ON Semiconductor Corp at UBS Global Technology and AI Conference Transcript

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

Question: Timothy Arcuri - UBS Securities LLC - Analyst : So I have to ask the first question. It's been you know, a little bit over a month since the earnings call. Anything that has surprised you from other companies that have reported or any developments in the market that you would want to call out, relative to what you talked about in your earnings call?

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Great. EVs in China are a great piece of your story. I think you said 50% China EV share exiting this year. Can you speak to that and sort of how you see the China EV market evolving for you?

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Great. Can you talk about the Trail platform? You just announced this it combines analog and mixed signal uses, 65 nanometer to integrate high and low voltage on a single chip. And I think you said the goal is to add a billion dollars in revenue over the next five years. What is the main selling point here for customers? And is this not something that your competitors can also do?

Question: Timothy Arcuri - UBS Securities LLC - Analyst : And is the billion dollars, is that truly incremental or does that cannibalize some of your existing reps?

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Got it. Can you talk about the CapEx plan as it relates to silicon carbide? You recently sort of cut your plan. And at the same time, your tone around buying chinese wafers has changed a little bit and you say look, we're, you've always been willing to, buy chinese wafers, but the quality of Chinese wafers is actually getting better. But that doesn't seem like it's why you've cut the CapEx plan. You've cut the plan because you're getting more output with the same CapEx because of higher yields. So can you just talk about that? Is --sort of what's changed that's allowing you to spend less money?

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Great. I wanted to ask about the LTSAs, and I don't know if that you want to answer this or as you do. But LTSAs have been coming down about $1 billion a quarter. And there's still a pretty significant part of the [$13.7 million] that's non current, and I assume that's parked beyond 12 months. And so I would think that as that becomes current that that it would be the non current that's coming down but it's both the non current and the current that are coming down. So can you just talk about sort of how the LTSAs are working and how the non current -- Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer Yeah, I think you get a look at it or what we report is it's a rolling 12 months, right, and then we do a lifetime. And as you said, both have come down, that's a result of one shipping every quarter, right? So we ship a portion of the LTSAs and another quarter kind of rolls in. If you think about the environment of what's going on with the softness, LTSAs dollars have come down as we're not just going to overship customers, right? We're not going to force the inventory on customers and deal with a hangover there. So LTSA volumes have come down as we've negotiated, win-wins with our customers, right, going through that process. But if you think about going forward right now where you've got customers looking at renewing LTSAs or extending LTSAs in this environment, they're just reluctant to commit to a volume right now. And that's okay, that's temporary. We have customers that are worried about a recovery happening and what's that going to do and concerned about supply assurance when that happens and they're talking to us about it. But right now, they're being very cautious. So when you look at those outer quarters, yeah, they are lower just because the slope is lower, right? But I would look at it generally whether it's short term, 12 months or longer term, just volumes are lower, just given the market dynamics.

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Okay. Got it. Can we talk about Silicon Carbide? I believe you did a little more than $800 million last year. This year has been a little bit lumpier. You said that for the year it'll be up low single -- low to mid singles this year. So can you just talk about how you see the market headed into 2025? I 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 03, 2024 / 4:35PM, ON.OQ - ON Semiconductor Corp at UBS Global Technology and AI Conference know you're not guiding Silicon Carbide revenue per se, you're thinking about it more relative to the market. But what are the factors to consider and where do the current third party estimates? Think that the market's growing next year.

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Are there any different dynamics in the industrial part of the silicon carbide business? Is that growing? Autos is just a little lumpier because of what's going on in autos.

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Great. Thad, I wanted to ask you about gross margins. East Fishkill has been a drag on gross margin. Can you speak to how that's going to roll off through '25, and sort of how you plan to ultimately get leverage from owning that fab? And maybe if you could just generally talk about some of the puts and takes, I don't think you're expecting a lot of gross margin recovery next year. It's more of a 2026 thing? Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer Yeah, that's right. Look, let me just kind of start with where we have gross margins, right? The number one driver in gross margins for us in the short term is utilization demand right? Today, we're about 65% utilized, holding a mid 40% gross margin. Every point of utilization is 15 to 20 basis points of gross margin improvement. You think about going from 65 to we peaked out around 83%, you can do the math on the gross margin expansion there. So that's going to be market dependent, right? 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 03, 2024 / 4:35PM, ON.OQ - ON Semiconductor Corp at UBS Global Technology and AI Conference So just as demand comes back, we'll increase our utilization. The other headwind that we have today currently is 100 basis points for East Fishkill. This is the foundry business that we're doing for global Foundries as a part of the acquisition of that fab. Contractually obligated, it's going to be it'll wind down in '25. So by the end of '25, that 100 basis points will be off the headwind. So you can think about that is fairly linear through throughout next year. And then as you go further out, you've got the divestiture of the four fabs that we did in 2022. It's $160 million of fixed cost that comes off once we start manufacturing that inside our network again. Now again, some of this is going to be demand driven, right? So as the demand comes back, we start manufacturing, we get the benefit. Don't think we're going to see a lot of that in '25, just based on what we're seeing in the market visibility of not much of a recovery. So we'll start to see that in '26. And then to your question about East Fishkill, so we're loading more products in there. This has been a long transition for us of qualifying products in there. Trail is going to be manufactured in there. So it's a matter of bringing that utilization up that that kind of goes into that equation that I gave you. And then the last element is just the mix shift of the company as you go into higher margin products. As we've exited the low margin type stuff, you get a favorable mix and that, that's a nice tailwind with us over the long term as well. But short term, it's all about utilization demand.

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Great. Can you talk about inventory? I know inventory at [disty] seems okay for you. It seems within the 9 to 11 week range. What -- how does that inform you to how your shipments are relative to consumption? Do you think you're shipping in line with consumption? And it just is consumption that's bad. Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer No, I think we're under shipping natural demand right now. We still think there's an inventory digestion going out there with our customers. So we think we're under shipping that demand. When you think about inventory, I think we've done a really good job of positioning the company. If 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 03, 2024 / 4:35PM, ON.OQ - ON Semiconductor Corp at UBS Global Technology and AI Conference you look at what I call kind of our base working inventory at 113 days, we've got strategic builds for silicon carbide and for our fab transition. So if you exclude that, it's 113 days. Our sweet spot is 100 to 120, so right in our sweet spot there. So if you think about whenever this market recovery happens, utilization starts to come back pretty quickly. Inventory in the channel, the distribution channel is running just under 10 weeks. We're going to run right in that ballpark for a period of time. We've been increasing, kind of surgically increasing the inventory in the channel to support the mass market. And we're seeing our customer base go up in that mass market. That's to see that long tail of customers. So I think we're, we're doing all the right things here kind of to support the long-term vision of what we're doing. And we position the company by seeing this downturn coming early, we took utilization down early. So I think we're in a good spot when there is a recovery to, to ramp back up quickly as well. It's not like we've got to burn through a lot of inventory in the channel and our balance sheet, we can flip things back on pretty quickly.

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Great. We focus so much on the power part of your business but can you speak to the other parts, how are they trending particularly ISG?

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Can you talk a little bit about LTSAs in the context of the China market? Are they willing to engage in LTSAs? Is that something that's attractive to them? Are they -- do they stick to the LTSAs when they sign them, you know Chinese EV?

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Great. And what's the thing in the silicon carbide market that we might be missing? Because I know -- I get these continual sort of like negatively leading questions about silicon carbide. So what -- when you talk to investors, what's the thing that people miss about your position in silicon carbide?