Parag Agarwal - Vice President-Investor Relations and Corporate Development Bernard Gutmann - Executive Vice President and Chief Financial Officer Keith D. Jackson - President, Chief Executive Officer & Director.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker) Christopher B. Danely - Citigroup Global Markets, Inc. (Broker) Tristan Gerra - Robert W. Baird & Co., Inc. (Broker) Ian L. Ing - MKM Partners LLC Rajvindra S. Gill - Needham & Co. LLC Shawn M. Harrison - Longbow Research LLC J. Steven Smigie - Raymond James & Associates, Inc. Vijay R.

Rakesh - Mizuho Securities USA, Inc. Kevin Cassidy - Stifel, Nicolaus & Co., Inc. Craig M. Hettenbach - Morgan Stanley & Co. LLC.

Good morning, ladies and gentlemen, and welcome to the First Quarter, 2016 ON Semiconductor Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session, and instructions will be given at that time. I would now like to turn the call over to your host for today's conference Mr.

Parag Agarwal, Vice President, Investor Relations and Corporate Development. Sir, you may begin..

Thank you, Brigette. Good morning and thank you for joining ON Semiconductor Corporation's first quarter 2016 quarterly results and conference call. I am joined today by Keith Jackson, our President and CEO; and Bernard Gutmann, our CFO. This call is being webcast on the Investors section of our website at www.onsemi.com.

A replay will be available on our website approximately one hour following this live broadcast and will continue to be available for approximately 30 days following this conference call, along with our earnings release for first quarter of 2016. The script for today's call is posted on our website.

Additional information related to our end markets, business segments, geographies, channels, and share count is also posted on our website. Our earnings release and this presentation include certain non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to most directly comparable measures under GAAP are in our earnings release, which is posted separately on our website in the Investors section.

During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should, or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections.

Important factors, which can affect our business including factors that could cause actual results to differ from our forward-looking statements are described in our Form 10-K, Form 10-Qs, and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for the first quarter of 2016.

Our estimates may change and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other factors except as required by the law.

During the second quarter, we will be attending, Jefferies Technology Conference on May 12 in Miami and Bank of America Merrill Lynch Technology Conference on June 2 in San Francisco. Now, let me turn it over to Bernard Gutmann, who will provide an overview of the first quarter 2016 results.

Bernard?.

Thank you, Parag, and thank you, everyone, for joining us today. Let me start by providing an update on overall business results. We delivered strong performance for the first quarter of 2016.

We posted strong growth in our gross margin, exercised discipline in operating expenses and despite the headwinds in certain end-markets, we delivered strong revenue performance under circumstances.

As we had indicated earlier, we have started taking actions to optimize our manufacturing footprint and cost structure, with an objective of achieving our target model. The macroeconomic environment appears to have stabilized, but order activity and business conditions remain subdued.

Order activity was steady throughout much of the first quarter and we have recently seen a pickup in order activity in line with seasonality. Our first quarter revenue performance was impacted by well publicized weakness in the computing and smartphone markets.

However, with accelerating momentum in the automotive market, we were able to offset much of the headwinds from computing and smartphones markets. Keith will later provide additional details on the end markets. We have taken actions to streamline our manufacturing network and operating cost structure.

These steps are just first steps, and we plan to take additional steps to align our cost structure with the current market environment and to achieve our target financial model. We have begun a plan to relocate certain of our manufacturing operations to larger existing locations within the company.

These relocations are expected to result in annual cost savings of approximately $15 million. As I indicated earlier, this is first of many steps we will take to optimize our manufacturing network, and we will make further announcements on additional measures as we make progress on our manufacturing consolidation plan.

In addition to manufacturing network consolidation, we took measures to further reduce operating costs of our System Solutions Group. These measures should result in annual savings of approximately $8 million, starting in the third quarter of the current year.

Shortly after the end of the first quarter, we obtained the financing for our pending acquisition of Fairchild at very attractive terms and interest rates. The blended interest rate for the financing is expected to be approximately 5.5%, which is very attractive as compared to rates that other technology companies were able to obtain recently.

As we have indicated earlier, our EPS accretion analysis for the acquisition of Fairchild is based on interest rate of approximately 5.5%. Under our current financing terms, we have flexibility of prepaying the term loan B and financing with cash flow generated by the combination of ON and Fairchild.

Now, let me provide you additional details on the first quarter of 2016 results. ON Semiconductor today announced that total revenue for the first quarter of 2016 was approximately $817 million, a decrease of approximately 3% as compared to the fourth quarter of 2015. GAAP net income for the first quarter was $0.09 per diluted share.

Excluding the impact of amortization of intangibles and restructuring and other special items, non-GAAP net income for the first quarter was $0.17 per diluted share. GAAP and non-GAAP gross margin for the first quarter was 33.7% as compared to the midpoint of our guidance range, which was 32.8%.

GAAP and non-GAAP gross margins in the fourth quarter of 2015 were 33.3% and 33.2%, respectively. The significantly better than expected gross margin performance in the first quarter was largely driven by higher utilization and a richer mix as compared to the fourth quarter of 2015.

Average selling prices for the first quarter decreased by approximately 2% as compared to the fourth quarter. Recall that in our first quarter of every year, our annual pricing contracts become effective and consequently we see a relatively larger pricing decline in the first quarter of every year.

Despite the annual pricing reset, our ASP performance in the first quarter is within our historical range of 1% to 2% decline per quarter. GAAP operating margin for the first quarter of 2016 was approximately 7.1% as compared to approximately 6.6% in the prior quarter.

Our non-GAAP operating margin for the first quarter was 10.6%, down approximately 50 basis points as compared to the fourth quarter of 2016 (sic) [2015], primarily due to lower revenue and slightly higher operating expenses.

GAAP operating expenses for the first quarter were approximately $217 million, as compared to approximately $224 million for the fourth quarter of 2015. Non-GAAP operating expenses for the first quarter were approximately $189 million as compared to midpoint of our guidance range, which was $191 million.

The better than expected operating expense performance was driven by continued cost control discipline. Non-GAAP operating expenses for the fourth quarter were approximately $186 million.

We exited the first quarter of 2016 with cash, cash equivalents and short-term investments of approximately $620 million, an increase of approximately $2 million from the fourth quarter. Operating cash flow for the first quarter was approximately $115 million, as compared to approximately $157 million in the fourth quarter.

During the first quarter, we spent approximately $73 million of cash for the purchase of capital equipment and used approximately $45 million for the repayment of long-term debt and capital leases. At the end of the first quarter of 2016, ON Semiconductor days of inventory on hand were 128 days, up approximately 6 days from the prior quarter.

In the first quarter of 2016, distribution inventory increased by approximately $1 million quarter-over-quarter, and distribution resales increased by approximately 3% quarter-over-quarter. For the first quarter of 2016, our lead times were up slightly as compared as the fourth quarter.

Our global factory utilization for the first quarter was up as compared to the fourth quarter. We increased utilization to build inventory for seasonally stronger second quarter. Now, let me provide you an update on performance of our business units, starting with Image Sensor Group, or ISG.

Revenue for ISG was approximately $168 million, down approximately 9% as compared to the fourth quarter. The revenue decline for ISG was driven primarily by selective participation in margin-challenged, consumer-focused markets and in lower end of security market.

Revenue for the Standard Products Group for the first quarter of 2016 was approximately $285 million, down approximately 3% quarter-over-quarter. Revenue for the Applications Products Group was approximately $251 million, down approximately 1% over the fourth quarter.

Revenue for the first quarter of 2016 for the System Solutions Group was approximately $114 million, up approximately 3% quarter-over-quarter. Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment.

Keith?.

Thanks, Bernard. I will start with an update on our acquisition of Fairchild Semiconductor and then I will provide commentary on the current business trends and on various end markets. We remain on track to close the Fairchild transaction in the middle of the year.

We have received approvals from regulators in Germany and Japan and we are working with the regulators in the U.S. and China to obtain necessary approvals. As Bernard indicated in his prepared remarks, financing for the transaction has been secured at very attractive terms and rates.

Teams from both companies have made substantial progress in preparation for day one and we're in the last stages of finalizing integration and operational plans for the combined company. We remain excited about the opportunities that the combination of the two companies will create for our customers, shareholders and employees.

Now, let me comment on the business trends in the first quarter. During the first quarter, the pace of bookings was steady through much of the quarter, but we saw a greater than expected weakness in a few markets, especially computing and smartphones. The pace of bookings has picked up in the last few weeks consistent with normal seasonality.

Business conditions although stable, continue to be soft. Despite a subdued business environment, the underlying fundamentals of our business continued to be strong, with major trends driving our growth in key strategic end-markets remain intact.

We remain confident in our ability to outgrow the semiconductor industry driven by the strength of our design wins in the automotive, industrial and smartphone end markets. Now, I'll provide some details of the progress in our various end markets.

The automotive end market represented approximately 40% of our revenue in the first quarter, and was up approximately 9% quarter-over-quarter. Our momentum in the fast growing market for ADAS applications remains intact. Sales of image sensors for automotive applications increased significantly quarter-over-quarter.

We are leveraging our leadership in automotive image sensors to expand into adjacent areas, such as power management for ADAS systems. Our leadership in automotive image sensors has enabled us to significantly expand our presence in certain geographies, in which we had been underrepresented.

In the automotive lighting market, we continue to maintain our leadership in the LED drivers, and motor control systems. We are benefiting from accelerating conversion from conventional lighting systems to LED lighting solutions for front lighting. Key program ramps in the first quarter include park assist solution for a Korean automotive OEM.

We're also seeing outstanding acceptance for our T6 MOSFET products for powertrain, braking and steering systems. Our power regulation solutions for infotainment and body electronic module applications posted strong revenue performance in the first quarter.

Demand trends in the automotive market remain steady, and we expect worldwide automotive units will continue to grow at an annual rate in the low-single digit percentage range.

We expect to significantly outgrow the automotive market with our increasing content in fast growing applications, such as ADAS, LED lighting, vehicle electrification, convenience and in-vehicle networking. Revenue in the second quarter for automotive end market is expected to be up quarter-over-quarter.

The communications end market, which includes both networking and wireless, represented approximately 17% of our revenue in the first quarter, and was down approximately 10% quarter-over -quarter, primarily driven by pronounced weakness in well publicized areas of the smartphone market, selective participation in certain margin challenged product categories, and seasonality.

We continue to increase our content and our design win pipeline continues to grow with major global smartphone OEMs and China-based smartphone OEMs.

Key drivers of higher content on various platforms include image stabilization and auto-focus solutions, battery protection FETs, high performance regulators, ESD protection, clock buffers, and ultra-small package MOSFET and EEPROMs. We expect revenue contribution from these wins in the second half of the year.

We continue to maintain strong presence in the Chinese smartphone market, and our performance in that market significantly exceeded our overall communications end market performance.

In the wireless charging segment, we're beginning to see acceleration in design-in activity for resonant charging solutions for major platforms in smartphones and automobiles. However, broad-based adoption of wireless charging has lagged our expectations.

Revenues in the second quarter for communications end market are expected to be up quarter-over-quarter due to normal seasonality. The consumer end market represented approximately 11% of our revenue in the first quarter and was down approximately 11% quarter-over-quarter.

The decline in the consumer was driven by normal seasonality and steep inventory correction in the action and sports camera market. On the positive side, we are beginning to see stabilization in the white goods market. Revenue for the second quarter for consumer end market is expected to be up quarter-over-quarter due to normal seasonality.

The industrial end market, which includes military, aerospace and medical, represented approximately 22% of our revenue in the first quarter and was down approximately 7% quarter-over-quarter. The weakness in the industrial end market was primarily driven by our selective participation in the security segment.

Trends in our traditional industrial sub segments were in line with expectations. In the medical market, we continue to build on our strength in the hearing health market. We continue to be a leader in this market and we are increasing our presence with our reference design platform for wireless hearing aids and PMIC for hearing aids.

In the machine vision market, we continue to gain solid traction with our PYTHON series of CMOS image sensors and CCD image sensors. We're benefiting from investments by industrial companies in upgrading their manufacturing capabilities. As I indicated earlier, the security market was the primary drag on our industrial performance in the quarter.

Given intense price pressure, we were selective in the market and focused our efforts on more lucrative and the higher end segments of the market. Revenue for the second quarter for industrial end market is expected to be up quarter-over-quarter.

The computing end market represented approximately 11% of our revenue in the first quarter and was down approximately 10% compared to the fourth quarter.

During the first quarter, we saw greater than expected weakness in the computing market, with PC shipments declining in the mid-teens percentage range, quarter-over-quarter, according to leading market research firms.

Furthermore, ramp of Skylake platform has been slower than anticipated as OEMs work to deplete inventory of PCs based on prior generation Haswell and Broadwell platforms in a soft demand environment.

That said, ON Semiconductor's Skylake-related product revenue increased sequentially as computer manufacturers continue a gradual transition to the Skylake platform. We expected that a majority of PCs shipped in the second half of the year will be based on the Skylake platform.

Revenue for the second quarter for computing end market is expected to be flat quarter-over-quarter.

Now, I'd like to turn it back over to Bernard for forward-looking guidance, Bernard?.

Thank you, Keith. Now, for second quarter of 2016 outlook. Based on product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $835 million to $875 million in the second quarter of 2016.

Backlog levels for the second quarter of 2016 represent approximately 80% to 85% of our anticipated second quarter revenues. We expect inventory at distributors to be flat quarter-over-quarter on a dollar basis. We expect total capital expenditures of approximately $55 million to $65 million in the second quarter of 2016.

For the second quarter of 2016, we expect GAAP and non-GAAP gross margin of approximately 33.3% to 35.3%. Factory utilization in the second quarter is likely to be up as compared to the first quarter. We expect total GAAP operating expenses of approximately $215 million to $227 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairment and other charges, which are expected to be approximately $25 million to $27 million. We expect total non-GAAP operating expenses of approximately $190 million to $200 million.

We anticipate GAAP net interest expense and other expenses will be approximately $38 million to $41 million for the second quarter of 2016, which include non-cash interest expense of approximately $6 million. GAAP net interest expense includes interest related to prefunding of the acquisition of Fairchild Semiconductor.

We anticipate our non-GAAP net interest expense and other expenses will be approximately $7 million to $10 million. GAAP taxes are expected to be approximately $3 million to $7 million and cash taxes are expected to be approximately $5 million to $9 million.

We also expect share based compensation of approximately $14 million to $16 million in the second quarter of 2016, of which approximately $2 million is expected to be in cost of goods sold and the remaining amount is expected to be in operating expenses. This expense is included in our non-GAAP financial measures.

Our diluted share count for the second quarter of 2016 is expected to be approximately 416 million shares based on the current stock price. Further details on share counts and earnings per share calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K. With that, I would like to start the Q&A session.

Thank you. And Brigette, please open up the line for questions..

Thank you. Our first question comes from the line of John Pitzer with Credit Suisse. Your line is open..

Yeah, good morning, guys. Thanks for all the detail as always. Keith, just my first question relative to the industrial market.

What percent of industrial was made up by security? Can you help me better understand how much business you think you left on the table because you didn't want to go to lower margin business, and I guess more importantly going forward, is there anything you can do in that market around cost reducing products to open up more of the TAM or how should we think about that market opportunity longer term for you?.

So the security market if that basically had been flat, the industrial results would have been flat quarter-on-quarter. So that basically makes up that kind of 10% or so drop quarter-on-quarter. It really is just the lower end of that market. We still strongly participate in the higher end of the security market.

So, I mean, you can do the math on that, but it's a noticeable percentage but not huge and, of course, the margins were quite challenged there, so we think it's the right move. We do expect security to continue to grow in the high end of that market where we can make good margins, and I guess I don't know what other aspect to address..

That's helpful, Keith. And then my second question just on computing being down 10% sequentially. You mentioned some of the drivers for that.

I'm just kind of curious, because when I look at that 10% number, it's not significantly better than the overall market and I would have thought that the Skylake content cushion and/or share gains would have allowed you to outperform maybe by a little bit more.

Help me understand, are the content gains coming in as expected, are the share gains coming in as expected? And I guess importantly, if the PC market's flat in the back half of the year but we see that transition to Skylake more aggressively, how much do you think you can grow that business half-on-half?.

Yeah. Couple comments there. One, we did not see the conversion to Skylake as we anticipated. There was very few more units made of Skylake quarter-on-quarter as a percentage of the total. So that was definitely a surprise to us.

We service that market through distribution, and our customers placed very strong orders on us going into the first quarter, which set expectations that Skylake would be quite strong. As it turns out, it was up quarter-on-quarter on the Skylake portion. But most of that product that we shipped stayed with the distributors.

And so on a sell-in basis, it would have been up very strongly, and some of our competitors, for example, are all sell-in. So, on a sell-in basis, it looked really strong, but on a sell-through basis, frankly, we did not see the conversion rate of Skylake that we expected.

We've talked with all of the computing folks here in the last few weeks, they are expecting, I think, a fairly flattish second quarter, but they are expecting continued Skylake conversions. And so, I'm anticipating to see that stronger up on the Skylake, as we approach mid-year and the second half..

Thanks Keith..

Your next question is from Chris Danely with Citi. Your line is open..

Hey, thanks guys. On the restructuring, can you just talk about, where you think the savings are going to come in, in terms of cost of goods versus OpEx, and it sounds like you might do some more restructuring.

Any particular areas that you're looking at and then what's sort of the timeline of those, could we expect more before the end of the year, is this like an ongoing thing?.

Thank you, Chris. So, on the breakdown, $15 million of the $23 million is in COGS and $8 million is in OpEx. As we said, the OpEx is mostly the SSG Group to shore up their bottom-line.

On the COGS side, it is manufacturing relocation activities, which typically take a year-and-a-half or so until you see the full benefits of those 18 months until you see the full benefits of those through the P&L.

And yes, these are first steps as we indicated on our calls, and as we are ready to talk more we'll be announcing throughout the year more activities..

Sure. And from my follow-up on a question on inventory, so it's – I think it's 128 days, that's – I think it's an all time high. Can you just talk about why inventory is so high, and then where you expect those inventory days to trend for the rest of this year, along with utilization..

So, yes, indeed, it is a little bit on the higher side of our historical numbers. We do expect the seasonal uptick in the second quarter. And as we are guiding about 5% up, this is in anticipation of that increased run rate. And obviously, we are also a normal seasonality for the back half, would also indicate more requirements for inventory.

In general terms, we would expect to taper off that and get inventory days to slightly lower numbers..

And maybe Bernard, you could just give us like your sort of typical range for inventory days, these days, and when you would expect to get there, so we could have some milestones?.

So, right now, it's more in the 110 days to 120 days, we have upped that compared to where we were before. In general, it looks like the semiconductor companies now are carrying a lot more inventory than we used a few years back. So that's kind of our range..

Okay. Thanks guys..

Our next question is from Tristan Gerra with Baird. Your line is open..

Hi. Good morning.

How much exposure do you have left in consumer for your CMOS image sensor business given the comment earlier that you had some selective participation at some consumer OEMs, and is your dime accretion target on track for this year?.

Yes. Less than 20% of our total image sensor business now and we're actually ahead of our accretion targets there, strong margins in all of the sectors being the key driver..

Okay. Great. And then as a follow-up to the inventory question earlier, you mentioned that your utilization rates were up in Q1, sequentially it would increase again in Q2.

Could you give us a sense of what the percentages, are you in the low 80s currently, and what is your target for the second half based on your initial Q3 outlook, I think you provided sometime in the past your initial outlook a quarter ahead?.

Yeah, we're operating in kind of the high-70s range, and I expect that will be pretty much true for the second quarter as well, and then as the second half develops, we could enter the low-80s in the Q3..

Great. Thank you..

Our next question is from Ian Ing with MKM Partners. Your line is open..

Yes. Thanks.

In automotive image sensors, you talked about entering some underrepresented geographies, could you talk more about that opportunity, and is there some cross-sell of other product potentially down the road?.

Yeah, we mentioned a Korean design win for ultrasonic parking it is that area where the image sensors have picked up quite a bit for us. And so we're seeing some very good pick up in Korea..

Okay. Great.

And then in SSG, looks like in March it's up modestly, are you coming off the Q4 lows here sustainably you think, and do you know what the new breakeven level will be for SSG after this restructure of $8 million, yeah?.

Yeah, I feel much, much better. We know have an upward trajectory based on all of the automotive and industrial wins we've had the last year or so. And so we are expecting increased sales from here on out.

With the changes that we've made, Q3 onward we should be above breakeven every quarter, and again as the revenue increases, there is a pretty good fall through of about 60% to the bottom-line..

Okay. Thank you..

Our next question is from Rajvindra Gill with Needham & Company. Your line is open..

Yes. Thanks for taking my questions, and congrats on good results. Wanted to talk a little bit about the ADAS systems and kind of your competitive positioning there. You'd mentioned that automotive is about 40% of the sales.

I was wondering if you could maybe provide a little more detail in terms of image sensors as a percentage of that, and where do you expect that to grow over the next few quarters or so?.

So, I'll back into that one, so ADAS for our image sensors, we believe we've got about 70% of the design wins in that sector. So we're expecting to see increased share for image sensors in ADAS. But from a total dollar for our automotive piece of that equation it's about 25% for image sensors and 75% for the rest of our products..

I'm sorry, image sensors are 25%.

25% of total automotive for the company..

Of total automotive, got it. Okay, great. And on the wireless charging opportunity, it seems like the other kind of major competitor is gaining some traction there. They have a kind of a Tri-Mode standard in wireless charging.

Wondering how – what are you – what is your thinking in terms of wireless charging going forward? You had mentioned that you felt that the adoption rates are slower than anticipated, but wanted to get your thoughts on how we should think about wireless charging in the back half of the year and going into next year?.

Yeah, so specifically, we have the resonant standard. Tri-Mode is great for the transmit side, and we are indeed releasing a product for that. But on the receive side, the resonant pick-up has been slower than expected in the handsets. And so, that was the comment relative to that. We do see that picking up now.

And as we get into the back half of the year, and with the 2017 launches, we would expect on a percentage basis to see very significant improvements and 2017, should see the bulk of the growth..

Great. Thank you..

Our next question is from Shawn Harrison with Longbow Research. Your line is open..

Hi. Good morning. Two questions, if I may, just in terms of the pending Fairchild acquisition. I can't remember seeing this, but the size of the tranche B loan that you can pay down early, what would be the size of that? And then secondarily on Fairchild, it seems to be that, they are losing head count and having difficulty replacing it.

So, just wondering, if there is any concern about the good talent leaving before you can acquire the company, and review who you want to keep versus you would like to, have like go?.

Very good, Shawn. I'll answer the first one, the tranche, the term loan B is fully pre-payable, the whole amount, the $2.2 billion that we financed..

Yeah. And on the head count, we watch that very carefully. Most of the attrition, we've seen so far is in the G&A portion of the business. And so, we feel very confident, we're going to be picking up a company with strong engineering and sales talent intact..

Okay. And then, I guess a final question, just thinking about your CapEx going forward, with some of the consolidation efforts.

Where does that maybe bring normalized CapEx, either as a portion of revenues or a dollar basis, to kind of 18 months out from now?.

We still expect to operate in the 6% to 7% range. We have been operating on the higher end of that, so maybe we'll push it down a little bit, but we're still operating in the 6% to 7%..

Perfect. Thank you so much. And congrats on the results..

Thanks..

Our next question is from Steve Smigie with Raymond James. Your line is open..

Great. Thanks, guys. I was hoping you could comment a little bit more on the restructuring activity.

Is the additional steps that you mentioned but haven't given detail on yet, is that going to be just for the core ON Semiconductor, or are you sort of making comments there about what you would do to the combined entity?.

Yeah. No, all of our comments are relative to the current ON Semiconductor. Obviously, when the transaction closes, there will be synergies that are associated with that combination, but these are independent of that..

Okay, great. And then, one thing you mentioned was you're seeing, I think, a pick-up in the white goods. I was hoping to get a little bit more color on that. I assume that's driven by maybe a little bit better market over in China but just wanted to get some extra color on that..

Yeah. It appears that the inventories which were quite substantial built last year are basically being cleaned out. We did see new orders from customers that had told us they had significant over-inventory position last year. So it looks like the inventory positions have been worked out.

I'm not sure it's a huge in-demand change, but it's certainly a huge change in their inventories..

Okay. Thank you..

Our next question is from Vijay Rakesh with Mizuho Securities. Your line is open..

Yeah. Hi, guys. Just on the Fairchild, I was wondering if you could give us some more recap or an update on how you see the synergies with Fairchild, and how do you see the fab consolidations, et cetera? Thanks..

Yeah. We really haven't got any changes. The deeper we get into it, it confirms our expectations. We do see the $150 million or so that we talked about.

We're still not prepared to announce specifics on further manufacturing actions that can be taken, but again, as we get deeper into it, we confirm that indeed, there's much more for us there on the manufacturing front..

Got it. And when you look at on the automotive side, between LED lighting and camera ADAS, how do you think – how do you look at it globally? Where is the penetration levels, especially with LED lighting just globally? And on the camera ADAS side also, obviously U.S. is a nice tailwind, but how do you see that pipeline going forward? Thanks..

Okay. LED front lighting is still extremely small. If you look at total automotive worldwide, it's less than 5% today have that, but we're seeing a strong adoption with major U.S.-built models picking up LED lighting for the 2017 year, so we're seeing that increase quite rapidly.

On the ADAS systems, again today the vast majority of everything is with rearview cameras, and what we are seeing is a very rapid adoption across all levels of models going forward, but again ADAS is a very thinly populated thing with less than 10% of the cars globally today..

Great. Thanks..

Our next question is from Kevin Cassidy with Stifel. Your line is open..

Thank you.

On the image sensors, have you seen any supply disruption in the market due to the earthquake in Japan?.

We have not yet had customers with major disruptions, but we're certainly closely monitoring that and offering assistance where possible..

Okay, great.

And in the security market, you mentioned walking away from the low end, is the high end still growing or is there a shift towards the lower end?.

No, the high end is growing, in fact it's growing faster than the low end is growing. So we still remain encouraged about the security market overall..

Okay. Great. Thank you..

And our next question comes from Craig Hettenbach with Morgan Stanley. Your line is open..

Yes. Thank you.

The comments on the strength in China handsets, can you just talk about as you look into the back half, just how you see the market evolving between kind of some of the traditional OEMs versus China?.

Yeah. Our expectation is that the China players will continue to gain share against the more traditional players in the second half, and at least from what we can tell backlog wise, that is already taking place with order patterns..

Got it. And then, just as a follow-up on Aptina, you mentioned it's tracking above expectation for accretion and margins performing well. Can you give us an update kind of where you are in terms of the business mix.

I know you've been focusing a little bit more on autos and industrial, do you kind of think you are at that desired mix in terms of some of the areas you deemphasize or how that plays out?.

We're pretty close. I expect leaving this year, we will be at the mix that we'd like long-term, which means the consumer piece of the business will be all accretive and all at the high-end, and the security business that we talked about earlier will be the same.

So I think we're a couple of quarters away from being at the ideal mix, but we're certainly executing very strongly from a margin and profitability perspective..

Got it. Thank you..

And we do have a follow-up from Rajvindra Gill with Needham & Company. Your line is open..

Yeah. Thanks for the follow-up.

Just on the comment about outgrowing the semiconductor industry this year, just wanted to get some clarity on that, as it stands now for the first two quarters of this year, revenue is going to be down about 9% year-over-year from the first half versus the second half – I'm sorry through the first half of this year versus the first half of last year.

You did have some tougher comparisons with the image sensor business, but it does reflect a pretty decent snapback in the second half, so just wanted to get a sense of how you're thinking about growing above the market given the first two quarters of this year?.

Yeah, I guess, couple comments. One, the automotive piece has been very, very good for us and we've been outgrowing that; you can look at the numbers.

The thing in our engines we talked about the smartphone market has been the steepest decline, and that is what we do expect to be much stronger as we get into the second half, and where our margins are much better.

So net-net the piece that's been missing, we think, is basically the outgrowth in the smartphone market has not shown up, because the market has self-shrank. We expect that to change in the second half.

And then on industrial, I think we're through all of the inventory corrections there and we should see that growing as well strongly in the second half. So the net of it is three markets where we think we're better positioned than competition, only one of which has operated here in the first half.

And so in the second half, we think we have all three markets..

Perfect. Thanks so much..

And we do have a follow-up from Ian Ing with MKM Partners. Your line is open..

Yes, thanks. Last quarter, you had an early read on weak hard disk drives and Seagate looks like it's one of your representative customers in your 10-K.

Do you have any updated thoughts on this market and how it plays out the rest of the year? I know there's concerns that some storage workloads are moving to the cloud potentially?.

Yeah. We do not see any strength coming for that market..

Okay. Thank you..

I am not showing any further questions. I'll now turn the call back over to Mr. Agarwal for closing remarks..

Thank you, Brigette and thank you everyone for joining the call today. And we look forward to seeing you at various conferences. Good bye..

Ladies and gentlemen, this does conclude the program and you may all disconnect. Everyone, have a great day..