ON Semiconductor Corp. - Analyst/Investor Day

| About: ON Semiconductor (ON)

ON Semiconductor Corporation (ONNN)

February 15, 2013 10:30 am ET


Sloan Boss

Keith D. Jackson - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of Semiconductor Components Industries LLLC and President of Semiconductor Components Industries LLC

Robert Charles Mahoney - Executive Vice President of Sales & Marketing and Executive Vice President of Sales & Marketing of Semiconductor Components Industries LLC

Robert A. Klosterboer - Senior Vice President and General Manager of Digital & Mixed-Signal Group

William M. Hall - Senior Vice President of Standard Products Group, General Manager of Standard Products Group, Senior Vice President of the Standard Products-SCI LLC and General Manager of the Standard Products-SCI LLC

Mark Goranson

Bernard Gutmann - Chief Financial Officer and Executive Vice President

Sloan Boss

All right. Hello, everyone. Thank you, all, for coming out. My name is Sloan Boss with Investor Relations. And I just wanted to start off with just a few kind of items for the people here. Restrooms are in the back, if needed, and we'll have some drinks throughout the day over here.

For those of you, lunch will be provided after the event. For those of you that will be coming to the golf with us, we actually are -- our teatime is starting at 1:00. So and we'll have lunch at the course provided. So feel free to just -- after the event, go change real quick, if needed. There will be a shuttle starting at 12:15 that will be out in front of the hotel to shuttle people to the golf course. And then feel free to just go straight to the golf course. There'll be boxed lunches there for us, and we'll have a good time out there. So thank you, all, for coming, and let me start with -- I'll read our Safe Harbor and then I'll introduce our first speaker.

So during the course of this conference, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words believe, estimate, anticipate, intend, expect, 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. Important factors relating to 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 fourth quarter and year ended 2012. Our estimates may change and the company assumes no obligation to update forward-looking statements to reflect the actual results, changed assumptions or other factors. Some data in this presentation may include non-GAAP financial measures. You can find reconciliations of these non-GAAP financial measures to the most directly comparable measures under Generally Accepted Accounting Principles within the following presentation appendix, and on our website at www.onsemi.com in the Investor section under the category Annual and Quarterly Results.

So with that, I'd like to introduce our first speaker, Keith Jackson, our CEO and President. Keith?

Keith D. Jackson

Thank you, Sloan. Welcome, everyone. Glad to see you here in sunny Phoenix. I think we're going to have a good day, quite informative for you. We would ask you to hold questions until the end. So we're going to go through the presentations in a fairly efficient manner here and then at the end, you can have the entire team available to you for questions.

So what we're looking forward today, give you a picture of the company, what's been changing here, what was going on behind the scenes in the last 7 or 8 quarters of slow industry growth. And I think what you should be hearing from us today is we think we're positioned very well for both improvement in the marketplace, but more importantly, as a company how we repositioned ourselves with our design wins and our importance to customers. We have continued to improve our manufacturing situation. We continue to be more efficient, continue to execute. And of course, we're trying to turn all that stuff into value for our shareholders and figure out how to get that back to them in a faster fashion. I'll start off with just a little bit of survey -- or summary of 2012.

One of the things that happens each year in our industry is you have to become more competitive, and I can tell you that we have done that. We were very successful in reducing our cost structure, reducing number of plants that we have to produce the same number of units, keeping our OpEx in control and making sure that even in trough sales through the cycle, we generate cash. I think the most exciting thing to me though is the design win acceleration we had in 2012. We came out with some just fantastic products in 2012 that are designed into the next generation of platforms, which we think positions us for very, very strong growth going forward.

We did expect the market to recover in the second half of 2012. It was a complete head fake for us, and we'll talk a little bit about why we don't think this year will be a repeat of that, because we are expecting the market to strengthen as we go through this year, with Q1 as a trough. We had some very since substantial hills to climb, they're specific to the company, recovering from the revenue loss that resulted from the floods in late 2011 and from the share loss that their customers had in Japan, putting a lot of pressure on our revenues last year more so than just the general market. We think we're through that portion of it. We think we're going to be able to start growing that business again. And we think the market will help us as we go through this year. I think the last thing I would say about 2012 is we did see continued destocking in the channel throughout the entire year, including the very end of the fourth quarter. So that sets us up very well for the next up cycle.

What's changed in the company? Automotive is now our largest segment. We haven't had an Analyst Day in a couple of years. A couple of years ago, the answer would have been computing, but we've been growing that business and investing in that business for several years now and it's now showing. As we look forward to 2013, we're expecting the communication segment to be the fastest-growing segment. We really increased the product content that we've got in the smartphones, and we see good design wins there that we think will make that the fastest-growing marketplace. Computing, we'll talk about each of these markets separately, but we think they're all going to be able to bring some growth to the company and certainly, improve our margins over time.

What's our expectations from a market perspective? We have all of the access to data that you have. And so I won't belabor things like GDP. However, I will point to what we think are very good signs for this up cycle here in the industry. In your top right-hand side, what you've got is a couple of line charts. One shows the revenues of electronic systems and the other one shows semiconductors. So the pink one, or the light pink one, is the hardware revenues; and the blue one, with the very sharp ups and downs, is semiconductors. It is clear that we have sold fewer semiconductors than our customers have sold electronic systems in the last 2 years. So you had 2 years, basically, of draining inventory in the supply chain from the semiconductor perspective.

That happened before, it happened in 2007 and 2008, and we all know what 2010 looked like. We're not up here projecting there's going to be a huge spike here in 2013, but I am suggesting that you can only go so long in under-shipping that channel before something has to change. And generally, semiconductors react in a much more aggressive manner than the overall market does. So we do think between this year and next, there should be some good growth opportunities for semiconductors and of course, the rest of the charts here, I'll let you look at your leisure, but they all suggest the same thing.

So what's our strategy been? Basically, we have been making ourselves more valuable to the customers that matter. And specifically focusing all of our resources on markets that we think will drive sustainable growth. You've been hearing from us, the automotive sector is one of those sectors that we think is outstanding, not so much because we think there's going to be more cars sold every year but because the buyers of those automobiles want more and more electronics, whether that's safety, whether that's things that drive fuel economy or things that drive driver convenience. In all cases, we think the content is growing there and so flat number of cars should drive growth, and any increase in cars should drive greater growth. And so we continue to invest there. We'll tell you stories on that or tell you the background on that as we go through the day.

In addition to automotive, we are also expanding in the types of products that we participate. One of the big changes the company, traditionally, has been in the low-power arena. Medium power, when it comes to automobiles but generally, low-power, types of products. In the last 2 years, we've been investing heavily in high-voltage and high-powered products. This gives us some opportunities. We think we've got leading technology now to gain share in markets that we did not formerly play. Specifically, on top of that, our module capabilities, we think is pretty exciting to bring additional growth to the company. Frankly, with much higher ASPs by providing our customers a module that replaces their entire function instead of having them trying to build that up discretely. And you'll hear more about that today as well.

One of the few markets that we think has significant organic growth is in LED lighting for general purposes. We do think that market is growing, it has been growing, it's been growing very quickly for us. But we think as we get to 2014, there may be inflection points with the prices of bulbs reaching the point where the general populace will do much more conversion from their current solutions.

Wireless. I mentioned earlier to you, we think that's the highest growth market opportunity for us. We do think smartphones are going to continue to grow. But again, similar to the automotive statements, ON Semiconductor's products, we've more than doubled our content opportunity in each of those smartphones. So we think we will be outgrowing the wireless market as we go through 2013 and '14. And again, our team will talk to you about the details on that.

And then lastly, from a profit perspective, we have been struggling to get the SANYO group for us at breakeven. We've had to put a lot more energy into cost reductions there and a lot of energy into selling the products to get the revenues turned around so they can start to grow again. We think we've got the plans now to have breakeven below 190 middle of this year, and specifically, have the activities on the sales side to start growing that revenue line, again, as we go through 2013.

I'm not going to go through each of these markets here where we have leading positions from our traditional marketplaces. You know what those are, you've seen those develop over the years. What I will say as you look next year, 2 old friends, automotive and the smartphones, but the power modules and LED lighting are real opportunities for us to differentiate ourselves in the marketplace.

With that, we'll be talking today, I'll have each of the presenters come up, we'll go through the markets, we'll go through the products, we'll go through the manufacturing that will separate us from our competitors. And then Bernard will also go through the financials and how we get more of that money back to our shareholders.

So if I could have Bob Mahoney come up, and he'll go through the markets.

Robert Charles Mahoney

Thanks, Keith. So Keith went through most of my pitch already about the design activity and the improvement that we're making in penetrating our customers. So what I want to do this morning is give you an update in the market in terms of how we see it. I'll talk about some of the applications that we're focused on, also our design activity in terms of how we're doing with new products. And then I'll give you an update on the organizational structure in terms of how we're changing that.

So when you look at this chart, I'll walk you through it. The vertical axis is really focused on the TAM CAGR for those markets. So when you take a look at communications, that's the fastest-growing market, if you will, on this slide. And also, if you take a look at the horizontal axis, you are now looking at where is our TAM? So if you look at computing, we've done very well there. Obviously, the industry sees that as a very slow growing market. We think with a lot of our new design activities, our new products that, at worse case, we think we can have modest growth out of that. And the bubbles represent, by the way, the size of the TAM.

So where should we be focusing this year as a company? If you look at the biggest growth that's going to come for us, it's going to come out of communications. And that's primarily driven by smartphones, as well as tablets. And my boss would tell you -- I would tell you, we have modest share there. Now, Keith, would give it a different term. But we will talk as we go through this presentation that we've made significant progress there.

In Mil/Aero, while it's an industrial relative big market for us, really, the key growth driver there is going to be lighting. And I'll talk more about that as we go through the presentation. And in consumer, consumer you see TVs, cameras and gaming. We think that's a very mature market, but the real growth is going to come out of white goods, and we're well positioned there as that market starts to return. And in automotive, we've done a very good job over the last 5 years. A lot of the GMs will talk about the design activity, the focus we put on automotive and the growth that we have in the past, and the growth we see in the future.

So I want to leave you with a couple of thoughts. The things that are going to drive the change in this company this year, the real growth drivers, are going to be tablets, smartphones, it's going to be white goods and it's going to be automotive. And in industrial, it's going to be lighting.

So when you take a look at the automotive segment, obviously, over the last 5 years, we've been doing a really good job of not only penetrating the applications there -- in fact, if you open up a car, any place they have electronics, you're going to find a lot of semiconductor parts. But what's more important is, is that we're bringing out more and more new technologies. So when you look at the graph at the bottom, every one of the slides I'm going to show you is going to have a graph like that, what is important is, we continue to win and grow our design activity. And if you look at the blue portion of the bar, the content from new products is going up very aggressively.

So whether it be an ASICs, ASSPs or even the new power modules from SANYO, it's enabling us to grow our bottom opportunity from $60 in 2012 to over $250 currently. Our capture rate is about $9.30. But obviously, as we grow in our capabilities, you'll see us capture a lot more of that this year. So really critical that we're growing our new designs a lot faster than we have in the past with new products.

The other thing I'll share with you about this market is, is that we're well positioned with the Tier 1s, and we're now starting to get engaged with the OEM car manufacturers. So both in Europe, North America, Korea, China and now we're starting to engage, with SANYO's help, in Japan. So we're well positioned there. We're winning designs in the applications we're focused on in powertrain and body, and in vehicle networking. And we're now starting to see our backlogs grow. So we're starting to see a slight improvement in backlog, and a lot of that is driven from the new design activity that the teams have been working on for the last couple of years.

Communication. So this is a market -- while we have been bringing out new products for the networking segment, really the focus is going to be on tablets and smartphones. This is an area that we were significantly under-serving. But if you look at the graph in the middle, from 2010 to 2012, our design activity has gone up exponentially. We put a major focus on these applications and these customers, and our business units have done a great job of bringing out technologies that really differentiates us in the marketplace. So we've launched new products for RF tuning, we've got the auto focus and optical stabilizers from SANYO, we've got battery fabs from SANYO, we've got common mode filters. And when you take a look at our bottom opportunity, we've grown that from $3.50 this year to close to over $7.

So what I will tell you is, we are designed in to every single major OEM, smartphone and tablet manufacturer. We're also designed in to a major domestic chipset as well as Chinese leading chipset suppliers. So we are well positioned as this market starts to grow. I will tell you today that our backlogs are starting to jump, and the teams have done a great job in support, and you're going to see this big -- see this be the single biggest growth opportunity for us this year as we go forward.

So computing. As you guys know, we've done a really good job over the last 3 or 4 years in computing and taking share. 4 years, 5 years ago, I think we started from no-place and today, we dominate the desktop and we've grown our share in notebooks and ultrabooks. So while we know this is a declining and mature market, we really think we have growth with our new controllers, AC-DC power supply technology, along with also some of our new thermals. And Bob Klosterboer, our GM, will talk about that more when he comes up. But we still see this as modest growth for us, so we don't see this as a declining market for us.

Okay. An important market. So when we acquired SANYO, one of the technologies we got was power modules. We expected last year that, that business was going to grow exponentially for us. And obviously, with the China slowdown, it didn't happen. And so we're still winning designs in TVs and we're still winning designs in gaming. But we see those as mostly replacement markets. The real growth for us this year is China housing is starting to show that it's recovering. White goods is starting to show it's beginning to recover. We've expanded our account base. We've also brought out new 2-in-1 technology for our next-generation inverter technology for air cons. And if you understand the air con business, it starts to ramp in Q1 and Q2 in greater channels, then it starts to flatten out in Q3 and Q4. Our backlog has jumped significantly, so we are seeing that market begin to recover.

So this is -- this is where we have an opportunity here to grow our business, to expand our value to our customers. Today, we provide a lot of MOSFETs and discrete solutions. But we're also now starting to launch new products and new high-voltage MOSFETs and IGBTs, as well as new modules. So what that does for us is it gives us the ability to start to ramp into other applications. So we now have the capability of serving induction cookers and HVACs and with the new products that we'll be launching in 2014 in our pitt modules, and I think Bill Hall will talk about that, we didn't have the capability of serving electrical vehicles, as well as with some of our solar power opportunities. So the difference here is we've expanded our ability to go into different markets, we brought more value to our customer base, and it's generating another revenue stream for us as a company.

For industrial. As you guys know, ON's a very broad-based supplier with lots of products. So we cover everything from wireless security to office automation to -- in Bobby's case, he's got a lot of products, especially with his DSP technology in medical. But the real key driver this year is going to be lighting. And when you look at the chart down below, you can see that our design activity in lighting has jumped pretty dramatically over the last couple of years. And as there is a push to move toward LED bulbs as well as control and sensing in the building -- and I'll give you an example of that. In our house, we're doing a little bit of a remodel and so my wife is putting all of the LED bulbs. But because I don't turn the lights off when I come out of a given room, she's now putting in -- your husband must be doing the same thing -- so I don't tend to turn the lights off, so what she's doing is, she's putting in all the sensor technology. So when we leave the room, then the lights will automatically power down. We have that technology. So we not only have the technology to serve the bulbs but also the sensing and control, inside the offices, inside commercial applications as well. So we see that as a big growth opportunity for us this year.

So let's talk about our design activity. When you look at this chart, you look at the pie chart, as we said before, automotive is a huge opportunity for us. It's been a market that we've done extremely good in terms of design penetration. If I remember correctly, I think semiconductor growth is going to be about 8% as a CAGR. And so we're positioned extremely well with the Tier 1s, also with the car manufacturers and new design activity that the GMs will talk about. More importantly, in consumer, we're well positioned, but it's really going to be about white goods. So there we've expanded our account base, we've turned out new products in terms of our 2-in-1 modules. And we're starting to see the recovery from the China housing market. So you're going to see us grow very aggressively there.

Wireless is the single, biggest success for us this year. Keith gave me constructive feedback over the last couple of years about the fact that we did have modest penetration in these applications. But our business units, our teams, our technical teams, have done a great job of penetration. So we're in every major OEM manufacturer of tablets and smartphones. And we have won reference designs, not only in the Chinese indigenous chipset manufacturer, but also in a major domestic one as well. So you're going to see that -- those designs ramp very aggressively. In fact, we've already got backlog started now.

More important about this slide, I think is when you look at the design activity and new products as a percent of design, it has jumped dramatically. The reason for that is, we're working a lot closer with our customers, the business units are visiting our customers more often. We've got more technical resources in the field, and we're doing a much better job of product definition. So more than 1/2 of our design activity, or pretty close to it now, is coming from new products.

So one of the things we've been doing over the last 4 or 5 years is changing the structure of the sales organization. And with the SANYO acquisition, we took the opportunity to do a -- to resize it, realign it, make sure it's sized, make sure we're sized to our current revenue streams. And our goal is to become 1:1, we will have 1 FAE to 1 SFC. Now on a global basis, you can see we're not quite there, but we're getting there.

Now in Japan, if you look at the pie chart on the left, there was not a lot of technical resources there. So one of the things we realized we had to do was change that model. So we're putting in the same footprint that we used around the world, and that is add more FAEs, also add additional SECs. So today, the model is, we're making the transformation, not quite 30% of our total resources now, our Field Application Engineers. We also opened 2 SECs in Japan, 1 in Tokyo, 1 in Osaka. They served automotive, consumer, industrial and medical applications. So what that's done for us is we're now getting tighter and tighter engaged with our customer base there.

So what I want to leave you with, we're well positioned in the markets and the applications that are going to grow this year. We've made tremendous strides in wireless. The backlog is coming in. We're making strides in white goods, we've launched new products, we've expanded our footprint with our customers, the backlog is coming in. The same thing with automotive. We're seeing it recover. We have lots and lots of new design wins that are kicking in, in the second quarter, that backlog is coming in. And the China -- when the Chinese come back from their Chinese holiday, our inventories in the channel are extremely low. We expect these guys, over the next couple of weeks, to be placing large amounts of backlog with us. So if we get just a little bit of a tailwind from the macroeconomics, we've got a chance to have a really good year.

And with that, I like to introduce Bob Klosterboer, Senior Vice President and General Manager of our APG division. Bob?

Robert A. Klosterboer

Thanks, Bob. Okay. So Applications Products Group. I'll go a little bit over what that means first. Basically, we've got the charter for all of the products that we specifically develop for an application. That doesn't necessarily mean custom products, but it can. What it does mean is if we do a DC-DC power supply, for example, or a VCore controller for computing, we're developing that for computing application, but it may be for all the customers in the computing space. So it can be a product that will proliferate across a lot of customers, it may even proliferate across several markets, but it's designed to solve a specific problem.

If you look at this business, you can see it's just over $1 billion business, it's about 45% margin, about 21.5%, 22% EBITDA. We had a really good year in 2012 as far as new design activity and things that we've done to position ourselves for the future. I'll talk about some more of those things in some future slides. If you look at the markets, and this may not be obvious, again, looking at it, we're a heavily industrial group, industrial, medical and Mil/Aero is categorized as one category when we release our results to The Street. So you can see that's the largest group within my division. Automotive is second largest. But as Keith and Bob have both mentioned, the wireless communications segment is going to become increasingly important to this business.

So the last -- since the last time we got together, it was 2010. We've sort of had a number of reorganizations within the company that have resulted in a structure that we have today. In 2011, we moved the Automotive Products Group into my group, and that added a lot of capability and a lot of design talent. And then just last year, second half of last year, we moved the power solutions and the power switching groups. You can think about that as the computing business, some of the consumer business, some of the wireless communication business. Again, around the applications part of the product. So the way that my group has broken up is pretty much along market lines or some specific product lines. And a lot of the benefits that we're going to see from that going forward is we've had an opportunity to consolidate some of our IP and our process development roadmaps to make sure that we're developing technologies that are in line with multiple segments when we have our technology development groups releasing processes. We've got a better opportunity to share intellectual property across divisions, with 23 design centers in 9 countries, there's a real opportunity for every group to design their own products and what we've been able to do by pulling this group together at this size, is be able to share some of that learning, get some better return on investment in some of our R&D products.

Again, we've got a leadership position in a number of significant markets. And I'll talk about some of those as we go through. A lot of things in audiology, automotive, computing that we're head and shoulders above some of our competitors in. What I'm going to spend more time talking about though is where we think we've got some emerging opportunities. There's a number of things, Keith and Bob both mentioned, LED lighting, I'll get into a little more specifics and some products that we've got in that space. Switching and smart switches and power switching. Load control has become an increasingly important part in meeting some of the power requirements. The 0 quiescent current products that are plugged into the wall, for example, require a new set of AC-DC converters that draw no standby power. We're well positioned in that area. Being able to turn on and off different buses within the computing space is becoming an integral part, even if the Windows 8 operating system may power up and down different parts of the architecture. In order to do that, you've got to have a very low on impedance, very intelligent switching to bring that power up and down. It's created opportunities for us. I'm going to talk a lot about RF tuning in a couple of slides, particularly for the handset space. And then in DC-DC in telecom, a lot of our capabilities are IP that we've developed in the computing space, very applicable to some of the telecom infrastructure space. And we've had a lot of success, particularly with a couple of large Chinese companies and being able to penetrate those products with our portfolios of DC-DC products. So again, that's an area where we may not see the growth we'd like to see in computing and some of these areas, we're seeing a tremendous opportunity in the telecom space with those same products.

A little bit about technology. The thing I really wanted to point out here is kind of the technology roadmap and nodes that we're on the company. All of these technologies are supported by internal manufacturing capabilities. They are processes that have been developed by ON's technology groups. And as you can see, our real emphasis right now is to move most of our product developments to 180-nanometer. Now in a world where we talk about 14-nanometer and 16-nanometer and 22-nanometer, 180-nanometer may not seem too sexy, but most of the products we have in my group today are in the 350- and 250-nanometer nodes, and those products are still ramping and still growing. The high-voltage, high-power intelligent analog products are typically a few generations behind the leading edge. And the good news for us is that we've got a lot of life left in our capabilities internally. It doesn't mean we're not looking at some other technologies or some specific products but as you can see, we've developed our 180-nanometer and our 110-nanometer digital nodes and mixed-signal nodes. What we're doing now is putting all the special sauce on them, the power modules, the VCD modules, the embedded programmability, eSquared and Flash, things like that to proliferate our entire product line, be well positioned for our customers at those technology nodes.

I'm going to go through some applications now. Automotive, as Keith mentioned, is key to our group. You can see -- you saw it's the second-largest segment within my division. You can see we do a lot of ASICs and ASSPs in my group that are customer-specific around this area. A lot of voltage regulation, SmartFET. A lot of it goes into powertrain. We'll talk about why powertrain is important to us. That's an area of the vehicle where most of the Tier 1s and even the OEMs still value a proprietary solution. Those proprietary solutions mean stability, stability in ASPs, it means we've got a very good visibility into the market because we sell one every time they sell a car.

The thing that's really driving all of the content in cars is if you look at it, there's the sort of Holy Grail for car buyers, the Nano, it's about a $2,500 car. Everybody would like their car to cost less, everybody would like their car to take less fuel, but everybody actually wants to drive this car. They don't want to drive the Nano, they don't want to drive the fuel-efficient car, they want to drive the new Audi. And so our job with electronics is to try and make that Audi closer to the price point of the Nano and closer to the fuel-efficiency of some of the other cars in the market.

So how do we do that? Well, the first area that I talked about is powertrain. We do a lot of development in powertrain, and our powertrain products are all around fuel-efficiency and emissions. About 100% of our energy that goes into powertrain electronics is about fuel-efficiency and emissions controls. A lot of start-stop alternator technology, which is becoming very popular in the market, dual clutch automatic transmissions increase fuel-efficiency, integrated throttle drivers, next-generation ECUs. As you saw, it's a big part of our business and we think it's growing opportunities there at the 48 volt rail. BMW and a couple of others have already launched a program to go to a 48 volt rail. As you saw from our technology roadmap, we're going to be well positioned for that because of the voltage levels of some of the technologies we're developing. Also programmable smart sensor interfaces. As there are more and more and more things being sensed and rolled into the equation on getting better economy, better fuel-efficiency, more safety, that means more opportunity for programmable sensors.

Another area is lighting. And we've been #1 in high-intensity discharge lighting for a long time in the company. The thing that's really changed with lighting though is that, 20 years ago or 10 years ago or even 5 years ago, lighting was primarily a safety feature in the vehicle. You needed to be able to see at night, other people need to be able to see your vehicle. Today it's becoming styling. OEMs, car manufacturers have found that they can use LED lighting because of some of the less constraints to differentiate their vehicles and to add styling. Example of that is, certainly, the Audi's that we've seen with the interesting front lighting, there are more and more vehicle-specific lighting modules coming. We talked to some of the big lighting Tier 1s, and they used to build one set of tooling and build lights for everyone. Now they have a set of tooling for every car model because there's just more and more differentiation and styling in the car coming from lighting.

A good example of a taillight lens is for the next model of Mustangs and Camaros that are coming out. They're very sophisticated, multi-light lenses, and we've got about $10 per taillight of content in those lenses. And so you think about a product that maybe 15 years ago was a bulb and a piece of wire and a switch, now there's $10 per taillight of electronic content in those lights. Take that times 2 on a vehicle and you start multiplying vehicle volumes and you can see how we're excited about some the growth in the lighting areas. There is new things like pixel technology that are going to do beam forming and beam shaping for next-generation front lighting. All of this is going to get enabled and we're in a really good position for it.

The interior of the vehicle for my division, the guys in SANYO do a lot audio and entertainment products. What we see is the communications, both wireless and wired communications, within the vehicle connectivity between your vehicle and yourself, whether it's your personal device, your smartphone, your house, the traffic environment around. That machine-to-machine communication is becoming a bigger and bigger deal in automobiles. And we think that, that's one of the trends that were going to help drive, and that we're going to see some benefit from. The other thing with the interiors is, again, personalization. We've got some products like programmable color lighting for the interior of your car, where you can sit down in your vehicle and actually change the interior lighting of your vehicle. Seems a little gimmicky, but when you talk to customers like FAW, First Auto Works, in China, there's not a lot of ways to differentiate those low-end vehicles, and so people like to be able to have a little different styling, a little different color. It's a very inexpensive way to do some of that differentiation.

And then, of course, safety. There's more and more regulations. The Child Safety Protection Act that drove the backup cameras in every vehicle. We are seeing a lot of opportunities, both in our ultrasonic park assist and all of the sensors that you have around your vehicle that go off, dynamic braking, we're seeing opportunities in cruise control. A big area though is in vision. And this, again, is night vision systems as well as occupancy detection, drowsy driver detection, where you start using pieces of silicon that are significantly larger than you do in some of the areas. And some of these applications alone can drive $10, $15, $20 worth of content in a vehicle, and we're seeing a lot more opportunities there.

This is just an example of some of the products that we brought out in the front lighting area, both for bending the headlights, as well as lighting the daytime running lights, cooling fans for cooling the high-intensity LEDs that they're going to use, but you can see there's a number of part numbers that we've already released that are already designed into production and we see this as a -- as a real growing opportunity for us.

Next section segment that I want to talk about is our industrial, medical and aerospace. As Bob said, it is a very stable business for us. It's the largest single-market segment within my group. A lot of very good, long-term customers that we have here, and we're sort of moving with those customers down technology curves.

What I wanted to mention is along the bottom row here because this is the area where -- it may be counterintuitive, but this is the area where we do most of our highest sophistication as far as technology development. The 2.4 gigahertz radio, it's a ZigBee, 4CE-compliant radio. It's in the low-power technology, 90-nanometer technology at TSMC. It came out, we transmitted open air on first silicon. We've seen a lot of customers, particularly in the machine-to-machine communication and the industrial communications space that are using this type of product. It's an ARM cortex-M3. There are other people in the marketplace with a similar type of platform to this, but we'll release this later this year.

In the medical space, this is our first 65-nanometer part. We'll release that. Again, it's TSMC's 65-nanometer, very sophisticated, triple core processor, all of the analog front ends, the codecs, all of the communication. Maybe not the typical type of products you think about when you think about ON Semiconductor, but these guys are sort of at the tip of the sword as far as developing, their driving Hans' group and the technology guys to make sure we've got the methodologies, the libraries, the IP in place.

The third part there is the flight controller for the new Airbus A350. It's a 1,152 pin device. It goes in every flight system. It's a redundant system in all the Airbus A380 controllers, a couple of million gates. That's in our ONC110 process in our Gresham fab. But these guys are really developing a lot of next-generation sophisticated products. The imaging products are in that space, where we're doing our high-speed imaging products, both for cinematography, as well as the biometrics, the security, those type of imaging sensors.

Wireless and tablets, sort of the star of the show, if you will. And you can see sort of a list of products that we have, particularly in power management for these devices. We've had a lot of success in battery charging, supervisors, the load switches and smart switches that I mentioned, boost bypass, DC-to-DC converters. A lot of opportunity, a lot of reference designs. If you look at a lot of the teardowns from iSuppli and other people out there, you're going to see ON Semiconductor products, where you probably haven't seen them in the past.

And that's sort of just, as Bob mentioned, the leading indicator of some of the areas where we've seen a lot of design wins and a lot of success. We've got lighting opportunities. We've got ambient light sensors, proximity sensors that customers are using for gesturing. We've got LED backlighting. We've got audio products, both audio amplifier products, as well as some of our DSPs for dual mic noise cancellation, echo cancellation, some of the improved audio products that are in some of the higher-end smartphones. And then if you look at the RF signal path, the capacity of tuning that I mentioned before and we'll talk about the integrated passive circuits that people are using in the PA modules. We've got a good line of those products, as well as some of the CMOS power amplifier controllers for some of the leading PA guys.

So here are the products. And Bob mentioned a couple of times on the power management side, and this is actually the Qualcomm reference design. If you pull it up on the web, you'll see the Qualcomm reference design with our parts in it, so it's not really a secret. So that's a product -- a DC-to-DC product that is gaining a tremendous amount of success, along with the new quad-core Qualcomm chipset and the first Qualcomm smart -- or the first quad-core smartphone that was released actually used this reference design and had our DC-to-DC products in it. Very excited about those products.

The battery management side, it was one of EDN's hot 100 products for 2012, with the release of our battery switching product. Our 1851 has seen, again, very good design interaction with the top 3 or 4 smartphone guys in the space. And then the control IC and the tunable capacitors, and this is a space where there's been a lot of discussion in the last few years in the market about tuning of antennas.

Certainly, when the iPhone came out and when people grabbed it, it dropped calls. People realized that tuning these integrated internal antennas in smartphones was becoming a bigger and bigger deal. It's also becoming a bigger deal as you've seen frequency band fragmentation with the LTE and the 4G phones, where now maybe there are 9 bands that are trying to optimize for, and they can't do it with a single or even 2 or 3 tank circuits within the phone.

And being able to tune all of those bands then really allows a couple of things. It allows better RF performance, fewer dropped calls, the carriers love it, but it also adds battery life to your phone. I'm sure you've all been in areas where you have poor coverage and you realize how fast your cell phone battery dies. It's because it's constantly trying to optimize, constantly trying to find a better frequency out there. If you can do antenna tuning, that will solve itself.

This product really came out into the market. It was a product that was developed by a small company called Paratek, which now Blackberry purchased. We've licensed the technology. We're selling it to a number of handset guys. We've got a number of other guys that are very interested. From very simple solutions of one channel, one frequency optimization to as many as 9 bands, like I said. And if you're looking at 9 bands of frequency, multiple high-voltage decks to control those controllers, you can be talking about a lot of content in a smartphone.

The last segment that I want to talk about is computing. And again, we've talked about some of the challenges in the computing space, some of the slowdown, I guess, if you will, in the computing space that's been caused by smartphones and tablet opportunities coming in. We think computing is a long way from dead. We think that the refresh cycles may be a little bit longer, as people don't have to go to the next-generation notebooks, for example, to get the next capability. They may get that on their tablet. They may get that on their smartphone.

But eventually, there'll be a refresh to a lot of those notebook products because there's just a lot of applications where those are required. We see desktops continuing to have a place, particularly in the commercial market space. And we see low-end server market really starting to grow, as we've seen more and more compute capability required for some of the things -- streaming video, even in some of your homes, you'd really like to have a low-end server there, as opposed to a tablet or a notebook-type of product doing that.

So what we see there in the marketplace, as you know, we've had great success with our VCore controllers. We've had some DC-to-DC success. We've always had good adapter space in that. But we see more going into the controllers, controllers with drivers integrated, controllers with drivers and FETs all in 1 package, DrMOS solutions, allowing us to add value even if the absolute numbers are declining.

The other thing that we've really done a good job of is developing a family of thermal management products, and we think the thermal management part of our PC computing space is going to continue to grow pretty significantly over the next couple of years. We also have a lot of other products. There's a lot of power products in the -- on the motherboard or -- other than the VCore controller. And that's where we've started to take some share outside of the controller to continue to grow that space.

Here's where I'm talking about some of those load switches and smart switches to control the bus rails and the connectors, some of the opportunities in other DC-to-DC areas and other specific powers -- power rails that need to be managed. So even though the VCore may be going up and down a little bit as far as number of rails and things, we think there's a lot of opportunity outside the VCore to continue to grow our computing business. And of course, we don't want to give up where we're #1. We're going to continue to gain -- or to maintain our share in desktops. We're going to continue to maintain our #2 position in portable and notebooks around the VCore and that controller. We've got very good, stable products for next generation. Our design wins have been very healthy.

So the key takeaways. We think that the product group has an opportunity to develop complete solutions for our customers. We have very good applications and technical guys. We work in conjunction with the solution engineering centers, the SECs that Bob mentioned, to make sure we're very close to the customers and that we're developing products for those spaces.

Remember on the first slide, we developed over 280 -- released over 280 products into production last year. Keeping that design cadence and that pipeline of new products and winning designs into these spaces is going to help us to continue. We think some of the macroeconomic things like machine-to-machine communication is going to boost some of our market spaces as well. And we really think that the new structure allows us to take advantage of some of complementary models between doing custom products, as well as doing ASSP and being able to rapidly change products for some of the rapidly growing markets, with IP that we may have developed for some of our slower-growing markets, like the industrial and the automotive space.

Thank you. Bill? Oh, yes, with that, I'll introduce Bill Hall, who leads the Standard Products Group.

William M. Hall

Good morning. Welcome to Phoenix. I'm going to talk about Standard Products Group. Usually, at this point in the presentation, everybody gets up and takes a bathroom break. So I do want to point out that we have a scheduled one after my presentation. So in fact in the past, I've even gotten up in the middle of my presentation, but anyway, that has to do with age.

Okay. So first, I will give you an idea what Standard Products Group looks like. So we, in 2011, did $102 billion; in 2012, in the downturn, did $101 billion of revenue. We're made up of 4 divisions: Power Products; Protection Solutions; Small Signal, those are all discrete groups; and then, the Integrated Circuits division, which is things like standard logic, standard linear, double EEPROMs and a few other things. If you look at the graphic that's in the middle between the 2 pie charts, that's how our revenue breaks out by market segment.

You can see kind of a theme going on here, it's for all of ON, but for Standard Products, automotive is our biggest segment at 25%. The next 4 are all fairly close. The areas where we are focusing most of our new product development are the ones with the arrows. Those are the areas with largest CAGRs. Now I will point out that the company is focused on telecom. And actually, in industrial, the area we're focused there is power supplies and power solutions for telecom, so there is kind of a crossing of technologies there.

From a market share standpoint, using 2011 data because we don't have 2012 market data yet, we had the fourth position in market. We're definitely within easy spitting distance of #3. A couple of other key facts, 50% of our business comes from China, so we have a lot of focus over there. Our top 10 customers, you can see all household names. I color-coded them for you, so you can see what segments they map into. They're in no particular order other than that. We have a number of top market positions. I think the 2 that are most important to us are that we're #1 in silicon protection and we're #1 in translators.

Okay. I'm going to talk about what's changed since we last got together in 2010. The first thing is I can no longer button this middle button on my suit, which is the same one I wore back then. My hair is a little grayer. But product-wise we picked up, similar to Bob -- Bob's explanation, we picked up a whole new division in the IC division, which brings all of these IC Standard Products into the total Standard Products Group.

Additionally, we pulled in MOSFETs into Power Discretes. And in 2010, I was talking to you about IGBTs and that we're getting into IGBTs. We've actually organically grown there. We're in the process of introducing our third-generation IGBT since 2010. Also, a lot of organic process in Protection and Small Signal. So if you look at the revenue addressed, in 2010, we are giving you 2009 numbers, end-of-the-year numbers. We were $500 million. We've grown organically in that time period by about 5% per year. And then, if you add in the IC division and MOSFETs, we're now a $1.1 billion company. And our TAM addressed has doubled from $9 billion to almost $18 million (sic) [$18 billion].

From a market standpoint, previously with cellphones, now, like the rest of the company, we're very focused on smartphones and tablets. Digital consumer, we're doing everything we need to do to maintain market share there, but it's not a strong, active investment area for us. And then, white goods, we have developed several IGBTs for the white goods market. But with the advent of SANYO coming in to ON Semiconductor, they have a very good portfolio and very good technology in the white goods area.

So we have -- in that case, we're working on lower-voltage and lower-current IGBTs. We've moved up now and are focusing on high-current, high-voltage IGBTs that go into this high-performance power conversion product area. The other thing under the 2013 focus you'll see is automotive. Again, like the rest of the company, it's our current biggest segment, and across all 4 of these product lines that are listed here, we have significant new product activities to develop parts for the automotive market.

Portfolio coverage is extremely important, if you're a standard products provider. What this chart shows you -- and all you have to focus on is the green blocks. If you have a green block, that means you're 1 of the top 4 suppliers in that category of standard products. And basically, if you look at this, we have the most green. There are some other guys that may be ahead of us in market share, like TI and Infineon, but they specialize in certain areas like ICs or power discretes. We are the broadest supplier and we believe the most relevant supplier of standard products technologies to the industry.

All right. So if you look at 1 slide and remember 1 slide, this is the one that I want you to remember. And this talks about our business model and how we are different maybe from other groups that you'll hear here today and some of our competitors. So the main thing is our products have a very long lifetime. A good example there on the right-hand side of that lifetime curve is metal gate logic, still generating good revenues, strong revenue and very strong margins. That product line was introduced in 1968. At that time, I was still riding a bicycle. Bob Mahoney still had hair. The world was a much different place. Yes, all of these products don't grow up to be 45 years old, but the real key point is most of my products have a mid-lifetime of 15 years or so where they generate substantial EBIT.

And you can see the model there. Currently, we're running about $900 million in that category, 34%, 35% gross profit margin. We spend 14% OpEx across all of SPG. And so out of just that category, we get about 20% EBIT. And if you want to look at cash flow, EBITDA, you're looking at about 27%. Of course, you have to feed that EBIT machine, and so we do that with new products. And we do spend a fair amount of money in new product areas, although we're focused heavily on those 3 areas I talked about on the last slide. So generally, we generate $150 million a year in that category, and we have that pipeline filled up with some pretty good high-protein products.

So how do we keep that big $900 million piece going? By far, the biggest activity for us is cost management. We're fanatical about cost management. I have a rather large product engineering group that works across all of my divisions and works heavily with the corporate operations groups to pull out -- the target is 6% to 8% of cost per year. And you could imagine, that gets difficult once you get parts that are 20 years old, 30 years old.

But we have many tools to go do that. Biggest tool would be increasing net die for wafer. We do this with die strengths, we do this by going to -- from 6-inch to 8-inch wafers. We have some unique technologies, innovative technologies that ON has, such as this narrow saw street technology. And this is an area where we found a radically new way to singulate die where you don't have a lot of wasted space between die that are used up by a mechanical saw. With a wafer that has very small die on it, this can give us up to 20% more die on a wafer. So the point is there's some traditional things like shrinks but we also look outside of the box very often for cost management. In-sourcing continues to be important. Factory consolidation is important. Materials reduction, like gold to copper, still big areas in helping to drive 6% to 8% out per year.

On the other side, the next biggest important thing to running that big chunk in the middle, that $900 million, is continuing to add capacity. And you can see, on average, since 2006, we've added about 7% unit growth year-on-year. 2012, we've sold 32 billion units. Right now, we have about 6 billion units that would generate about $100 million to $150 million depending on mix, when the market turns up into our next strong upturn.

And then the chart on the bottom shows that, of course, we're always looking at margin management. The good news is, on the right side, you see that most of our revenue, the lion's share, comes from products that are over 35% margin. In fact, the biggest category is products over 50% margin, which may be surprising to you on a standard products line. And our duty is to work on that stuff that's below 35%, and we do a lot of cost reduction. And if that isn't going to work, then we kill the products. So that's how we manage that part of the business.

Now let me talk about our new product strategy, and this is important because this is what feeds that EBIT machine. So we are focused on 3 areas. And again, it's a bit of a recurring theme that you've seen in other presentations. Smartphones and tablets is one, automotive is second and the third one for us is high-performance power conversion. So what's common in all of these is they're large TAMs, they are fast-growing markets, they're all markets where ON Semiconductor has a very good presence, which means a large infrastructure, solutions engineering centers. We're well designed into reference designs, all that kind of stuff.

And then what we, SPG, try to bring to this is competencies that -- real technical competencies that will allow us to have technical leadership in these categories. So for example, if you look at smartphones and tablets, one of the things we're really good at is small packaging. We do everything from true chip scale to encapsulated chip scale, to things like we have the world's smallest MOSFET. So very good at small packaging.

Secondly, things like BlackBerrys and iPhones and so forth, you actually go into your pocket and dig this thing out about 50 times a day. Well, you guys probably do it about 150 times a day, but the normal person. And so it's subject to a lot of handling, a lot of ESD and a lot of EMI issues can be associated with these. We have the #1 position in protection, and the reason why is because we are very good at protecting these high-speed signals that are going into these devices without degrading the signal that you're trying to protect. In fact, we are world class and the best in the world at doing that.

Now if you go down to automotive, again, a focused segment for ON. You saw earlier -- actually Bob's data showed were 26% of our total revenue. Again, we have a big infrastructure that covers automotive as a company. The competencies we bring, not only the protection stuff that I just talked about, but also power discrete devices like MOSFETs, IGBTs and rectifiers are very big in this space. And to do those well, what you have to be good at as -- is backside wafer processing.

And not all companies are good at that, and we have very good capabilities to grind wafers to very small levels of thinness and then handle them afterwards, so that they don't break apart. We're also good at doing deep backside implants. All of that gets you the most efficient MOSFETs and IGBTs that you can get. So we leverage that technologies -- or those technologies into the automotive market.

Key investments there for us are medium voltage MOSFETs. They go into some things like power steering and fuel injection and antilock brakes, stuff like that. IGBTs going specifically into air conditioning. GaN and PIMs set us up down the road for HEV applications. And we're taking our knowledge in protection, and we are translating that to infotainment and also into in-vehicle networking and a few other areas. So that's automotive.

The last one I'll talk about is high-performance power conversion category. You may not have heard this term before but it really means high-end power supplies, high-end motor control. Things -- it's driven as a whole by things like the cloud and enterprise networking. It includes things like uninterruptible power supplies, server and telecom power supplies, industrial motor control and alternative energy, like solar and wind, things like that. Again, that really uses competencies that we've developed in automotive. And it takes them up to the next level, so all -- to the next energy level, so voltages and currents and everything are going up 1 level there. And key investments there are on high-efficiency MOSFETs, super junction, field stop IGBTs and then GaN and PIMs, a couple of years out.

So it's one thing to be able to pick what markets you want to play in and know you have general competencies, but how do you really win in this marketplace? So if you were to ask me 5 years ago, "Bill, how do you decide what parts to bring to market?" For discretes, it was pretty simple. It was for a given technology, we would introduce a part in every voltage and current combination that made sense and then put it in 3 different packages and then release it to the market and see what the customers buy. And they might buy 5 out of the 25 parts you released.

That's changed a lot over the last few years, and now what we have to do to win is you have to introduce multiple generations of products at the same time. You have to be working on multiple generations of products simultaneously. You also have to have a systems-level applications engineers located next to the customer who can decide for each one of those generations of products what parts specifically do you bring out for specific applications.

So the 2 charts you see on here, we'll look at the one for IGBTs, represent that. You can see the 4 green lines that are kind of running diagonally, those are 4 generations of better and better efficiency IGBTs. And what you can see on this, if you study it, is within 3 years, we have actually developed the highest efficiency IGBTs in the industry. Now there's a strong market leader in this area. They're going to come back this year with their next generation, but we're already working on our fourth-generation part. And so being able to stay in that #1, #2 position, whether you flip-flop back and forth, you are able to control most of the market share in that important growing market.

On the right side, I won't go through in detail, but the same thing is going on in Protection. It's just a different parameter. In this case, it's better signal integrity instead of power efficiency. In the case of protection, we didn't have to catch up. We've always been in the lead, and we have a model that keeps us in the lead. And I could show you at least 6 more of these kind of charts, all on different products that we are pursuing that all have a parameter that you continue to iterate in on the next-generation part.

Okay. I always enjoy talking about packaging because it's very visible, you can -- tactile, you can feel it. I can pass things around the room. You've seen charts like this before, so I won't go through and belabor those. It's important that we continue to drive to smaller and smaller packages. And in power, you handle more and more power in a small package.

But I'm going to give you an example of the extremes of packages that we're working on. So right now, we're working on technical capability to get back into the PIM business. Motorola actually did PIMs. This one was done here probably 10, 12 years ago. The idea hasn't changed much. The form factors are a little bit different, and this right here is what some of the popular ones look like today. These, I can put IGBTs, and instead of selling them for $0.50, I can sell them from $10 to $100.

Now on the far extreme, if you look down here, this is where we're at, with small packaging for the wireless and handheld applications. We have our latest DFN0201. It's a chip-scale package that's encapsulated with plastic. There are 10,000 of these in this vial. And the question I'd ask you guys in the room is, what do you think has more street revenue associated with it? This $100 part or this 10,000 units of tiny parts that go into wireless? You got it. This is worth 10x what this is.

Now, does that mean, why am I doing these? They both generate better than 50% margin, way better than 50% margin. Capital for both is fairly similar. So this just lets me play in 2 different areas. And by being on the extreme end of the packaging, I can command very good margins and keep that EBITDA machine going. Now I'll pass these around the room. You can open the vial if you like. I've already spilled some into my briefcase.

So we're just about done. Do I get a red flag here or can I do my last slide? Okay. So this is my last slide before the takeaway.

So another view of looking at our strategy in Standard Products would be more of a product view. I haven't talked a lot about the IC part of our group because it's relatively new to me. But I'll give you an example. Of course, what me and everybody else who stands in front of you tells you is that the key is looking for the fastest-growing parts of the market.

So if you take logic, for example. The logic market itself is forecasted to be flat through 2015. So you've got to look within that for the growing pieces. For us, it's translators, and translators that support the wireless market are growing at a 6% CAGR. And we do pretty good with translators. Remember, I told you earlier, we're actually #1 in that space. And the reason we're good is because we always stay ahead of the past generation in size and speed combination.

Now if you want to look at another example, op amps. We're #1 in the world in general-purpose op amps, but that SAM is only growing at 3% per year. Our focus right now is on wireless, low-power op amps and high precision op amps for the HPPC market, and that's growing at double the rate, 7%. And I can say the same thing about IGBTs and PIMs, general market growing at 12%. Our focus is on HPPC and automotive. We can win there because we have some of the best efficient MOSFETs and IGBTs in the industry, and we can grow it 50% faster than the rest of that part of the market.

So key takeaways. I would submit to you we are a vital player in the standard products market. We're one of the guys that can move that market. We have a great business model. Just the middle part of our portfolio generates 20% EBIT, 27% EBITDA. We replenish the revenue that drives that every year with $150 million of new products.

We've introduced some very significant platforms in the last couple of years, IGBTs, generation 6 FETs, common mode filters for EMI, low-cap ESD and so forth. And we're working on some pretty neat stuff, like PIM modules, which are the power integrated modules, the big guy that I just passed around, and gallium nitride.

So that's it, and now you get that break.

Sloan Boss

Okay, everyone. And for those listening to the webcast, we're going to take a break for about 20 minutes and -- which means we'll start back up at about 10:10 Mountain Standard Time. And also would like to remind you guys that we do have some demos in the back here. There's some pretty cool FLIR infrared goggles that you can check out and check some of the heat mapping on the walls and things from your handprint and stuff, and then also some great products from our SANYO Group, with some LED lighting and some noise cancellation and some pretty cool products back there.

And with that, we'll see you guys in just a little bit.


Sloan Boss

If we can take our seats, we're going to get started here with the second half. And for those on the webcast, we're starting up. And the next speaker will actually be -- we have a slight change, unfortunately, our Senior Vice President and General Manager of our SANYO Semiconductor Products Group, Mamoon, has come down with a flu, which we do not wish upon anyone. So we hope he feels better soon. So stepping in for him will be Keith Jackson to talk about our SANYO Products Group.

Keith D. Jackson

Welcome back. I'm not sure I can generate quite the enthusiasm Bill did for standard products when he said we did $102 billion worth of them last year. But I will try and generate some excitement now for you for SANYO. I know you've certainly heard some of the problems we've had there. We'll talk about where we are in getting this business back and healthy, but we're actually still very positive this can be a growth engine for us for the future. What have we done for the last, actually, 2 years? We have got our costs continuously coming down as we exited last year, about $56 million a quarter, permanent fixed cost reductions. And we also have been focused, at the same time, in making sure we can sell more products outside of Japan. Again, no secret that our customers in Japan have been losing market share with the high yen and other issues. So we've really have been focused on getting those design wins outside of Japan, using the ON sales force, and that's making very good progress. 2012 was a challenge. I'm not going to belabor the flood we had in Thailand, but it took out $400 million a year worth of revenue generation manufacturing. We've recovered as far as getting all those products qualified last year, but it does take time to get back into the designs after you've lost those.

As we look forward to 2013, we wanted to make sure this business was a profit generator, and we're going to have plans in place so that as we get into the third quarter, you should have your breakeven below $190 million, and we're targeting getting the revenues up above that number to start generating profits.

So what does it look like? I showed you earlier the markets for the total semi industry in Japan, they're still about 14% of the global demand for semiconductors. And the expectation is they will start growing again in '13. Economic policy there certainly has got our customers more excited, seeing that they can be more competitive in a very export-driven market for them. And so at this stage, we are expecting to see modest growth start occurring again in 2013, which should help us with our customers in Japan. That restructuring I talked about, just to give you a graphical, we had 3 wafer fabs that were supporting that business in 2011, we've got 2 of those successfully closed, midyear last year, and we have one factory left in Niigata. That factory is large enough for us to expand back to the previous revenue levels. We don't need additional factories or investments to make that happen, so we're pretty excited about the footprint that we've got there. So we've moved, with that move, our breakeven from $320 million of revenue per quarter down to $230 million. We've done some back-end consolidations as well, you saw the Thailand factory coming out, we've created a new manufacturing entity for assembly test in Vietnam called OSB. And we are moving more of our technologies there to get some very significant cost improvements and our breakeven number down to $190 million quarter here for the second half of 2013.

What's the profile? Again, the opportunity we believe is Japan is about 14% of the world market. For this business, it's about 38% of their total business. We will change that profile by growing outside much, much faster than inside of Japan. And from a product perspective or a product mix perspective, they were about 50% consumer in 2011. But you're going to see shortly in the next few foils that we're going to be out growing in the handsets, automotive areas, to get a much better balance in the business.

From a product type perspective, you can see that on this chart, most of it is in our analog and power domain. There is a small amount of micro memory logic that supports each of these markets, and we'll talk about how that fits. But that profile, we should be seeing most of the growth occurring in the LSI and hybrid areas.

So what do they bring to the party? Why are we excited about them still? They've got some engineering talent, they've got some great technologies and IP. Some of the things they are bringing to the table right now, autofocus and image stabilization for camera modules, anything that uses 8 mega pixels, need some of those technologies on your phones, and they've got very good aggressive technologies there. Battery management. Some of the lowest, our ON devices in the marketplace, help us have a very good positioning in battery modules. And now with the AMOLED increasing content in handsets, they've got the drivers there as well as the flashes for the cameras.

We've talked before about the inverter modules, that business was hampered last year by a slowdown in development in China. We've seen that turn the corner, we're starting to see increasing orders there, very positive book-to-bills on that, and we've been lowering our internal cost structure by using ON-generated internal components. That, plus the fan motors that go across the various markets really give us some opportunities in our module business. And as I mentioned earlier, they've got nice ASPs, so any inner growth there gives us nice revenue growth.

Automotive. You've heard a lot about automotive today. Where do they fit? They've got some pretty exciting igniter modules. This is what replaces spark plugs for most of you with the older cars. But they sell modules into that area which are pretty exciting. The displays in many of the cars, they've got some very efficient solutions for those. And then infotainment, specifically, some very good content.

Industrial. Again, you see some of the same technologies being used again, the motor control, motor drivers, the MOSFETs and the modules. And so again, what you have is some technologies where we have core competencies, fitting some very big needs in -- for the markets.

How are we diversifying? I talked earlier about growing faster outside of Japan. You can see the bar chart here, not quite twice as fast from a new product design window, inside versus outside, but we are certainly outpacing our design wins outside of Japan there. And it's very significant. If you look at these segments, I mentioned earlier that consumer should become a smaller part because we are out growing with automotive and wireless. Again, you can see this in the pie chart. Good margins, better margins, if you will, in those markets with a consumer. So again, it gives you not just growth perspectives, but also margin improvement opportunities.

Now I'll just talk a little bit about some of the specific products that we bring to the table from this group and the various segments of focus. We've more than doubled our content opportunity in phones year-on-year. We've been playing in autofocus for some time in the MOSFETs side from SANYO, as I mentioned earlier, on the very low, our ON MOSFETs. But now we've added in the lighting and drivers for the AMOLEDs, as well as haptic drivers that go into many of the phones that have been designed in several of the Chinese accounts. So again, the doubling of our opportunity there is pretty significant with the growth in smartphones.

Automotive. Taking the position or opportunities up dramatically, with both moving into infotainment more heavily on the radio side, but also modules now for all of the comps, fans and mechanical instruments inside your car. And so with those modules, we move our opportunity from $13 to over $70 per automobile. I mentioned earlier some of the LCD drivers and igniter modules where we have existing presence. But as we look forward, the design wins really give us more opportunity for automobile.

White goods. We've talked about the white goods and the variable speed motor modules before. What we've added there is more in the IGBT side, developing those internally rather than having to buy those on the outside, but also looking at combination parts where you're doing more than just the inverter. We call them 2-in-1s or there or there's going to be some 3-in-1s out there, where we can get more and more content into our single module, making us more attractive to our customers, giving them a better price point, and again, helping us increase our margins. I mentioned earlier, we have seen a big change in China. The order patterns are back, it looks like they've burned through a significant amount of the inventory that was built up in 2011, so we're very hopeful on this year of having us return to growth.

So what should you expect overall? What would I leave you with on SANYO? We bought this company because they had some great technology, some great engineering talent, that's all still true. They've had some challenges from nature and from various political issues over time, but nonetheless, that part remains. We've driven hard to get the cost structures in line so we can generate profits and we're confident we can be doing that in the second half of this year. And we've used the ON infrastructure to help this group start growing outside of Japan, which we believe will lead to company growth and improved company profits. So headwind withstanding, we think we're through that in 2012. And as we go through 2013, instead of talking about headwinds, we'll be talking about the tailwinds that we've got in many of the markets.

So with that, I will turn it over to Mark Goranson, our Senior Vice President of Operations, who will talk about how we continue to make ourselves competitive.

Mark Goranson

Thanks, Keith. Good morning, everybody. So I'm going to be talking a little bit about manufacturing operations and the supply chain. So this is both Bill Schromm and my group. So Bill has the SANYO operations, as well as the planning and IT. So some of the improvements we've been making in that arena we'll be talking about from his domain as well.

So kind of I will be talking to you about how we're going to be bringing to market all these great products that Bob and Bill and Keith has talked about, as well as, the cost reductions that we have going in place to make sure that we have ample gross margins to meet the financials that we need to. So some of the things that I'll be talking about is the wafer expansion -- wafer fab expansions that we have predominantly on the agents' arena for all of these new products that are coming into play. The expanded footprint in Vietnam. Bill talked a little bit about the power modules that we're bringing to market, so that particular facility was bought with expanding the power module market, as well as consolidating a lot of our packages that are cost-challenged and to free up some space in Seremban and some of our other facilities for development of new packages so that we can continue to be cost competitive there.

The other thing is cross-qualification. As you know, as businesses start to pick up, and the fabs start loading up, it's very key for us with our seasonable markets and all the different marketplaces that we play in to be able to have flex capacity so that we can move from fab to fab, depending on situations, and that can optimize the fab loading. So we've been doing a lot of cross-qualification there, both with foundries and internal fabs to be able to smooth out that capacity and make sure that we can take good advantage of upswings in the markets.

We'll talk a little bit about the factory consolidations and some of the cost savings that we have in place that will help to drive some of the margin improvements that we'll be talking about. Some of these things are going to be in-sourcing. We've been, over the last couple of years, with the downturn, we've been taking a lot of the products from foundries and subcons and moving those internal so that ideally, I can keep my factories internally running around the 90% range and flexing to foundries and subcons so that we don't have to take the big swings in CapEx or depreciation on unloaded tools. And then some of the other big investments we've been making is we have a facility in the Czech Republic, where we actually bought some assets from Simco, and we're actually growing our own ingots and pulling our own silicon on 6-inch and 8-inch, to help give us the stability of supply, as well as rip out some of the costs that we have with some of our suppliers because we have a lot of highly-specialized substrates from EFI that we have to pay a premium for. And we'd like to grow that internally so we can continue on the cost savings path.

And then talk a little bit about some of our advanced planning systems and processes that we've put in place to make sure that we're delivering greater than 95% OTD to all of our customers. Pretty big efforts gone under there in the last couple of years. And we're proud to say that we're a full member of the EICC. For those of you that don't know what the EICC is, it's a committee of electronics manufacturers globally that ensure that we follow all labor laws and that we institute the best practices to make sure that people are well taken care of.

And then environmental sustainability. We're very proud of the fact that we're a very green company, a lot of our parts deliver energy savings. We also spend a lot of time in the operations arena, making sure we're reducing our carbon footprint, reducing our affluence, making sure we're using more environmentally-sustainable chemicals or metals, things of that nature. So really big efforts we have in terms of the environmental sustainability.

So here is some of the cost savings that we've ripped out over the years. You can see that it's close to $415 million, cumulative by 2015. And a large part of this is done by the factory and other projects. So this is things like copper to gold -- or gold-to-copper conversions, high-density lead frame. So we had some of the super extreme high-density lead frames where you can get 33% more die on the same lead frame, with very little increased cost in metal, so that's been a huge win for us.

And then we've talked a little bit about the silicon in-sourcing we've done on the Czech Republic. So that ends up saving us like $8 million on a $50 million spend on silicon, so pretty big improvement there. And then I'll talk a little bit about some of the factory consolidations that we've done there, which will give some of these cumulative savings over the years.

Capital expenditures. We have made some pretty big expenditures in 2011 and 2012. Most of this has been with the tooling up of the 8-inch fab in Gresham and Pocatello. It's also been some of the back-end test equipment for the ASICs, as well as the SANYO part in 2012, was the capital investment we had to make for the Thailand flood situation. So for 2013, you can see that we have forecast a pretty dramatic drop in CapEx, and that's because we have made those prior investments, and we expect to utilize those assets more efficiently this year. So the same resources that are -- been used to install and qualify all of that CapEx, they're actually focused on increasing yields, increasing utilization and making sure we get better return on those investments that we made in 2011 and 2012.

So you can kind of see, this is the fab front end -- footprint that happened in -- started off in 2009. There's been a lot of questions in a lot of the tables that I've walked around on, kind of what our footprint was and what it looks like. And so this is kind of what I'm going to walk through here for the fab. So you can see that there are some 5-inch fab in Idaho and 4-inch fab in Slovakia and a 6-inch fab in Slovakia. Those fabs were shut down and consolidated predominantly into the 6-inch fab in Czech Republic and the 8-inch fab in Gresham. So if you remember in past analyst meetings, one of the big focus items we have was to get Gresham fab full. So I can tell you today that, that fab is full.

So the next step was 8-inch and 6-inch growth in Belgium and Idaho. So this is organic growth in ASIC business. We had pretty big wins in the automotive arena and the wafer starts grew dramatically in Idaho, Belgium and a little bit in Gresham, from all the wins we've had on the ASICs side of the business. Then with the purchase of SANYO, you can see that the consolidated under Gunma and Gifu under the one fab, Niigata, and made it to where it's a large factory in Japan. And on this year, we closed Japan. Most of those products got consolidated into the Czech Republic and the 8-inch factory in Gresham as well as some of the discretes went into the 6-inch fab in Malaysia.

So future room to grow. So the strategy here is we have pretty much, probably, the footprint we want on the 6-inch side. But we expect to continue our growth on the 8-inch fab in both Gresham and Pocatello. We still have quite a bit of room to install tools to get to the 4-wall capacity in those 2 particular facilities.

Now I'll talk a little bit about the back-end capability and what we've done there. So you can see that Santa Clara operation went away. This is a small test operation we had for the catalyst business which we actually consolidated into the Philippines. OSV, which is our facility in Vietnam, this is the large facility we purchased last year, predominantly for the use of the PIM modules. We're also in-sourcing a lot of the cost-challenge packages from Seramban, to be able to free up space in Seramban, as well as get better cost reductions in those particular parts and fill up the factory.

SSMP is the consolidating site in the Philippines for the SANYO product, so that site will also be one of our large factories in the Philippines. So we'll have 2 large factories in the Philippines. Very good cost reduction opportunities there. So next, we'll talk a little bit about the technologies that are going into the factory. So, Bob talked a little bit about the technology nodes that we've been working on developing. So the lion's share of our nodes right now are in the .25 micron and larger. But it is getting more important, especially in the 8-inch fabs, to be able to get down these technology nodes so we can free up wafer space, not only for cost reduction, but also, we can get more wafer starts per unit area in there. And so that is one of the key things that we want to do, is to get from the .25 micron technology down to the .18 so we can free up more space, as well as get improvement in die size.

Talk a little bit about the global supply chain. So we've been doing a lot of work here in terms of our CRM systems, our analytics, making sure that we continue our best-in-class OTD performance to our accounts. So like I said, we had been doing 95% and we plan on taking that up higher. So the supply chain guys have been really busy on implementing analytics and the capabilities within our Oracle system, as well as putting in place global service managers, business-to-business architecture, and a command center, to be able to deal with customer and supply issues. And so through DiSTI and direct, we have greater than 95% from all accounts, a really good performance there. And then direct cost-to-serve, we've been making tremendous progress in reducing our cost to service our customers, and this is through our efforts in how we deliver products from packaging, all the way through our logistic systems.

Global distribution. You can see that we're pretty well distributed. We're a global company. We have footprints and distribution centers that are just about spread out everywhere. So we're in close proximity to all of our key customers and distribution centers.

Annual ship volume. You can see we're in pretty good ramp there. We have the capability of shipping tremendous amounts of volume, and with this new acquisition or new development we have with the Singapore Global Distribution Center, it's our largest facility in Singapore for shipping products under the electronic industry. So we've done tremendous progress in terms of enhancing our ability to ship products and our capabilities of being able to manage our customer accounts.

So with that, I'll turn it over to Bernard.

Bernard Gutmann

Thank you, Mark. Okay. First, let me give you a brief overview of the key financial objectives. As we have seen this morning, we have a big focus on growing revenue faster than the industry, that both Bob and Bill and Keith talked about the different product areas. We have a particular focus on automotive, wireless, LED lighting across all of our business areas. We have seen that we have significant design win activity, which gives us the fuel to be able to achieve this financial objective.

We also want to capitalize on earnings, leverage up in the up cycle with being a company that manufactures approximately 80% of its total production, of its total revenue, and being at a 70% utilization, we believe we have some good leverage up, as the cycle goes up. And with that, we want to generate superior cash flow, not only from the -- leveraging up the up cycle, but we continue, as Bill was talking about, with our discipline of cost reductions within the SVG world and within the, as Mark talked about, within the operations. We also should be getting better mix -- better gross margin as our mix improves, whereby, our 3 areas of focus should have better-than-average gross margin. And also, as we fix SANYO. And I will talk about SANYO in more detail in a second. As a result of all those of first 3 items, we should be in a position to provide excellent returns to our shareholders. And I'll talk to that in a second also.

Breakeven for SANYO has been a focus since I took the job. We have made already good strides, and you can see it graphically. Although we still have a ways to go, good thing is that we have all the different actions in place, in progress to achieve that breakeven. Initially, we talked about reducing the breakeven to $200 million, and then we reduced it to $190 million. We did achieve the closure of 2 fabs within 2012. We have implemented headcount reductions, which you can see the reduction in the breakeven point from Q2 to Q3 of 2012, that was our first phase reduction that we did within the SANYO Japan operations. And we have also now implemented fringe-related reductions that are reducing the breakeven point, starting in Q4 and will continue in the next 3 quarters of this year, as well as next level of headcount reductions that are in, right now, in process of being implemented.

The third leg of the -- bringing the breakeven point from the cost point of view down is the integration and harmonization of our systems, make them -- making them equal to what we have on the ON legacy site. We have completed the back-end integration during the fourth quarter. We have also completed the integration of all the outside-of-Japan sales offices into the ON footprint, and we will continue and plan on finishing that effort by the middle of this year towards the third quarter. That, coupled with the revenue growth opportunities that Keith talked about, particularly in white goods, smartphone and automotive, will allow us to achieve this breakeven.

From a cost point of view, we have said that it is, by the third quarter of this year, that we plan on achieving that, and we still have the same objective, nothing has changed. A new thing that has occurred is that the yen, starting with -- this -- in December, has devalued against the U.S. dollar. And here is the graph that shows the trend over the last 3 years. And using the ON average exchange rate that goes into an -- our accounting system, you can see that, already for the first quarter of this year, we're seeing an average of about 87:1 in terms of rate. We are -- and we are seeing the spot market rate, right now, being much higher than that at 93, so if it continues like that throughout the year, that should help give us some nice tailwind. It should help us in 2 ways: one, our own internal cost structure, it does hurt revenues as we do have a portion of our revenues that's denominated in yen, but it's more than offset by reduction in costs for the heavier portion of comps and OpEx that's in yen. And as a result, we should be getting about $600,000 -- with the leaned-out cost, it was $800,000, and as we're leaning out the yen-based cost about $600,000 to EBIT line for each yen that the yen moves. So that's a tailwind that should help us make the breakeven even better as we go throughout time.

On the ON legacy side. As we talked about, we have reorganized into 2 business units that should give us a optimized way of doing business, both from the business model point of view for SPG, as well as the optimization of R&D for the APG group. Now we can see that even right now, if we look at the 2 peak-to-trough cycles, and this goes to Q4 2012, you can see that we have fared better in this cycle than the prior cycle both -- not only on the revenue line, but most particularly at the operating margin line where we have done substantially better.

We have said all along in the past that we aim to achieve a net debt neutral position, that's still our aim. We have been making progress. We did, as you can see on the graph, did have a few step backs, ongoing step backs, a few increases in the curve, and those were related in 2011 with the acquisition of SANYO and in 2012 with the restructuring costs that were associated with SANYO as well as doing some share buybacks. But our intent is still to achieve a net debt neutral position, which should allow us to then entertain other ideas and other plans to return shareholder value. With the long-term model or the target model I will be showing to you in a second, this goal appears to be achievable in a reasonable amount of time.

If we look at some historical data. You can see here the graph that shows our revenue percent change over the last 7 or 8 years, as well as our EBITDA. And compared that against our basket of competitors that we typically compare ourselves against. And obviously, our focus on acquisition has helped us achieve that, and we have outgrown both revenue-wise and EBITDA-wise this basket of competitors.

At the same time, if we look at the same period, our cash flow generation on a percent basis has also been pretty solid. And that's even with the SANYO acquisition, which did cause the generation to be less than it has -- it had been in the past. And we should continue doing that on an even better basis as we fix SANYO and outgrow the industry.

If we look at these cash generation, it doesn't seem to have been fully recognized in our sales -- in our share price. As you can see, the different metrics that show we're still pretty low in this different areas, which presents an opportunity, obviously, for getting that recognition and move up the food chain.

Returning capital to shareholders. We announced in our call that, so far, since we implemented a -- since we got approval for a $300 million share buyback program by the Board, we have repurchased 8.8 million shares in the third quarter and fourth quarter, and have -- we do -- spent $55 million at a price of $6.26 for that. As I mentioned a couple of slides earlier, moving to a net-neutral position will allow us the possibility of exploring other methods of returning money to shareholders, i.e. dividends. And I'm pretty excited about the opportunity for cash generation in 2013, stems from several factors: one, we are going to spend, as Mark has stated, spend less capital in 2013; we are indeed reducing our cost structure particularly for SANYO that will allow us to become breakeven or accretive; and we are allocating our resources to these focused areas that we talked about: automotive, smartphones, LED lighting, that should help us outgrow the market and generate more cash.

So talking about that, what's our view for the -- target for the midpoint? Midpoint should be construed as something in the next 2 to maybe 3 years, hopefully 2 years. We think we can achieve an -- a revenue of about $800 million. We don't think that, that's a outlandishly high target which -- since we have done actually $906 million in Q2 of '11, now that's when SANYO was running at $280 million. We think we can achieve a blended gross margin for the company in excess of 40%, probably 41%, and that should drive the EBITDA to be in the $180 million to $200 million. We'll continue spending R&D at the same pace. We have blended average of 11% to 12% with obviously a much higher percent on the APG group than the SPG group, the blended average is 11% to 12%. And we will continue at a pretty good clip of 11% to 12% in SG&A, which comparing to our competitors, seems to be a pretty good position to be at.

This should allow us to generate, again, $180 million to $200 million in quarterly EBITDA, which translates into quarterly free cash flows in excess of $120 million to $140 million, and allow us to get to this mythical goal that we have had for a long time of $0.25 per quarter or $1 per year, even range from $1 to $1.20.

So closing on, what are the key themes that we talked about today? Points that I want to reinforce. We are positioned to outperform, we have all the good design wins in the pipeline, we are focusing on fixing SANYO, we should be able to outperform the competitors. As a result of all these design wins, we are becoming more important to our customers, and we will continue focusing on that. We are structured for focused growth. We do have a very good and solid manufacturing and operational operation that will continue driving cost reductions, deliveries and [indiscernible] to continue outperforming. And our financial strategy will continue to focus on increasing shareholder value.

And with this, we conclude our formal presentation. And now, we would like to invite everybody here for Q&A. We have a fair amount of time allotted to this, so please feel free to ask any questions to any of us.

Question-and-Answer Session

Bernard Gutmann

Sloan, if you will?

Sloan Boss

Okay. Is this microphone working? Okay, we are opening up the questions. If all the presenters could, if you're on, if you guys could please come up to the front. And for those listening on the webcast, if any questions -- we don't have the capability of having a webcast question come in, but if any questions come up to those listening in on the webcast, feel free to go to the Investors section of the ON Semiconductor website at www.onsemi.com, and you can find my contact info, Sloan Boss, and you're welcome to send in any questions you have to me.

So with that, we'll pass around the microphones for questions here.

Unknown Analyst

Thanks for all the presentation, color and detail. It's appreciated. I have 2 questions, one is on SANYO and one is on just a broader financial model. First of all, on SANYO, can you maybe talk about some of the trade-offs you've made as you've taken down the breakeven level? And obviously you've consolidated a fab and done a lot restructuring there. Can you maybe talk about any kind of sacrifice you've made to the potential scale of SANYO as we kind of ramp into the top of the next cycle? How do you think about what reduced scale of sales might look like in the future? That's the first one. And a follow-up, please.

Keith D. Jackson

Okay. So the -- for the first one. What we've really done there, we've accelerated, in time, a lot of things that we would have done and what would take a little longer to move some of these cost reductions through. So primarily, we kind of hurried things along, and this required from us to spend more to make that happen. So in essence, we've had an extra burden, financially, in the short run, in order to drive that faster. That's the bulk of it. Certainly, there is potential for some impact in the kind of midterm, if you will, just because of the intense focus people had on reducing costs as opposed to doing other things they do. But other than that, there's no really change in the capacities or capabilities that are needed to run the business. That was really just a time acceleration, intense focus internally to pull that forward.

Unknown Analyst

That's helpful, thanks. And then a follow-up on the financial model, if we could. Maybe you can help us understand. First of all, at that $800 million a quarter target you've just provided, Bernard, what does that assume roughly in terms of the SANYO contribution? And then maybe, as we look forward, if you see some of the growth initiatives that you have, you all talked about, play out, if you get back to that $900 million a quarter level, what kind of margins could that generate?

Bernard Gutmann

Okay. Thank you. So within that model, within that -- the medium-target model, we're assuming SANYO revenues are in the low-$200 million to mid-$200 million level, and the gross margin for that is in the low- to middle-30s. Now the second question. We haven't modeled that, but you can pretty much still take an -- a fall-through when you get to that level of probably 40% to 50% on each incremental revenue dollar to get you to what it would mean to get to a $900 million revenue.

Unknown Analyst

Thanks, guys. So clearly, business is getting better, and it's not just ON. But I think we're all worried that we're going to have another head fake like we did last year. So I'd open it up to any of you guys. Can you just give us a little bit of perspective on what you're seeing differently this year versus last year, what gives you confidence, so we're not Charlie Brown trying to kick the football that Lucy is holding?

Keith D. Jackson

Yes. Lucy might strike again, is that the concern? The -- I guess, the big difference year-on-year, we actually started seeing our bookings rate improve in October very substantially. I mentioned this in the other conferences we had late last year and early this year, and that has continued. So as opposed to before, our customers were telling us to expect an uptick, they actually started placing orders for Q2 back in October, and that's a phenomenon that tells us they either got some very substantial launches or are starting to get some concern about supply. And that has continued. So now we're seeing good bookings into Q3. So if you actually look at the backlogs we have this year, at this time, they are substantially stronger than they were before. And last time, again, we were expecting things to get better and see all those orders come in, but we've actually already seen that happen. So I guess the thing that gives us the most confidence is actual numbers on the books versus just conversations with our customers.

Unknown Analyst

Thanks. And just for my follow-up question for Bernard. Bernard, can you just give us a sense of what the debt pay down schedule is? And does you $1 to $1.20 EPS assume any additional debt pay down or is that just [indiscernible] right now?

Bernard Gutmann

Right now, for this year, our total debt pay down, the maturity is about $280 million is still left to be paid. Most of it will be back-end loaded in the year. And the current plan is to pay -- continue paying it down as it matures. I am not counting on any significant reduction in the interest rate to achieve the medium-term model. And our interest expense, noncash interest expense -- cash interest expense right now is not a significant portion of our total model, it's around $8 million a quarter.

Unknown Analyst

Bringing it back on the SANYO side. The $190 million breakeven on SANYO, is that based on JPY 87 or do you see that improving if the yen goes from JPY 90 to JPY 93?

Bernard Gutmann

It should improve as it goes -- as the yen weakens further.

Unknown Analyst

So it's based on JPY 87 at this point. And the second question is when you look at product management on the wireless side, you mentioned you are working with Qualcomm. Who are the other guys you guys are you working with on Qualcomm?

Mark Goranson

I think I mentioned that we're also working with a wireless chipset leader in China as well.

Unknown Analyst

Again, with respect to SANYO, as you see the -- as you expect the SANYO business to grow through the year and even beyond that, I guess, how much of that is the SANYO business within Japan improving? And how much of that is the SANYO product line growing outside of Japan? Maybe you could give us some quantitative metrics if you could.

Bernard Gutmann

Yes. The bulk of it, if you look to the presentation, is really design wins outside of Japan driving that by almost a 2:1 measure. So there will be growth inside Japan, we believe, this year, but about twice as much outside.

Unknown Analyst

Great. And just as a follow-up, Bernard. You mentioned -- you've kind of mentioned about the dividend potential, one of the things you guys were thinking about, one of the criteria was getting to -- net debt down to 0, I guess. Is that the only criteria? How are you thinking about it? What are the other criteria you might -- guys might think about before getting more serious about thinking about a dividend?

Bernard Gutmann

Well, I think that's the primary criteria. First we want to get into that level. We obviously have to look at a bunch of other aspects. But to me, it's the primary criteria before we entertain that idea.

Unknown Analyst

Bernard, you guys did 31% growth last quarter, you're talking about 41% growth, so there's 10 points there. Can you kind of breakdown how much of that is from internal utilizations? How much of that is from higher revenues? How much of that is from SANYO factory closures or other acts [ph]?

Bernard Gutmann

Well, again, in general, on the short-term business, the fall-through on incremental revenue is about 50% for the ON legacy business, about 50% for the SANYO business. So that gives you an idea about how much the incremental revenue will contribute to that. Indeed, bringing the breakeven point from $230 million to $190 million gives you also an idea about how much the contribution on the SANYO cost-reduction piece will be. In addition to that, as I mentioned, we should be also getting a help from the mix as we get more of the higher gross margin products in the automotive and smartphone areas. It's -- those are the main 3 factors that contribute to that 1,000 basis point improvement.

Unknown Analyst

Can you tell us what inning we're in right now in the SANYO move from $230 million a quarter to $190 million a quarter?

Bernard Gutmann

What we showed is that in the fourth quarter, we were already down to about $210 million, and we continue implementing things in Q1. So in Q1, it should be below that.

Sloan Boss


Unknown Analyst

Yes. Can you talk about your inventory levels for the SANYO white goods in China? My understanding is they were relatively high in Q4. And if anything has changed in those inventory levels in Q1? And then I have a follow-up.

Keith D. Jackson

Yes. I mean, we don't have a precise data from all of our customers in China. But what we do know is they told us they had enough inventory back in the third quarter of 2012 so they didn't need any more parts for several quarters. And what's changed is they are back to near the same run rates they were prior to that overbuild. That's from a order-placement perspective. So I mean that just gives us the indication, they pretty much bled through it and are getting into comfortable levels.

Unknown Analyst

Okay. And then if you can talk about your appetite for acquisition. I understand you want to get to a net debt neutral, but beyond that, are there any areas in your product portfolio, any holes in your end markets where you should expect to do more equity?

Keith D. Jackson

Yes. We obviously quenched our appetites here for the last couple of years, as we did some digestion. We do believe we'll be through that midyear, as we mentioned before. So we'll at least be open to entertaining it. As you looked at the market balance I showed earlier, we're underrepresented in communications. We think, organically, we can solve all the wireless piece of that equation. But for all the infrastructure piece, it's not a forte for us. So certainly some opportunity to improve our mix balance, over time, with some communications products.

Unknown Analyst

Great. Thanks. Just hoping you could talk a little bit about the gross margin percentage, it's 41% here. Is there room for upside to that if you had a 2010-type year, where you had strong demand, really strong pricing, could that go to 43% or something like that?

Bernard Gutmann

I think there is always opportunity for going higher. But with the balance of the SANYO product and the ON product, I think right now 41% is still a pretty reasonable goal to get to 1,000 basis point improvement, compared to the current levels. The product mix inherent of -- if we get more and more on the automotive, that would be a means to improve the mix and get higher than the 41%. So there is a possibility. But right now, I think, we first need to get there before we think about higher than that.

Unknown Analyst

Great. And then just hoping you'd talk a little bit about the R&D percentage. I think your midpoint, and obviously you've got a lower spend on the discretes, higher spend on the analog. Are you specifically targeting the analog to be above, below, in line with competitors on similar type products? And how does that change going forward? Do you constrain that or increase that?

Keith D. Jackson

So we benchmark ourselves not just an aggregate as a company, but by each business. So we've got a group of guys that are doing wireless DC-DC. We compare that against other folks outside to do similar things, to make sure that our spending is appropriate. And so we think we're competitive on every business, at every level on the analog side. We think we get a little better leverage, frankly, for that dollar. But what we spend our time on is not so much trying to get that number down, but making sure we're focused on where we can get the best returns. And so it's really how much smarter can we be on what we do, as oppose to trying to drive the absolute R&D spend down.

Unknown Analyst

A couple questions. Bernard, in terms of the -- in terms of the CapEx assumptions for the -- just the medium-term model, does that assume that CapEx is relatively flattish from 2013 on forward?

Bernard Gutmann

It basically assumes we are in a model of running in the 5% to 6% of revenue. The product mix inherent of -- if we get more and more on the automotive, that would be a means to improve the mix and get higher than the 41. So there is a possibility. But right now, I think we first need to get there before we think about higher than that.

Unknown Analyst

Right. And then, Keith, I was hoping you'd talk a little bit about the R&D percentage. You think your midpoint, and obviously, you've got a lower spend on the discreet higher spend on the analog. Are you specifically targeting the analog to be above, below, in line with competitors on similar-type products? And how does that change going forward? Do you constrain that or increase that?

Keith D. Jackson

So we benchmark ourselves not just an aggregate as a company but by each business. So we've got a group of guys that are doing wireless DC-DC. We compare that against other folks outside to do similar things to make sure that our spending is appropriate. And so we think we're competitive on every business at every level on the analog side. We think we get a little better leverage, frankly, for that dollar. But what we spend our time on is not so much trying to get that number down, but making sure we're focused on where we can get the best returns. And so it's really how much smarter can we be on what we do as opposed to trying to drive the absolute R&D spend down.

Unknown Analyst

I have a question. Bernard, in terms of the CapEx assumptions for the medium-term model, does that assume that CapEx is relatively flattish from 2013 on forward?

Bernard Gutmann

It basically assumes we're in a model of running in the 5% to 6% of revenue. So as the revenue grows, we should see some modest growth in CapEx, but still be in the 5% to 6%.

Unknown Analyst

Okay. And is most of the CapEx being spent on the back end at this point or is it still kind of all over the place?

Bernard Gutmann

It's in both areas. But right now, probably in the short-term, we'll be more in the back end.

Unknown Analyst

Okay. And then the yen impact, the depreciation in the yen impact, is that more of a Q2 or Q3 event for you guys before we start to recognize it?

Bernard Gutmann

We see some benefit in Q1 as our average rate for the first quarter will be around 87 in our accounting system, and then it depends really on where the spot market continues going, but we should see another benefit if it stays at the current level.

Unknown Analyst

Okay. And then last question is in terms of the computing side with the tablets kind of offsetting kind of the notebook side. Are you guys seeing a complete offset from tablets versus notebooks and desktops at this point? Or is it still kind of a headwind that we should probably plan for in 2013?

Keith D. Jackson

I think we'll continue to see some headwinds on the notebook space in particular. As some of the new applications come out, what we've seen is what drove complete refreshes in the past to get to the next big thing. People may be downloading to their notebooks now. But what isn't changing is if you look around the room, all of you have notebooks. And while the refresh rate of those notebooks may change, the utility or the functionality of the notebooks isn't changing. So we do expect to see some uptick probably in the second half as the market gets better. We think that a lot of our corporate refresh rates have been taken down over the last 6 or 7 quarters while the market's been down. We see some things like the desktops and the notebooks probably gaining share going through this cycle as compared to the last cycle. But we do think that those refresh rates are not going to be at the traditional levels again because your smartphones and your tablets will continue to cannibalize that desire to rush out and get the next new one, and you'll be at more of a cadence of not wearing out or using up your notebook at quite that rate.

Unknown Analyst

I wanted to just ask a couple of questions, specifically on the smartphone wireless area. You've mentioned a lot of different initiatives there from the reference designs to RF tuning. One in particular that seems interesting is the OIS market. Could you sort of rank which ones you think are the biggest incremental drivers maybe in the next year to 2 years and sort of sort that out? I mean, it's a lot of things to process on our end.

Unknown Executive

Yes. As you can imagine, a lot of things to process on our end as well. We've really had an opportunity, I guess, as the smartphone content and functionalities have continued to go up. We know that in the near-term, probably some things that are going to happen the fastest are the DC-DC products and some of the reference designs. We're seeing a lot of traction there. The question was earlier about the reference designs in the big chipsets. Remember, there's still a lot of handset guys out there, the big guys that do a lot of their own DC-DC and power. So they may or may not pick up the reference design. The reference designs are great design wins for us, but we're also very engaged with the handset guys directly for some of their power needs. The RF tuning is sort of the wild, wild West. There are several solutions out there. I think tuning will be a requirement in LTE handsets. I don't think that with the band fragmentation, they can get around doing some amount of tuning in order to be able to take advantage of LTE. Which solution will win out ultimately, is still sort of up in the air. We feel very comfortable with the feedback we've gotten from several major smartphone guys that they will be incorporating our tuning solutions. And so percentage growth, that's going to go from nothing to a pretty significant tens of millions kind of number, I think, in the next 18 to 24 months. So that's going to be a big growth area for us. And then on the OIS front, that's more of a SANYO product. Keith, do you want to talk about that?

Keith D. Jackson

Yes. I mean that's really tied to what percentage of the phones used in high pixel rates. So by the time you get to 8 megapixels, you really need something for the demo and stabilization. So the content goes up pretty dramatically. And so I think the answer to your question there will be how fast will that high end of the smartphones grow for that piece of it. But the tuning, pretty much across-the-board for the 4G, the DC-DC driving a lot of near-term growth. And I think our filters, longer-term, will be the 3 most significant products.

Unknown Analyst

Okay. And just on the OIS side, do you -- it's a pretty interesting market that could be pretty explosive, I think, later this year. But are you considered probably 1 of the top 3 vendors of choice for that? Or do you see that being a very...

Keith D. Jackson

Yes, we have a very strong position with the #1 or #2 guy, depending on which afternoon you want to take your polls on the market, but we also have, we believe, one of the most efficient solutions both from a cost and a power usage perspective. So we're feeling pretty good about our opportunities.

Unknown Analyst

Okay. And then lastly, just a -- who knows where it's going to go but it seems like metals pricing is actually starting to finally turn lower. How is this going to impact the model for you guys? I mean, certainly, I made the argument with Bill that yes, there were some growth in discrete, but part of that was probably due to the fact that copper kept going up. But -- sorry to be a cynical -- I was just wondering how that's going to impact your model going forward?

Keith D. Jackson

Yes. So I guess I'll give you 2 comments. One, we have yet to figure out how to get more price for our units depending on what happens with metals. So we basically ate all of the gold and copper run in our pricing, so it just put more pressure on our margins. So we haven't figured out how to monetize when it goes up. When it goes down, that's a good thing for us, but it has to go down pretty dramatically. And we actually are seeing fairly stable or sideways movement in most of the things that matter like copper and gold. It's been pretty sideways. So right now, I'd say it's pretty benign to us, but if there's significant excursions in the upward side, it actually creates pressure on margins. And on the downward side, obviously, it'd be great. We just haven't seen that kind of downward movement in 5 years or so.

Unknown Analyst

You guys talked about your white goods efforts. I think some of that is business you picked up with SANYO. I mean, I know Fairchild and IRF are in that market. Can you talk about your competitive advantages, how you compete and when, and kind of what the contribution from that particular segment...

Keith D. Jackson

Sure, sure. So we think we're the second-largest supplier, a surprise to many in the world. And IRF and Fairchild are not #1 or #2. They're down the pack. So we haven't made as much noise about it, but it's a very significant position. And we think really what does it is our efficiencies. We have some technology that gets you much better energy performance at a cost point and a size point for the packages. So that's really all of the secret sauces and how you can get more power density. And we think we do one of the best jobs in the market at that.

Unknown Analyst

Roughly how big is SANYO, is that business?

Keith D. Jackson

It's roughly $100 million business right now.

Unknown Analyst

Bernard, in your target model, what SANYO revenue level is required to hit $0.20 of annual EPS contribution? I mean, it looks like you're revising a model from a $1 of earnings power to between $1 to $1.20. And I just want to know what the level of SANYO revenue is required to hit that range?

Bernard Gutmann

You should be in the low 200s. You should be getting to that point.

Unknown Analyst

Just want to -- perhaps you could talk about reactions by your distributors right now with some of the improvement of your -- that you're seeing in bookings now. What are you hearing back from the distributors in terms of their propensity to start putting some more inventory in place? And I guess that question probably pertains to the OEM customers as well, who seem like the pretty [indiscernible] right now.

Unknown Executive

Yes. So right now, our inventory in North America and Europe are pretty stable. So we're pretty comfortable there. I do believe that when we get through Chinese New Year, that you will be seeing a significant backlog placed with us. They run that margin of that model down pretty low. So traditionally now, what they do is when they get into the last week of the quarter, for Q4, they burn it down hard, get back, look at what's happening in the marketplace, and then they start to give us a lot of short cycle to resell. My expectation is the inventory is too low to service the market today. And so I think in the next couple of weeks, we're going to start to see increasing backlog, specifically out of Greater China.

Unknown Analyst

Just a couple and a follow-up just there. In terms of the orders in China, are you seeing expedites at this point?

Unknown Executive

Yes. So my expectation is, is that as the business continues to improve, I think people are waiting to see when they come back -- because we talked about the head fix, right? I think everybody's watching to see, is it really going to be real. And I think, to Keith's point, it is going to be real. So we're starting to see expedites go up. We're starting to see a lot of short-cycle orders. I expect that to continue as we go on to the rest of the quarter.

Unknown Analyst

What type of lead times do you get typically from customers in that area?

Unknown Executive

Tomorrow? Well, typically, I'm not sure they give us a lead time. I mean, we tell them what the lead time is and they place the order and they say, Okay, this is what I needed. So I would say that the way in which we try to manage that, we commit to our lead times so if -- but we also then try to make sure we hit our customer's requirement. So that's how we hold ourselves accountable. Even though you're sharing lead times with customers, the only thing that matters is when they get the product. So we really hold ourselves accountable in terms of what they need.

Unknown Analyst

Is this demand coming from the -- at the distribution level or is this direct OEMs at this point?

Unknown Executive

So you're getting both depending on how a customer goes to market, whether he uses MSI and/or distributions especially in the wireless space right now. So you're seeing it across-the-board. And as we talked about with the chipset manufacturers, where they don't buy anything from us, you're starting to see it proliferate, especially the domestic design. We probably have 20 customers today coming through distribution in Greater China right now.

Sloan Boss

Do we have any other questions?

Okay. I guess with that, we will end the ON Semiconductor Financial Analyst Day. Thank you, all, very much for coming, and thank you to those listening on the webcast. And thank you very much.

Keith D. Jackson

Thank you.

Bernard Gutmann

Thank you.

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