And the real question is some of your competitors are seemingly going the exact opposite way of you running much higher inventory, making sure channel inventory is ready for a rebound, et cetera. So I guess, what are we going to have to see, to get you to let that either 150 million in the first quarter, 145 million in the quarter and bookings actually flow through. And I guess related to that internally, once you hit that a hundred days, is that when the utilization will start to creep up and your inventory burn internally will stop.

Hey Ross, good morning. Let me take the more strategic perspective first, I think competitors who you are quoting, who will tell you the exact opposite, have a different business model. This is more about catalog product companies. They're the majority of our product is really application and or customer deal specific, which means in our case we just don't need to hold more inventory because we have a fairly good visibility into the specific applications at our customers and the associated run rates. So we continue to believe that the 2.5 months of inventory and distribution is about the right number for us and we are very, very sure we will not miss a bear or not miss any uptick by following that strategy. Now, Peter, maybe over to you relative to the hundred or better we are facing in Q3.

And just to add a little bit to that, Ross. We'll ship the $150 million when the distributors start shipping their product to their end customers. And at the moment, the reason we don't ship the $150 million is that they order more than they can ship. And we're not willing to let them have more than 2.5 months, because we have pretty sophisticated models by type of product. In terms of the internal inventory, our goal is to go down to 95 days. Utilization will start to increase when revenue starts to increase. So on flat revenue, flat utilized – flat revenue, flat inventory, you'd see utilization be relatively flat. Flat inventory, increasing revenue, you'd see utilization start to increase. So it's pretty straightforward. It's all about the more we ship, the better the utilization gets.

Thanks for that. And I guess as my follow-up on the OpEx side, I know there's specific math we can do on the $575 million and what percentage of revenues that would be. But to the extent you have that framework, Peter, about the gross margin being 55 million to $2.4 billion, your commentary about the OpEx getting up to kind of a $575 million level on a quarterly basis, any sort of framework about the relationship on that to your visibility on revenues, your assumptions, et cetera? And how much you might turn that up or down relative to how the revenue trajectory improves or doesn't at that time?

Yes, that's a great question Ross. So what – one of the things that Kurt was saying before is we think, Q2 is the weakest revenue number for 2020. We think the second half will be stronger than the first half. And we think 2021 will be better than 2020. So within that context we think we have the right products, we're making the right investments. We're going to win in our market. So we have no plans to reduce our investment. And this year we've taken some short term actions that I mentioned, like reducing – sorry, basically eliminating pay rises and incentive payments and cutting executive salaries. And at least the first two of those are not maintainable as you go into the next year. So it will add to our costs. But our assumption is maybe not completely in the first and second quarter, but we can afford this level of OpEx because of what we think the revenue will do. Now we have there’s a huge second wave or something then maybe we change our view on that. But although we didn't see it a V-shaped recovery from Q2 into Q3, we don't think 2021 is a complete write-off. So is that helpful? Did I give you the context?

Your next question comes from the line of – comes from the line of C.J. Muse with Evercore. You may now ask your question.

Yes, good morning, good afternoon. Thank you for taking my question. I guess a follow-up question on the gross margin side. So you're effectively telling us that between $2 billion, $2.4 billion, you should see 85% incremental gross margin. So curious should that be ratable as you progress?

Do we don't say that. What we do – what we've said is we have a model that we think is reasonable of a 5% change in revenue gives you about 200 basis points of margin. That sort of gives you a 100 basis points of margin, but that's the kind of plus or minus the $2.3 billion level. There's a couple of other things that go on. Our fixed costs at that level are about 35%. So if you do the math, that's about, I don't know, $400 million, maybe a little bit more million dollars a quarter. So at a much lower level of revenue, your fixed costs are higher. So you do get some higher fall throughs at very, very low levels, both directions. But you have to be able to do the calculation that’s certainly not relatable.

Okay. And would you expect it to be concurrent with the utilization increase? Or would it be one quarter delayed?

Well I mean it’s a great question, okay. So up to 70% we'd expect – until utilization is 70%, any improvement in utilization will kind of benefit is in the current – won't benefit us really in the current quarter. You see a big benefit once you go to 70%, because you start to carry some of the fixed costs forward. But it's still by factory so it's kind of hard to give you a real line when we're operating the way we are at the moment.

Okay, that's helpful. And that as my follow-up, in your prepared remarks, you talked about being encouraged by some of your wins, radar, wireless, crossover processors, secure UWB. If you had to really highlight what is driving your conviction on growth in the back half what would it be within that construct clearly with the addition of macro improvements as well?

Yes, I'd say if I had to pick two for the second half then it's probably the automotive radar and the wireless connectivity.

Great, thank you.

Your next question comes from the line of William Stein with SunTrust. You may now ask your question.

Great, thanks for taking my questions and good morning, everyone. First Kurt, there's a couple of areas in Automotive that you haven't highlighted, that one of which I think is already ramping and another one is more of a future. But I think we'd love to hear an update on the Battery Management Systems progress? And also the S32G network processor, any design win traction that talk of there? And then I do have a follow-up if I can.

Yes, thanks, Will. Absolutely, and by the way, by not mentioning them, doesn't mean that they don't do what they should do. So the Battery Management is actually very, very nicely on track, especially this year. Since in the meantime, I think, it's fair to say it all looks like that the pandemic as unfortunate as it is, but it seems to further push the share of electrification. So just from a run rate perspective, from a new model launch perspective, it all looks like that electric drive trains are benefiting from the pandemic over the next period of time. And given our very, very strong position with the leading European OEM as you know, and I would say very nicely growing position in – with a lot of different customers in, especially in China, we enjoying that very much. So I'd say very much on track. I was actually surprised you didn't ask one question in that context, which is the combination of ADI and Maxim as a competitor. But let me just mention it here, because it all looks like that our superior value proposition of a system approach, including the micro, is again something which is matched by that deal as it looks to us. So very nicely on track. The other one you mentioned is the S32G. So that's the 16 FinFET-based gateway processor, on track, launching and ramping in production next year. I just have to hold your horses a little bit. Very likely in the next, maybe three or four months, we are going to come out with a press release with a pretty prominent customer which is going to give you then further evidence there and in which model and with which volume this solution is going to ramp. I mean, it's a much broader basis, but there is one very prominent one, which I hope we can actually announce in the coming period.

I appreciate that. And if I can get a follow-up perhaps of Peter, a lot of companies raised capital to improve liquidity, in sort of the March, April timeframe, perhaps as NXP did. Some of them have since sort of reverted back and repaid some debt to perhaps consider that maybe that level of liquidity is no longer needed. Is NXP contemplating this, are you planning to run at the elevated liquidity level for awhile? Thank you.

Yes, to be honest, irrespective of the COVID crisis, I would have gone out and taken that debt anyway, because it's to pay down the 2021. It's about $1.4 billion note. So in the coming months when we think it's the right time, we'll pay it down. But it was always planned to use it for that and a little bit of the 2022. So that's what we'll use it for, yes.

Got it. Thank you.

Your next question comes from the line of Toshiya Hari with Goldman Sachs. You may now ask your question.

Good morning. And thanks very much for taking the question. I wanted to ask on the mobile business. Obviously, you guys are operating in a fairly challenging environment with smartphone units declining strong double digits. You do seem to be outperforming the market. I guess, if you can speak to what you're seeing from a mobile wallet adoption perspective, that would be very helpful. And if you can speak to your opportunity set as it relates to ultra-wideband going into the second half, and more importantly into 2021, that'd be helpful as well. And I've got a quick follow-up. Thank you.

Yes. Thanks for the question. Great question. Indeed, we also see and believe we are outgrowing. And indeed, this is very much about content and attachment rates rather than mobile unit run rates. The two key drivers for growth going into the third quarter and the second half in Mobile is indeed ultra-wideband, as I briefly mentioned before. But it's also inside the mobile wallet with one of our very leading customers in that space, we have actually a change of the system architecture. And that change impacts the Silicon dollar content, which we are shipping into the solution. It's actually nicely growing with a change. So the growth, the sequential growth, which you are seeing is the new additional of untra-wideband, and it is a higher content of silicon in the mobile wallet. And thirdly, it is the attach rate of mobile wallet per se, which is going up. And that was the other part of your question. So the mobile wallet attach rates are on track to the 50% mark in the next year. And maybe a little bit more anecdotally at this point, but it feels to us that the pandemic is giving also a boost to contactless payments in those countries on the globe, where there has been a much lower attachment rate so far because people haven't really accepted it yet. So it is actually another one which seems to be a little bit early to make that call too firm, but they seem to be also helped by the by the pandemic. So three drivers in mobile, higher silicon content in the solution for the mobile wallet, the attach rate of the wallet going up, and thirdly, ultra wide bands.

Great. And as my follow-up I wanted to ask on the competitive landscape. Kurt, I think, you guys have in the past talked about NXP potentially being a beneficiary of the U.S.-China trade tensions. I realize share gains take a long time, probably take years in your business. But from a customer engagement perspective, are you seeing any change for the better for NXP? Thank you.

It keeps being a door opener very clearly, so we are seen as a European company, we are a European company and in doing business with China. And that is it's definitely a positive lever into engagements. So as you said, I mean, even in fast moving market design wins takes time, but it is clearly a positive for us. Yes.

Your next question comes from the line of Blayne Curtis with Barclays. You may ask your question.

Hey guys, this is Tom O'Malley on for Blayne Curtis. I just wanted to ask quickly on competition in UWB. Apple has their own. In Android, do you see anyone entering the market or any increase in competition there, or is this really just a discussion of attach rates going forward?

Hi, Tom, great question. I think ultra-wideband across ecosystems is very, very much of a deep system play. So it is not about this one, RFIC, it is actually about the combination of the RFIC as secure elements. So in all the applications, which we are starting to ship now, it always comes together with a hardware secure element and the associated software. So that's a triangle combination of software, hardware, secure elements and RFIC. That is actually what gives us the differentiation and which, I believe, is also a pretty high hurdle for competitors. So if you only look at this from an RFIC perspective, it's probably not such a big deal over many years to make a competitive product. But for the whole solution to be shipped, it's a big deal. And that's where we have to lead.

Okay, that's helpful. And then just a broader one following-up on John's question earlier, and really in your prepared marks, you called out China specifically. Obviously, I assume a portion of that is the automotive coming back and some industrial as well. But could you kind of size where that benefit came in? Was it more on the auto side or more on the industrial and IoT side?

Well from a – are you asking for Q2 or for the guidance into Q3?

Both would be helpful. But you made the comment, I think, on Q2 and going into Q3, so whatever you can give on both.

Okay.

Well I want Q2.

Yes. Yes, clearly on Q2, China was a big factor across the board. And that's simply because the pandemic – I mean, it has had like a phased shift. So China has seen the biggest impact from the pandemic in Q1 already and then a pretty good recovery in Q2, while Europe and the U.S. have been essentially shutdown for the earlier part of Q2. Now, if you go into Q3, it is actually more broad based. So the auto recovery, for example, the 20% quarter-on-quarter, that's not just China. I mean, this is really across the Board. So we do see auto recovery, especially I would say, from a sequential perspective in U.S., in Europe and also starting in Japan, because those are the places where the shutdowns were in Q2.

Thanks a lot.

Operator, we have time for probably one more question today.

Your last question comes from the line of Chris Caso with Raymond James. You may now ask your question.

Yes, thank you. Good morning. The question is with regard to the buyback perhaps you could talk about what the plans are there and what would be the criteria for doing some resumption?

You want to take that?

No I guess that’s for you.

We will restart the buyback when we get to a ratio of two times net debt to trailing 12-month adjusted EBITDA. So we run 2.2. In Q2, we'll be on a 2.3, 2.4 in Q3. So it's going to be a while before we see the buybacks restart again. But it's when our net debt levels will return to two times.

Got it. That's clear. Thank you. Just to follow-up with regard to some of the comments you made about production and getting utilization back up and getting to your inventory target, do you have a timeframe in mind when – and obviously this is dependent on demand, but absent a inflection in demand, how long does it take at these utilization rates to get to your inventory targets internally?

Well, we get down to 100 in Q3 trying to get to 95. So it's at these utilization levels, assuming revenue is okay, it's pretty easy at this point to get down to 95.

Right. So by the end of the year, for sure.

Yes, I would think so, yes.

Got it. That's helpful. Thank you.

I would now like to turn the conference back to company.

Great. Thank you, gentlemen. Thank you everyone for your interest and your time today. Not sure Kurt, if you had any last moment remarks you'd like to make before we sign off today.

Yes, thanks Jeff. So let me thank everybody for your attention today. I think it's indeed a good moment now, because it all looks like that Q2 was the trough. We do see growth going forward across our businesses, across the regions. And I feel good about this because it is clearly a mix of recovery of the markets, but at the same time playing out of our company specific drivers, which is most important for us to win market share going forward. At the same time, we still treat this very cautiously which means from a OpEx spend perspective, from an inventory perspective, from all the factors which are under our direct control, we're going to stay very, very vigilant as we've done over the past period. And with that, I thank you all and speak to you next time. Thank you.

Thank you all.

Well, ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.