Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

ON Semiconductor Corporation (NASDAQ:ONNN)

Morgan Stanley Technology, Media & Telecom Conference Call

February 26, 2013 8:00 pm ET

Executives

Keith D. Jackson – President and Chief Executive Officer

Bernard Gutmann – Executive Vice President and Chief Financial Officer

Analysts

Daniel Fuss – Morgan Stanley & Co. LLC

Daniel Fuss – Morgan Stanley & Co. LLC

Okay. And we’ll get started here. Before I begin, just have to ready this quickly disclosure. Please note that all important disclosures including personal holding disclosures and Morgan Stanley disclosures if you are in the Morgan Stanley public website, or it can be found at the registration desk.

All right, and for those of you who don’t know me, my name is Dan Fuss and I work with Joe Moore; semiconductor analysts at Morgan Stanley. And with me here is Keith Jackson, the CEO of ON and Bernard Gutmann, the CFO of ON. Guys thanks for being here.

Keith D. Jackson

You’re welcome. Thank you.

Daniel Fuss – Morgan Stanley & Co. LLC

To start off, for the benefit of those who aren’t as familiar with the story, yeah, obviously we’re a company that has a pretty broad portfolio of products. Could you talk about kind of the unifying goal of the portfolio and what you guys are really building up?

Keith D. Jackson

Sure. So we fundamentally have focused on power efficiency as a company and providing power solutions to our customers in all markets. So what we find is there are certain new markets but they all have power means. And so when we optimize technologies and architectures for power we can use them across the markets and so we leverage basically our R&D across all the markets and then from a sales perspective our sales team gets a solid entire portfolio, but net of that we think is a very efficient semi-conductor model.

Daniel Fuss – Morgan Stanley & Co. LLC

Great and I guess just kind of also high level. Can you briefly touch upon these kind of segments in your business into the application specific side and the standard product side? Can you kind of talk about the long-term growth drivers that you see in each of those markets and which one you kind of favor long-term?

Keith D. Jackson

So basically the way we look at the business with standard products perspective is, these are generic products that can be used market-to-market, with solid specific power needs if you will in their applications. Growth rates on that should be tied to whatever those markets they serve and the percentage that they serve them in. What we do there is we focus on our technologies to be more efficient in the competition and specifically target beyond our need to the areas that solid power needs for the fastest growing markets. So there it is a broad model, but it’s not just margin, it really is targeting those well. So it should be a good growth marketplace for us and margins are pretty reasonable.

Keith D. Jackson

The application specific much more targeted investments. These are typically for power control and they solve specific needs for the customers in each market, and so we choose which markets to compete in and of course like all companies we’ll tell you that you target the ones that you think are going to grow the most over the next few years. For that, that has been for ON Semiconductor at least in the automotive market. For the last number of years, we think that had a lot of very good prospects in the mobile markets just as well as, so those two have been dominating our investments for the last several years..

Daniel Fuss – Morgan Stanley & Co. LLC

Great. And then kind of start when we dig into the business, it’s helpful to take a look back at 2012, and obviously 2012 was a challenging year for basically every semi-conductor company out there. Can you kind of walk us through the year Bernard specifically and maybe talk about some of the areas that justification heading into the year.

Bernard Gutmann

Sure, 2012, I think coming off a weakening 2011 as we went through that year, we were expecting for basically return to market health in the second half of 2012. That did not materialize, in fact the second half started to weaken a bit. We saw people bringing down their inventories further below consumption rates and that’s not what was expected, and that’s a generic statement. Specifically for us it was intensifying with our business that we do with our Japan customers and as they entered into what looks like a trade battle with China, and then turned out being a boycott of Japan goods in China as we got into the fourth quarter.

So marketwise, I’d say it’s very disappointing. It did not work as anticipated. From a company execution perspective our cost reductions met our expectations, we closed three factories last year as we expected to execute on the cost reduction program, so internally we felt pretty good about what we were doing, externally importantly the market just did not support any growth positively.

Daniel Fuss – Morgan Stanley & Co. LLC

Got it. And so just kind of touching upon the China situation, I believe that it really started to impact you in the third quarter. Can you kind of talk about where that stands right now and what kind of a drop off your customers saw beginning in the third quarter and if you expect that business to come back?

Unidentified Company Representative

So our customers definitely saw a sequential decline. Japan based customers saw it’s principal line in Q4 versus Q3 and I actually don’t – I was asking them those questions in October, they expected something that range from 35% to 50% sequential declines. Their order patterns didn’t show that regular number, but it did show like 15% to 20% declines quarter-on-quarter and so it may not been bad as the field, but what we’re hearing now is frankly the situation has not gotten worse, but it’s not got a lot better either. And so it’s kind of a stable need at those levels.

Daniel Fuss – Morgan Stanley & Co. LLC

And do you have any kind of view as to how that plays out into 2013?

Keith D. Jackson

I guess we would expect some resolution on that. They are both very large trading partners for each other. It’s not a stable situation to have more trades going on. So I suspect their means to be into that, but I have no insights of the timing or intense level going down.

Daniel Fuss – Morgan Stanley & Co. LLC

Got it. Then kind of looking out into 2013 overall, I know that you guys have been quite bullish that we’re going to see kind of an upturn through this year, could you just kind of talk about why you are so confident in 2013, and kind of taking into consideration that we talked the same think in 2012, right, for the second half of the year. Specifically what do you see the confidence that this is going to be different than last years time period?

Keith D. Jackson

So in 2012, we were talking to our customers, they were telling us to expect improvements as it went on. But frankly from an order pattern perspective there was plenty of capacity short cycle or those were being placed. And there weren’t a substantial uptick in the order patterns in the January time frame. So we were talking a lot of expectations which later on just didn’t happen, this year big difference. So back in October we started to seeing the order patterns pick up, an increase but more importantly the customers are struggling to order two quarters out, will not still not occur in 2012. And so they are voting with their order this year, saying we think things are improving, we think the suppliers probably are going to get tired in rather than reserve and we think the pricing power that we have is loosing relatively what has been in the past.

So all those things cost, purchasing people the price orders that are out there. So we think those are very good signs. So that order pick up started in October, it continued to pace till January and it has now continued pace after trying this. So we are feeling better this year than we did it last.

Daniel Fuss – Morgan Stanley & Co. LLC

Got it. And kind of along those same lines, can you talk about the level of inventories in the industry both there are kind of a customer level, where they are now and also what you’re seeing in distribution, I mean just kind of talk about how you guys are ready to purchase an upward trajectory in 2013?

Keith D. Jackson

So inventory levels are generally and if you look at the up and down cycles in our industry they are linear than we normally are at the evolvement of a cycle, and specifically in China they are extraordinarily linked. So basically in China if you look at the OEM or through at the distribution channel your total number of weeks of supply is less than our manufacturing cycle time. And that is generally a sign that it doesn’t take much of a pickup to have people starting to worry about supply. So in general, we think there is certainly some situations in China that may cause us to get more orders than we are expecting in the seasonal change, might increase over that.

North America and Europe, those are as I mentioned earlier also remained abnormal but they are still about what our manufacturing cycles are, so they are clearly more stable in those regions.

Daniel Fuss – Morgan Stanley & Co. LLC

Got it. And then kind of last week, we briefly touched upon this with pricing and you look at pricing I think those pressures were coming greatest in the back half of last year, but then as we look at into the first quarter, I believe you said down 2% which first quarter is typically the most difficult comp. Could you just kind of provide some thoughts on that?

Keith D. Jackson

Yes. So we saw the most pressure actually in Q3 in last year and back to the expectations for the industry and we’re all expecting some growth when that didn’t occurred, we had a lot of sales forces that kind of were in a panic mode, we need orders and then if we drop prices enough we’ll get them, but at the time we got into Q4, it was pretty evident that market itself was soft, so there wasn’t a lot of orders to get if we drop prices and things started to stabilize and get better.

We have been traditionally on the annual contract to get all that priced in the first quarter and so that traditionally is your worst quarter and this year we guided down to frankly it’s quite moderate for Q1. So we’re feeling better about pricing power that we have this year.

Daniel Fuss – Morgan Stanley & Co. LLC

Got it. And we kind of take a step back and looking to your end markets, which end markets are you most optimistic on entering 2013, and which one would you be kind of relatively most concerned about?

Keith D. Jackson

So, on a company basis, we are most excited about the wireless market. We came out with products in 2012 that increased our opportunities in handsets, in fact they doubled the opportunities and we’ve gotten some good wins with the leading suppliers of handsets. So we believe that that will out grow all of our markets for the company in 2013.

We continue to be positive on the automotive sector that should provide growth each quarter this year, but accelerating growth in the fourth quarter as they view those models change over for the new years and basically we use a lot of the servicing base that we have got design into proliferate two more models.

So those two markets should be the strongest force in that order. We have various degrees. We’ve seen some positive turnarounds in the white good sector as the inventories are burned in China, but back to the concern, we still have not seen a pickup in industrial, that tends to be a lag right now in industrial, maybe a catch up for most people, but it really captures a lot of building activity for us as a company and that tends to be a lagging industry and it is lagging.

Daniel Fuss – Morgan Stanley & Co. LLC

Got it. Just a little comment, we’ve seen ADI, they’re pretty optimistic about industrial and now if we look, what kind of difference in ON when thinking about obviously it’s very different business?

Keith D. Jackson

Yes, so we have the large pool of players in our industrial sector, there is Schneider’s and the Simmons and the GEs and the Emersons and they are telling us that they are burning through inventories and things are getting better, but back to last year versus this year, I am waiting on the orders before I declare that. So at this stage few orders haven’t come to us.

Daniel Fuss – Morgan Stanley & Co. LLC

Got it. And if you could just kind of move back to handsets and obviously you have had a lot of success recently in that market here in the full time reference design, can you just talk on specifically about which part if you see driving the growth in 2013 and then the other.

Keith D. Jackson

Let’s start off with that.

Bernard Gutmann

Okay. So you mentioned the BCDC reference language we have and we do think we have a better position there, not just in the reference designs, but also in the handset makers that kind of go their own way, so we’ve done very good with our products there, we’ve come out with competitive products of good prices and so we’ve been quite pleased. But completely new areas for us is basically the antenna tuning, the LTE generation of phones that have multiple bands are paying more attention to signal integrity and signal strength we’ve got some new products that go into that, that we’re seeing very attractiveness, we’re pretty excited about those.

And also in the camera modules with our image stabilization and auto focus products that we did in previous have and so that combination has given us new opportunities in addition to our regular presence in all of the discreet power plants.

Daniel Fuss – Morgan Stanley & Co. LLC

Got it and it’s kind of higher level to think about in 2013, obviously when we think about smartphones, it’s going to be a market that’s driven by the low-end. As we saw the high-end kind of carry that market over the last few years, last year and this year it’s going to be the low-end smartphone market. Can you just talk about how ON participates in that market and kind of what your thoughts at differential will be in a typical low-end smartphone just as kind of a higher end.

Keith D. Jackson

So there can be as much as $1 content change between low-end and high-end, but what we are saying or what we believe will occur is that the indigenous handset makers in China will outgrow the western counterparts or the non-Chinese counterparts as I should say, because the demand internal to China is looking at that lower end phones as we described and they have got the dominant position. So we have increased our content there as we referenced designs and through our other efforts inside of it. So the dollar content potential is not the same as the high end, but it is still like $3 a phone at the lower end of this smartphone sales.

Daniel Fuss – Morgan Stanley & Co. LLC

Great. And then kind of shifting gears to the automotive market, I mean this is, now I guess one of your largest exposure is I believe it is the larger exposure market held that recently well in 2012. Obviously we all know kind of drivers long-term in autos, how are you feeling that autos this year and are there any specific customers or market that you haven’t penetrated before that you can see driving growth there longer term?

Keith D. Jackson

So one of the good pieces in these is we have been increasing our exposure geographically and to customer base on a pretty steady basis. Our fastest growing segment has been in China for sometime and we expect that to continue, but we are also growing quite quickly in the Korean automaker side of the business.

As we look at those markets and I sense the main growth story for us is not necessarily more cars been built, the more cars adopting the kinds of things that moves our electronics and whether that’s lighting or is LED products, energy efficiency for all of the interim transition products, safety with lot of the features new including backup mirrors and backup cameras and line deviation in all those kinds of things use more of the conference et cetera.

So those proliferate model wise from the high end to the low end, that’s what we feel at Delta Elec for the market; this is just the number of cars.

Daniel Fuss – Morgan Stanley & Co. LLC

Great. And then shifting over to PCs, obviously 2012 was a very tough year for the PC markets and exaggerate about the fact in the second half of the year you had at the OEM level amounts of inventory corrections. Could you talk about outside inventory questions run, it’s of course do you think – how do you see kind of a PC outlook in 2013 Bernard?

Bernard Gutmann

Well, we think the inventories are very much in control in the PC chains. And so I don’t really think they are extreme lien, but they are certainly on the lien side. So then in good control. Clearly we saw the impact of tablets into the notebook sales last year. We didn’t see the corporate refresh that many were expecting in the second half. I do suspect that we will see a little bit better source of refresh this year, but in aggregate we are not expecting PCs ignoring the tablet side to have a lot of unit growth throughout the year. Those are small, if any. So really the tablets continue to be the growth story from that perspective.

Daniel Fuss – Morgan Stanley & Co. LLC

And then as you know, speaking with your PC customers you kind of see them just the cautious tone is, are they really adopted in the second half of last year. Do you see that as the kind of new normal in that market.

Keith D. Jackson

Yeah, we don’t have any body who is very, very optimistic. Right now, we are seeing – they had hoped for I think a little better pick-up of Windows 8 and some of the ultrabooks than they actually received. But on the other hand, none of them are extremely pessimistic. I think those kind of sold in on kind of flattish for the PC, T’s and the banking on growth in this province.

Daniel Fuss – Morgan Stanley & Co. LLC

Great. And then kind of the one right spot for you guys in that markets has been the power. Can you talk about kind of what as been driving the share gains and how you see that today.

Keith D. Jackson

So we continue to gain share there and we think we grow with the latest generation as well. And specifically in the desktop we are kind of greater than 50%, not a lot of growth left for us there, share wise. And then in the notebooks we are kind of mid-30s. Right now, we think there is a little bit more to grow generation to generation there. And so it’s really been the story of higher performance products have been price point which for us is a pretty good model. And we think that extends basically forward into the next two three years.

Daniel Fuss – Morgan Stanley & Co. LLC

And how do you view kind of the competitive dynamics in that markets, are those changing or?

Keith D. Jackson

Share shifts have to come from someone, so there are obviously dynamics that are changing there, largely I think that we will roll down to a couple of large players and very small over the next year.

Daniel Fuss – Morgan Stanley & Co. LLC

Great. And actually at this point, if there are any questions from the audience feel free to ask.

Question-and-Answer Session

Unidentified Analyst

Can you give us an idea in terms of sizing where the front pieces relative to your PC or tablet or whatever granularity setting that we’re all trying to get arms around is? How important is this.

Keith D. Jackson

I mean, PC’s look they are challenged, with the other smaller stuffs.

Unidentified Analyst

Okay.

Keith D. Jackson

So we’ve been growing that from a very small portion of the company despite the 7% I think in 2010. We think it is now close to 10% of our total players. And that should accelerate and grow this year. So PC’s are about 19% of our business, handsets are currently at about, fast forward a few years, they basically should be approaching parity. So we’re getting lot of growth in the latter side.

Unidentified Analyst

(inaudible).

Keith D. Jackson

No, that’s just handset. Now the tablets we still count in our PC market from a total sales perspective. And so in stance what you get is we got obviously growth from a unit perspective in tablets, but they have lower SP content. And so you got to sell a lot more tablets to make that for one more notebook. And so that piece that we think has some lowest single digit growth opportunities over time, versus the handsets which can be much higher.

Unidentified Analyst

All right. Two simple questions. First upon, as it relates to your thoughts on this year, if you think about semis in sort of very GDP centric sort of business and it’s pretty hard I think to come with a scenario where GDP is going to be materially different than last year. Why are you sort of more optimistic, why is it going to be different than last year, or sort of a set up and then sort of in terms of demand.

Keith D. Jackson

So we do believe some makers are not GDP dependent. We think GDP is maybe slightly better than last year, but nothing significant. So I agree with your premise.

The real other factor in semis, that’s different maybe from some other markets is there is a very large supply dynamic to the cycles for us. And right now we are extremely lien in the inventory. So the supply chain I mentioned earlier in Asia is less than our manufacturing cycle. And generally that sets you up for an opportunity to help grow whatever the GDP is as people need to replenish those lines as lien times, start to extent. We’ve seen our lien time start to extend here in Q1, that is not a prediction that they are going to get out of control, but it is certainly moving in an extended way and then normally leads to accelerate in orders by our customers when they see that; so that’s the difference you see there.

Daniel Fuss – Morgan Stanley & Co. LLC

In terms of the yen sensitivity, can you talk to either P&L changes as the yen moves towards hundred and secondly just on more of a transaction point of view, with respect to your customers comparing against the Koreans with weaker yens?

Bernard Gutmann

Keith?

Keith D. Jackson

The yen where we have said, as that’s for each yen that begin the values against the U.S. dollar will pickup about $600,000 at the EBIT line for quarter. It’s made up by a reduction in revenue as we have some exposure about 40% of our revenue is yen denominated by greater than debt reduction in cost affecting $600,000 per yen at the bottom line.

Bernard Gutmann

I would just clarify that’s 30% gross annual business only, and its about 25% of the total company. So it’s not that bigger number.

Keith D. Jackson

But we do see a weakening on the revenue line with the yen devaluing, but our costs are greater than the change in revenues, so we got a net-net positive. The customers right now are hopeful, more hopeful than I have seen them in two years that the yen weakening will make them competitive.

I would say primarily in the television marketplace they are most hopeful, that they will become more competitive and increase their sales there, but in Japan we’ve worked with virtually a no backlog model. So the customers order within four weeks when they need it even if your cycle times are 12 weeks and it’s a much less I guess IPO driven way of doing business there. So their purchasing value is kind of give our guys a heads up that they think they are going to need more as so much they think they are going to need, but they actually plays deals though in monthly basis. So I would tell you that we have not yet seen a big change in orders.

Daniel Fuss – Morgan Stanley & Co. LLC

Yeah.

Keith D. Jackson

So we don’t know yet, but I will say that they are all talking very positively that they think they can regain some share.

Unidentified Analyst

Got it A couple of questions, you said your lien types were elongating from what level to what level and when did they start to change?

Bernard Gutmann

Yeah from six weeks to eight weeks and from a market perspective, it’s definitely led by our mobile chip types of products has led that.

Unidentified Analyst

And then you said that the – when did that start to happen?

Bernard Gutmann

Well actually those have been moving out this quarter

Unidentified Analyst

During the first quarter?

Bernard Gutmann

In the first quarter, yeah.

Unidentified Analyst

And then you said DC-DC products both of you are getting some wins and so what specific DC-DC convertors are you selling, what update?

Keith D. Jackson

So there are several DC-DC power products in a cell phone and we (inaudible) mentioned this in the call comment in media tech chip sets its one of several one of the ways that frankly we can continue to grow that business is targeting some of the other power levels that you get up the full suite, we just have the first one and I think it’s $650 million product.

Unidentified Analyst

And then one last one the Powertrain venture having with the cars that is related to pulling the care credit uses of the Powertrain and putting in automotives?

Keith D. Jackson

So in automobiles when we think Powertrain, there are several aspects to it for fuel efficiency. One of it is actually the transmissions, you’re seeing a lot of advances being made by the auto manufacturers in the transmissions giving double clutch options, giving six instead four lots of things going on there we provide a lot of electronic control device, engine controls, lot goes on from engine troubles susceptive that were involved in emissions controls, getting basically more efficient buyer, give them a little boost to their economy and then probably one of the larger changes rather than just refinements is it what start stop alternatives and that we’re seeing adoption increase on.

We got some very good contents there and this thing adopted to fund more cars. So all of those things Powertrain alluded to market. Did that answer your question?

Unidentified Analyst

And just in terms of industrial at a very high level, are you seeing – do you think you’re seeing its like gas court people or gas court financers have mentioned your thoughts just generally about the strength of the industrial markets overall and is that set in sort of your GDP analysis probably?

Keith D. Jackson

I guess I’ll repeat, for us industrial the biggest external factor that appears to influence that is building the weight of buildings so whether it’s residential or office doesn’t seem the matter when people build more buildings we see an uptick in our industrial business and when they don’t last we see a downtick in that business and it’s been pretty stagnant. We just really haven’t seen a big change. What we offered from our industrial customers is they burn through the inventories they built during 2010 and 2011 they got a little enthusiastic at that period when they saw lead times move out in order to do many things and they’re telling us they’re pretty much burnt through that, so we should same through expect much more of a tighter coupling between their activity in order wellness. But right now, we haven’t seen a big change in orders, so either they are still believing in those inventories or there haven’t been a uptick in building yet, taken back.

Unidentified Analyst

Thanks. Can you talk a little bit about what needs to happen if SANYO for to start for to move into profit?

Bernard Gutmann

So on the SANYO front, we have made plans to reduce our breakeven point from about $230 million revenue level a quarter to about $190 million. The actions to do that have always been put in place or in process of being implemented and we are confident that the plan as we stated which is by Q3 of this year is achievable, so we planned on achieving that that’s from the cost point of view.

At the same time, we are also seeing that we have a good traction on several front and the top line which will help us also to increase debt by figure as Keith was mentioning on the wildest site for autofocus and image stabilization on camera module, we are seeing that the inventory on the white goods, particularly air conditioning units in China has been burned off and we are now seeing some incremental demands there.

We are also seeing some data traction on fan motor controls and we know we have a seasonality pattern on the SANYO business that’s similar to ours, were Q2 and Q3 are stronger than Q1. So when you couple all that, the cost reductions we believe we have the plans in place to achieve that breakeven in Q3.

Daniel Fuss – Morgan Stanley & Co. LLC

Great. And if there are no more questions, we’re actually out of time. Thank you, guys.

Keith D. Jackson

Thanks for being here.

Bernard Gutmann

Thank you, Dan.

Daniel Fuss – Morgan Stanley & Co. LLC

Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ON Semiconductor's CEO Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)
This Transcript
All Transcripts