ON Semiconductor Corp at Deutsche Bank Technology Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ross Seymore - Deutsche Bank - Analyst : Let's start on the cyclical side of things? Hassane, you've talked about an L-shape recovery pretty much all year. In my view, in the first half of the year, people were disappointed with that. In the second half of the year, it's looking to be more correct than not. Give us the update. Are you still seeing the same muted recovery or muted [connection]

Question: Ross Seymore - Deutsche Bank - Analyst : Talk about a little bit what those positives are and where you're still seeing some negatives?

Question: Ross Seymore - Deutsche Bank - Analyst : You guys have been very aggressive on the inventory side, like you just mentioned, you started this process much earlier than most. Do you believe the customers are going to make the same mistake they've made in the past of over adjusting inventories on the downside and creating volatility, maybe not to pandemic levels of volatility, but do you think anything has structurally changed? Or is the industry just going to be cyclical because it always is?

Question: Ross Seymore - Deutsche Bank - Analyst : Right. What about the pricing side of the equation? There are -- I'll have some structural questions later. And so onsemi is a little bit different. -- if you went cycle to cycle, it's not a fair comparison versus your peers. But if you talked about to the extent there were benefits because of the shortages from a cyclical perspective, are we just going to return to the normal low single-digit decline on a year-over-year basis? Or do you feel that there's a step down because there was a step up?

Question: Ross Seymore - Deutsche Bank - Analyst : That's a good segue and you might have answered this question what you just said. But the pointed question people ask are LTSA worth the paper they're written on because they've fallen apart and for many companies when times have weakened. So does onsemi view the value of them in the relationship enhancing information sharing aspect? Or is it the strict you agreed to buy X number of parts at Y price, and you're going to be held to that. Thad Trent - ON Semiconductor Corp Yes. Look, we're never going to just shift to a customer's overship their demand. That's never good, right? You're just causing a problem down the road, right? What it's allowing us to do is engage in a much more strategic level, right? So these are not done at a procurement level. These are done at an executive level, highest level CEO to CEO type level because they're multiyear and sometimes billions of dollars. So it's a different type of engagement. So I do think they're here to stay, and I think they have value. Are we willing to make a change on it? Of course, we are. But we're going to come up with some win-win situation with the customer.

Question: Ross Seymore - Deutsche Bank - Analyst : So last question on pricing and inclusive of the LTAs side of things. Hassane, you mentioned that the cost of the product and the value it adds doesn't change on January 1. But you also acknowledge that historically, that's how people did it. Out of your customers, do you think that relearning, training that you -- the change in behavior is accepted by the majority of them now and people get the joke -- or are you still having to fight that out in January is not as much fun.

Question: Ross Seymore - Deutsche Bank - Analyst : Right. So let's switch gears over to a little bit more of the secular side. And silicon carbide is always a hot topic. You guys have talked about, I think, growing two times the market rate and the volatility, at least year-to-date has been more on the market rate than your penetration above and beyond that. Talk about what you're seeing from the end market from an EV perspective in aggregate, silicon carbide and then ON penetration within it?

Question: Ross Seymore - Deutsche Bank - Analyst : What about the slope on the silicon carbide penetration going from that 6% to something more is that --

Question: Ross Seymore - Deutsche Bank - Analyst : And the adoption of more of a hybrid that does a little bit of both. Do you see that happening? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 5:00PM, ON.OQ - ON Semiconductor Corp at Deutsche Bank Technology Conference

Question: Ross Seymore - Deutsche Bank - Analyst : The hybrid, that's actually one definition hybrid that was super helpful. I was actually referring to the use of IGBTs and silicon carbide and trying to cut costs as we've heard some OEMs talk about. How do you see that more blended approach?

Question: Ross Seymore - Deutsche Bank - Analyst : So on the silicon carbide side of things, it's a point of big contention, not just because EV demand has slowed, still growing, but slowed but also because the fear of commoditization on the silicon carbide side in and of itself, largely more on the substrate side than the solution side. Talk a little bit about that commoditization risk and why I would presume you're not concerned about it from a onsemi point of view.

Question: Ross Seymore - Deutsche Bank - Analyst : What was the differentiation that allowed you to win VW?

Question: Ross Seymore - Deutsche Bank - Analyst : No Tier 1 in between. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 5:00PM, ON.OQ - ON Semiconductor Corp at Deutsche Bank Technology Conference

Question: Ross Seymore - Deutsche Bank - Analyst : And have you guys talked about either the size or the duration or even timing of when that all happens?

Question: Ross Seymore - Deutsche Bank - Analyst : Got you. Last question on silicon carbide. You mentioned about one of the things that made it lumpy, but it would be another adoption accelerant was when the infrastructure was ready Talk about how onsemi plays into that part of the market? And has that also been somewhat disappointing. We hear some government statistics about the billions that they've spent for at seven charging stations or something along those lines.

Question: Ross Seymore - Deutsche Bank - Analyst : So in the last couple of minutes, we have going to wrap this up for more financial questions. The structural improvement of the company holding the 45% gross margin at the trough. It obviously be the aspirational peak and now it's the trough.

Question: Ross Seymore - Deutsche Bank - Analyst : There you go. I'll give you the two points. So either Hassane or Thad, what are the key drivers of going from 45% to 53%, which is the new target? Thad Trent - ON Semiconductor Corp Yes. Well, let's first talk about how we get to 45% because I think it's really important. All the work that we did over the last three years was to set us up for a market correction, right? And so now you look at where we are today, sitting here 65% utilized at a mid-40% gross margin, historically different than what the company ran at a low 30% gross margin. So in -- as we walked away from $475 million of business, divested four fabs, streamlined our operations. That was all the setup where we are today. So anchor point there. So now if you think about how do we go from mid-40s to the 53% target. The primary driver in the short term is utilization. And so I think we're in a great spot today for the recovery whenever this happens and at whatever pace it happens today. So if you look at where we are, we've got lean inventory in the Disney channel. We're at nine weeks by design. Historically, the company ran 11 to 13 weeks. We've got low inventory in the balance sheet when you look at our working inventory and you exclude our fab transitions and the silicon carbide ramp. And so when you think about that 65% utilization going back up to, we peaked out at 84%. It is for every point of utilization, you get 15 to 20 basis points of gross margin improvement. When the market shifts and comes back on, we don't have to burn through a lot of inventory. We can actually think up the utilization very quickly, depending on what that slope looks like coming out of this. So you'll see that benefit come through in gross margin quickly falling through to operating margin and free cash flow as well. So you got that element. We have the East Fishkill business that we do for GLOBALFOUNDRIES. That's the foundry business as a part of that acquisition. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 5:00PM, ON.OQ - ON Semiconductor Corp at Deutsche Bank Technology Conference That's 100 basis points dilutive today. That rolls off by the end of '25. So you should think about in '25, is that being linear. So that's not market depending anything. That's just time. It's just -- we just have to roll through this contract. And then you've got the monetization of the four fabs we divested in 2022. So as we move that production into our network, that's $160 million annualized, and we'll see a benefit. Now some of that will be market-driven because that will be depending on the demand. But we'll start to see some of that in '25, probably a lot of it in '26. And then everything that we're working on in R&D, all new products are at or above the corporate average, so you get favorable mix. So if you start stacking up all those improvements, you get pretty close to that 53% target. And we've always said the 53% is a milestone. It's not a destination. So the structural changes are allowing us to keep the higher lows and hopefully higher highs as well as we go through this.