ON Semiconductor Corp at Nasdaq Investor Conference Transcript

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

Question: Joseph Moore - Morgan Stanley - Analyst : So maybe if go off script, breaking news today that you've acquired the Universal Silicon Carbide business from Qorvo, can you talk a little bit about that? What benefits do you guys see from that?

Question: Joseph Moore - Morgan Stanley - Analyst : Great and Qorvo wasn't able to extract this value because they don't have the breadth of power that you guys have, is that.

Question: Joseph Moore - Morgan Stanley - Analyst : Great. Well, congratulations. It sounds like a great deal for you guys. The other new development is the development of Treo, the program of analog. Can you give us an overview of that and how that fits into your (multiple speakers)--

Question: Joseph Moore - Morgan Stanley - Analyst : And can you talk about that with -- you're talking about margins that are the high-performance analog types of gross margins, but you're competing there with companies that have broad catalogs and you're -- how does that competition work? Do you have to have the same building blocks that they have to achieve this?

Question: Joseph Moore - Morgan Stanley - Analyst : Okay. Good stuff. Thank you for that. So maybe moving to the overall industry environment, the number one debate we get on for ON is gross margin. You've done such a good job, you've got gross margins in the mid-40s with utilization in the mid-60s. Can you talk to the sustainability of that? I mean, obviously it's a challenging demand environment. Can you sustain the profitability that you have? Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer Yeah, look, our margin right now is driven by utilization, right? As you said, our utilization is 65%, a trough utilization historically for us. And typically in previous downturns when we hit this level of utilization, our gross margins were high 20s, low 30s. So the fact that we're holding the mid-40 shows that we're structurally a different company. From this point forward, whether utilization goes up or down, that's going to drive the gross margin. Given the outlook that we're seeing right now with the uncertainty, we think for the next several quarters, we're going to be -- we will be below seasonality for the next few quarters. So we may take utilization back a little bit and margins will move slightly with that but that's temporary, and as utilization comes back on. So for every point of utilization up or down, it's 15 to 20 basis points of gross margin, up and down. So you can do the math there. We peaked out utilization around 83%. So going from 65% to 83% you can do the math, it's a nice tailwind there. Like I said in the short term, if we've got to take it down and not build a lot of inventory, that's fine. That's temporary when the market recovers, we're going to turn it back on. We've managed our inventory in the channel and on our balance sheet very effectively. If you look at our working inventory, it's 113 days. Our sweet spot is 100 to 120. So whenever this market does rebound, we're in a really good spot to turn utilization back on quickly and then there's about a quarter latency for that to hit the P&L but you start to see that through gross margins very quickly. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 10, 2024 / 4:00PM, ON.OQ - ON Semiconductor Corp at Nasdaq Investor Conference So it's not like we've got to burn through inventory at the disty in our balance sheet before we see utilization improve. So you may see some short-term headwinds to utilization and gross margin. But, I think that's all temporary. But, structurally, we're a different company and we're positioned well for the market rebound.

Question: Joseph Moore - Morgan Stanley - Analyst : Okay, great. So to maybe double click on a couple of those. You talked about the 113 days of operating inventory, you also have the strategic reserve, which comes up a lot. So can you just describe the rationale for that? Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer Yeah. So we've really bucket our inventory and into the two buckets. One is the base inventory or working inventory, that's 113 days. We have another 100 days, which is what we call the strategic inventory. That's for our fab transitions in the silicon carbide ramp. So just as a reminder in 2022, we divested four fabs. We've been doing the last time builds in those divested fabs and we'll burn through that inventory over time. So as the market rebound happens, that's again, another way we're going to create strong free cash flow, turning that inventory into cash. But when we look at truly what's that working inventory that's in our sweet spot. That other piece is by design. It's just taking a little bit longer to bleed through because the market's softer right now.

Question: Joseph Moore - Morgan Stanley - Analyst : Yeah. Okay. That's great to hear. So you mentioned the demand environment, I guess it was around this conference last year that you guys started signaling weakness in autos. You were early to see that. I think the same was true in industrial a year before that. You were the first ones to see that. So where are we now in that process of reducing customer inventories and automotive? And obviously, there's good underlying organic growth in those markets. When do you see us returning to that from a semiconductor perspective?

Question: Joseph Moore - Morgan Stanley - Analyst : And to what extent do you think that European weakness is a function of the success of your customers in China? Because it does seem like that's at least an element is that European luxury cars exported to China seems to be disappointing. And I know you have a good presence with the customers there.

Question: Joseph Moore - Morgan Stanley - Analyst : I mean, the shortages that we saw I've done this 30 years and I've not really seen that before two years ago where every automotive insurance analyst is calling me to figure out when we're going to start building cars again. So like it makes sense to me that there would be a buffer of inventory that got built after that. I guess what's your visibility into how much may still be there? And when do you think that may start to clear? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 10, 2024 / 4:00PM, ON.OQ - ON Semiconductor Corp at Nasdaq Investor Conference

Question: Joseph Moore - Morgan Stanley - Analyst : Great. Okay. On silicon carbide, you had some nice proof points with the win with Volkswagen earlier in the year, you've made investments in brownfield local-for-local locations, but it's obviously been a choppier market than you would have anticipated. Can you talk about the outlook of silicon Carbide adoption going forward.

Question: Joseph Moore - Morgan Stanley - Analyst : And in terms of ON's capabilities here, I mean, you have vertical integration that nobody else has with your own internal substrates. But we've also seen, China substrates starting to become more viable. Can you talk about those dynamics? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 10, 2024 / 4:00PM, ON.OQ - ON Semiconductor Corp at Nasdaq Investor Conference

Question: Joseph Moore - Morgan Stanley - Analyst : Yeah. Okay. Let me see if we have any questions from the audience. If not, I can continue. Unidentified Participant_1 Great, thanks. Hassane, just maybe a quick one. It looks as though Chinese platforms are moving a lot quicker. Like every 24 months, we get a new platform. So help me understand, is this having an effect on your product cycles? And when you look across the peers, who do you think suffers in that sped up cadence? Thanks.

Question: Joseph Moore - Morgan Stanley - Analyst : Are there questions from the audience. We have a minute and a half left. Maybe we could close with just any of this weakness drive any change in the pricing environment. And I know you have good LTSA coverage maybe unique from your competitors. Just how do you see the role of pricing going forward?

Question: Joseph Moore - Morgan Stanley - Analyst : Great. Well, we're out of time there, so we'll wrap it up, but congratulations on navigating all this so I'd like to (multiple speakers)--