Good morning, everybody. My name is John Vinh. I cover semis here at KeyBanc Capital Markets. We're pleased to have Thad Trent, CFO, and Simon Keeton, EVP GM of the Power Solutions Group from onsemi. Welcome, guys.
Thanks for just having us.
Having us, yeah.
Maybe, Thad, maybe just talking kind of big picture from a cycle perspective, it looks like you've successfully navigated to kind of a soft landing scenario here. I mean, however, there's still a lot of concerned investors out there that maybe auto industrials just haven't seen it, and potentially it's the next shoe to drop. I'm just wondering if you could just comment on that, and then, you know, the other thing I think everyone's looking at is if you look at aggregate inventories on balance sheets and distributor balance sheets, we're all kind of running at all-time highs, so maybe help, help square that.
Yeah. I think what you really got to do is you, you got to break down our auto and industrial business further, right? Because that broad category doesn't really fit well. I think in, in our auto, we're over-indexed to EVs, ADAS, you know, everything that's got a, a rapid growth rate on it. In industrial, we're being driven by, alternative energy, some medical, things like that. you know, last year, mid-last year, we saw consumer-facing industrial get soft, right? I think it's similar to what others have seen. We've seen that go basically flat from that point forward, and I think it's been fairly stable. The alternative energy grew 70% year-over-year.
Our auto, auto business is doing fabulous, you know. That's because if you think about an internal combustion car, we've got $50 of content. In an EV car, we've got $750 of content. There's a 14x content story here, which gives us that growth, and I think, you know, as best we can tell, we don't think there's large pockets of inventory out there. Our medium and high voltage products are still highly constrained. You know, customers are still expediting from us. I think things are, are stable. If we look at our LTSAs, signing long-term agreements, customers are still signing them, which is a good sign. You know, we added $4 billion of long-term agreements just last quarter alone.
These are customers that are extending their agreements or expanding, adding additional products onto those agreements, or new customers that are coming in and engaging with us. I think given our silicon carbide exposure, which is obviously fast growth in EVs, I think that's why we- you- we're a little bit unique compared to everybody else, is we have secular drivers. I think the other parts of it, even if you exclude silicon carbide, out of our revenue numbers from last quarter, our automotive business still grew, you know, without silicon carbide. We've got a lot of products that are over-indexed into that EV, that is really creating that content story for us.
Great, thanks. Maybe we just focus a little bit more on autos. I think auto demand for you seems like it's been pretty strong. Several of your peers recently have come out and talked about seeing weakness in, in autos, and some have talked about seeing weakness more specifically in China ICE. You know, so and we've even heard some companies talk about weakness amongst certain EV OEMs. I'm just wondering if you could just talk us through more broadly about what you're seeing within the auto space. Are you seeing pockets of weakness? How is EV compared to ICE? Is ICE weak, but it's just the content story that's offsetting that? And then maybe just talk about, you know, geographically, what are you seeing in North America, Europe, and in Asia?
Yeah, well, the auto industry, in terms of units, is forecasted to grow about 5% this year. I think next year it's forecasted to grow about 1.5%. Our exposure in EVs is obviously going to outpace that. If you look at the EV growth rate, it's projected to be a 35% CAGR over the next several years. That, that remains, you know, kind of as I was saying, that, that content story there. When we think about it by geography, you know, you mentioned China, we don't have a lot of exposure into ICE engines there in China, we're a net share gainer in China, it's all incremental for us, right? It's not like we had a large embedded revenue base there.
For us, you know, our China revenue last quarter was up slightly. I would also say, generally in China, we haven't seen a big snapback in the overall market. We're seeing growth in automotive, but I think the other stuff is similar to what you're hearing from many of our peers. It's just, you know, I think there's a expectation of there's gonna be a snapback, and we're not seeing that broadly. North America and Europe auto, very stable. Again, I think order patterns are very stable. You know, again, we don't think there's a lot of inventory out there. We've been managing our channel very tight. We've been managing our internal inventory very tight. You know, we took down our utilization, starting Q2 of last year.
Really, for a year, we've been keeping under utilization kind of low in that 70% range, exiting last quarter at 70%. I think we've been managing very cautiously, just given all the uncertainty in the overall market as well. Auto generally across the globe, from an EV perspective, is stable. We've also been supply constrained on our sensors for 3 years now, and just haven't been able to keep up with the demand there. I think as as we've been able to get more supply, externally on sensors, that's been helping us grow as well.
Great. Maybe Simon, you know, on silicon carbide, $11 billion in LTSAs, just curious, what, what's the average duration of these LTSAs, and with the incremental $4 billion in LTSAs getting into accumulated number $11 billion, how, how far do you have visibility out on, on that business?
Yeah, I think you see a variation across the LTAS, LTSAs in terms of duration. I'd say on average, it's about five years, but some go out over a decade, and it gives us very good visibility into the order patterns and what people are expecting over that duration. It helps us with the development of the next generation products within that time period.
Great. Obviously, you know, with the progress that you're making there, it does feel that you're gaining market share within silicon carbide. Can you just walk us through what are the top kind of two, three factors that are driving these share gains for you, and why do you win?
Sure. I think one of the mnemonics that I used before at Analyst Day were the four S's of silicon carbide, and it still rings true. It starts with superior performance, right? We have a value proposition in the performance of the device. When I say device, it's silicon carbide in a module really gives you the most enhanced performance to extract all that value, so it's having that capability. Superior performance is still critical to every single application. It's supply chain. Having the substrate, the device itself, and the package all in-house, not only can we guarantee supply, but we can tune the performance 'cause we have substrate, device, and package to give an optimized solution to the end customer. We can scale as a customer wants to scale.
We were talking about $1 billion of silicon carbide this year, and it gets even bigger. We've been able to scale up very rapidly and very effectively, as evidenced by the performance and gross margin last quarter, which was really quite good. Then you look at the, the scope. It's not only the silicon carbide, but the surrounding products that go with it. A silicon carbide traction inverter will have a gate driver. That gate driver is tuned to that silicon carbide to provide optimal performance. We have all these other non-silicon carbide silicon devices that go along with it into the EV. Those are the four S's, and the last one I would add, I'm gonna add a fifth S to it, is systems.
Because we're first mover into EV, it gives a better picture of what the end customer wants from a solution space now and over the next five and 10 years. We can adopt that into what we call our Horizon Three developments and really create optimized solutions, not only for now, but for 2025, 2027, 2030, 2032. We have that visibility because we've got first mover with that OEM in that particular space.
Great. One thing I wanted to kind of touch base on, Simon, I think you touched base upon this topic at your analyst event, is just China risk. You know, I think there's some concerns out there that the Chinese are investing a lot into silicon carbide substrates. At some point in time, does it make sense for you to completely outsource it? Maybe can you talk about kind of the value that you see with the integration of the substrate, the drivers, and the modules? Then, what are you currently seeing right now from the Chinese and their ability to ramp substrates?
Sure, sure. As you know, we have internal substrates, and then we also buy from the external market. We expect to have north of 50% of our substrates coming from internal by the end of the year. Part of that value proposition is we have a very good cost structure on those internal substrates, which you see evidenced in the gross margins that we're getting on silicon carbide. What we're seeing from China, and we source from China as well as part of that external play, is we get to see the quality of what's coming in, and that quality is not quite there. We also see, it's not indexed completely, meaning if I have a bull, I can see, you know, slice one through slice whatever, slice 30, index on after another.
What I'm seeing from China is slice one, slice 7, slice 15, so it's not contiguous, so maybe we're getting kind of the best of the best. The question is: Is it scalable? We have to see it scale, and at some point, could it be there? Yes, and that could be a tailwind for us. We could actually buy more external substrates if it made sense. There's also a geopolitical factor, and particular customers will not want to take that risk of a supply chain having a, a substrate coming from China. Some are okay, some are not. It's a bit of a, a mixed bag, and we'll be watching it very closely. I think we're in a, a very good position.
It won't necessarily, t he substrate doesn't necessarily drive the performance of the device itself, but with supply chain, it becomes incredibly important.
Great. Are there any questions? Great.
Thad, I wanted to follow up on a comment you made. You had recently talked about seeing a, a pretty meaningful uptick in your image sensor business. What's, what's driving that uptick?
Well, clearly, there's more sensors in the car every year, right? You've got advanced safety. If you think about a backup camera, that's just not something that we can differentiate on. All the sensors around the car, even inside the cabin, which have some type of machine vision, is where we play. Very advanced, sophisticated things that many of our competitors can't do. We've got, you know, north of 70% market share when it comes to ADAS across the globe. That's because we can do this, that other competitors can't do. The growth there is really the adoption rate of more sensors in the car. As I said, we've been constrained for three years.
We've just been limited because all of that is manufactured externally, which, which supply was very limited externally over the last couple of years. As I said, as, as supply is coming online, we're actually able to catch up with some of this as well. We pick our spots in automotive. The, the other piece that I should mention is factory automation, so that's another big area that, that we play in when it comes to sensors. Both those areas are expected to grow at really nice clips over the next several years. Like I said, we've kind of got a, a great portfolio that supports, you know, all of our customers' needs, whether it's auto or industrial. We've completely restructured that business from what it was 3+` years ago.
3+ years ago, it used to be a lot of webcams, a lot of consumer-type devices. Today, it's 90% auto and 10% industrial. High margin, sticky business, you know, great business for us versus a commoditized business that turns quickly. When we look at our projections going forward, we look at our long-term agreements, we have a nice view on what our customers are doing.
Great. Speaking of, you know, exiting business, I, I wanted to talk about your non-core business. I think you've exited $100 million this year so far.
Right.
What's, what's been the gross margin profile of the businesses you've been exiting these days? I think you said you've $350 million-$400 million for the rest of the year. How much is remaining in total that potentially could be exited beyond this year?
Yeah, that's right. Let me just calibrate everybody. We're exiting the highly volatile, price-sensitive business that historically has been there. The way you exit is you price yourself out of the market. You keep raising pricing until your customers go someplace else. We announced our plan to do this in 2021, and it's actually taking a lot longer for us to exit this business than we expected. Our gross margin of this business that's still remaining is in the mid to high 40%, or sorry, low to mid 40% gross margin, right? It's not bad gross margin today as we priced it. We're just not losing it as fast because supply is not coming online.
I think our customers are also valuing assurance of supply because we're-- we can support them, or the switching costs might be too high for them as well. We think there's about, I think I said, $350 million-$400 million for this year. We've exited $100 million thus far, through the first half. You know, we'll exit the rest of it here coming in Q3 and Q4. If at the end of this year, this business is still here, it's gonna be deemed good business, right? Because it's, it's decent gross, gross margin. As long as we don't need that capacity for something else, we'll continue to support it. Now, also remind you, we divested four fabs last year in anticipation of exiting some of this. Some of it's going to happen and has been happening. Others, because we'll just run out of supply.
Others may stick around, and it's sticky business, we'll keep it if it's attractive gross margins. But it is much slower than we anticipated, just because supply hasn't come on it. I would say the pricing environment hasn't dropped like we thought it would. If that's the case and the, the pricing holds, we'll continue to support it. After this year, I don't expect there's more exits. This is it.
Okay. I wanted to also ask you about medical. I don't think I've remembered you guys mentioning medical in your prepared remarks ever. Sounds like this is kind of an emerging opportunity here. What is the medical growth that you're seeing all about?
Yeah. There's a couple key areas. The continuous glucose monitoring, the CGMs, a big, big play for us as that's taking off. We've also do a lot in hearing aids. If you think about hearing aids going over the counter now, that, that reaches an audience that didn't have access to hearing aids in the past, you know, across the globe. That's driving really nice growth. If we think about our medical, it's still a small piece of our business, but we think that's got a 20% per year growth rate on it when you think about those applications. All of those are kind of in their infancy, just starting to take off right now.
Wow, that's great. Maybe we can talk about margins. You know, on the silicon carbide business, I think you talked about being at 15% margins in the current quarter. As that continues to ramp by the end of the year, and as, you know, internal becomes greater than 50%, are the margins on your silicon carbide business gonna be, you know, at or above corporate at that point?
Yeah. We've always said long term, our gross margins would be at or above the gross margin, the corporate average, right? As we price the products without all the start-up costs, we would achieve those, those margins. Last quarter, our silicon carbide gross margins doubled quarter-over-quarter. Simon's business for silicon carbide was profitable for the first time. High teen operating margin. Gives you an indication of kind of where those margins are. As we continue to ramp, by the time we exit the year, we believe the silicon carbide gross margins will be at the corporate average. Q3 is the high point for the dilutive impact because it is still below the average, and you just have a higher, higher revenue number.
By the time we exit the year, we think we're back to the corporate average, and then longer term, we're back off to the races again in terms of margin expansion.
Okay. maybe related to that, can you talk about just the progress you're making on 8 in right now? Is there a way to think about potential cost benefit to you once, once you start ramping 8 in?
Yeah.
You want to talk about.
Yeah. Obviously, we've got 8 in engineering going right now. We've got the furnaces, and we've got the flow through Bucheon, through the factory, so we're still on target. We're hitting all the milestones that we need to hit, so we expect engineering through 2024 and then production in 2025. What you see as you go from 6 in to 8 in, the real savings comes from the processing after the substrate, because at that point in time, that manufacturing flow, that tool set is 8 in capable. It doesn't know if it's doing 6 in or 8 in, so you're gonna get 6 in to 8 in, 1.8x more die per wafer on that tool set, and that's where you can get some of the savings from.
Yeah, the big benefit that we get out of that is it's, you know, the capital required to scale to 8 in is already there, right? All of our furnaces are retrofittable. It's not like this next wave, we've got to put a lot of capital into it. Then in the fab, we are 6 in and 8 in compatible, capable already. It's not like there's another wave of investment we need to make to make that, that move.
Great.
Any other questions?
Just curious on the fab strategy. Has anything changed over, you know, what everybody's [audio distortion]
No. No change to the fab strategy. We divested four fabs last year, four sub-scale fabs. We just acquired the East Fishkill fab from GlobalFoundries, which gives us a lot of capacity. No change in, in our strategy there. We manufacture internally about 65% of our own product. As we fast forward with our expansion, it'll still be about 65. We think we have the right footprint now. Now, it's about what I call Fab Right, getting the right mix in the right locations to optimize the cost. Step one was Fab Liter, just downsize it. Step two is Fab Right, optimize it. That's what we'll be doing over the next, next few years.
[audio distortion] targets for internal production of the substrate for this attention, are those targets the same for inch?
They will be over time, right? There, there's a ramp time. We're gonna be very deliberate on 8 in. We're not gonna rush it. It'll be at our pace and very deliberate. We're, we're getting extremely good results on 6 in. We're making sure all those learnings go into 8 in, and when we do 8 in, it's gonna be at or above moving forward. We're, we're not gonna rush it. There's a lot of learnings from 6 in that we're, we're gonna apply, but we're doing very well on 6 in, so I don't feel like I've got a lot of pressure, like, "Oh, I've got to do it immediately." We have to be very thorough and deliberate with this and, and very engineering focused. We'll get there for sure, but it'll be on our timing.
Great. Was there another question there? Okay. I wanted to ask you about East Fishkill. I, I think some of the incremental margin headwinds there were somewhat unexpected. Can you give us just some perspective on what's causing these, these headwinds and, you know, just the time frame and your level of confidence of getting these headwinds resolved?
Yeah, we closed the transaction, December 31st last year. You know, the deal was announced almost three years ago, right? Over those three years, we were slowly ramping up production while GlobalFoundries was running the fab. Over the next three years, we'll continue to, to ramp up while they ramp down. The surprise that we got after we closed the transaction, when we got full access to the fab, was just the cost structure was much higher than we anticipated. I characterize this as like blocking and tackling. You know, we run lots of fabs. We know exactly how to run fabs. We can benchmark to our internal fabs, know what the cost structure should be. It's a matter of being able to make those changes, and that takes time.
The fab is fully loaded today, so it's really hard to tinker with a fully loaded fab. You've got to be really careful that you don't break the recipes while you're, while you're adjusting for this. It takes time. We're really confident. It's about a 250 basis points headwind was there last quarter and will be there for several quarters. My projections are by the time we exit 2024, we will have that cost structure back into place. That headwind's gonna be with us for a while, just as we continue to take cost out. It's, it's everything from supplies, chemicals, cycle times. It's, it's blocking and tackling, and it's what our teams know how to do. We've, we've got a long history of running fabs. We just need to go tune that one up.
I would really say this was probably from being neglected for three years, right? It's just nobody was really focused on it, and it's just a matter of focusing and getting it tuned up.
Great. Hey, Simon, I wanted to maybe follow up with you on, a comment that maybe Hassane made on the call that you're starting to sign these LTSAs with, upfront capital commitments from your customers, and I think you guys made it clear that you don't really need customers to commit capital for you to, for you to build out this capacity. Maybe can you talk about, you know, how these agreements and these capital commitments came about? You know, are they kind of suggesting it, or are you kind of suggesting it, and how do you guys figure out what, what amount of capital commitment needs to be put out there to secure these agreements?
Yeah, I think so a little bit of both. We do have customers approaching us that they want to be a part of it, right? They want a tangible part of the silicon carbide growth and to know that that supply is gonna be there. In some cases, it's everything from consigned equipment to capacity reservation. There's different models that we use with different customers. We try and be flexible with the customers and have it done in a way that makes sense for the customer and us at the same time, financially. I think moving forward, we'll still see that. People want to be a part of this, and I think we have an effective way to do it. It also gives us a good financial return at the end.
Yeah, and I would also-- kind of to clarify Hassane's point, right? Last year, our free cash flow margin was 20%. We create a lot of free cash flow. Our long-term model is, you know, 25% free cash flow. I'm confident we're gonna get there. Now, Hassane's point is, we're not hostage to customers to fund our investments in silicon carbide expansion. Now, as customers approach us, and they want dedicated supply, we're gonna say, "We want you to co-invest with us," right? We want skin in the game. We want you to have a, have a piece in there with us, and that's required to achieve our financial model longer term, right? If we can get them to pay up front, and then that helps with the cash flow.
Hassane's point was really like we're not relying on customers for the expansion, but we will require they co-invest when they want dedicated supply.
Just to follow up on that, that is, when, when you've got a customer that's putting up capital to build out capacity on behalf of that customer, is that capacity that you build out for that customer dedicated solely for that customer, or are you also able to utilize that capacity for other customers?
Yeah, good, good question. I get asked that a lot. It, it depends a little bit on the model, right? I mean, we've got cash from customers. We've got consignment from customers, where they're actually, you know, gonna consign us the equipment. In most cases, we structure it to where we have the ultimate flexibility. It may be dedicated for that customer, but it is if they're not using the capacity, we can use it for other customers. We take that incremental capacity and be able to use it. That's, that's a win for us. It's a win for them, obviously, as well, because they're getting that dedicated capacity. We structure it so that we can, we can scale with it and use that excess capacity. We don't want a line sitting in a building not being used, right?
I mean, that doesn't make sense. You know, even from our footprint, that doesn't make sense. Yeah, that's, that's the intent, is that we can use, use that capacity for our own needs.
Great. Last question from me. I need to ask the obligatory AI question. Are there opportunities for you to benefit directly or indirectly from, from AI at this point?
You wanna take it?
Certainly, you know, you look at the, the power development that we have, I think it's complementary to what we have in, like, servers, AI servers, absolutely, 'cause it's about power efficiency. I think, yes, there's this adjacent play that we have in power that we can participate in the AI market, certainly.
Most of these AI servers are running at 48 volts. Do you have share of that area?
We do already.
Ah.
I, I can't give you the specific names, but you can kind of guess who's, who's doing what in AI and servers, and so we already have a position, and I think there's the ability to scale that position as well.
Is there an opportunity for, for silicon carbide in, in, in servers?
Potentially. I think the, the verdict's still out between silicon, silicon carbide, and GaN in servers, right? It's pretty crowded when it comes to a technological solution. It remains to be seen who's gonna win. It may be all three, depending on what the server's looking for. I think we're in a pretty good position. We'll see where the, the market changes with it. We want to drive that.
Okay, sounds good.
Thanks.
Thanks, guys.
Thanks .