Good day, ladies and gentlemen, and welcome to the ON Semiconductor Business Update Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference may be recorded. I would now like to turn the conference over to Parag Agarwal, VP of Corporate Development and Investor Relations.
You may begin.
Thank you, Sonia. Good morning and thank you for joining today's conference call. I'm joined today by Keith Jackson, President President and CEO of ON Semiconductor and Bernard Gutman, Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this broadcast will be available on our website approximately Q1 following this conference call, and the quarter broadcast will be available for approximately 30 days following this conference call.
The presentation accompanying this conference call is posted on our website. During the course of this conference call, we will make projections or other forward looking statements regarding future events or future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, plus, 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 from projections. Important factors which can affect our business, including factors that could cause actual results to differ from our forward looking statements are described in our Forms 10 Ks, Form 10 Qs and other filings with the Securities and Exchange Commission.
Our estimates may change and Kamhee assumes no obligation to update forward looking statements to reflect actual results, change assumptions or reflectors except as required by law. The discussion in this conference call will be limited only to acquisition of GLOBALFOUNDRIES 300 millimeters fab at each physical by own semiconductor. As we are in quiet period, we will not make any comments on current business environment or on near term outlook for our business. Now let me turn it over to Keith Jackson, who will provide a strategic overview of acquisition of Fishkill 300 ML Plant.
Keith? Thank you, Parag, and
thank you, everyone, for joining us today. At the outset, I extend a warm welcome to the employees of East Fishkill Fab. I'm excited about having you as a part of the ON Semiconductor team when this transaction closes, and I look forward to working with you to build a globally outstanding manufacturing organization to better serve our customers. In the transition period between today and closing, we look forward to working with you as we transfer our products into the East Fishkill Fab. I'm very pleased with the plan we made with GlobalFoundries to add the first 300 millimeter fab to our manufacturing network.
We believe that this is a transformational transaction both from a strategic and financial perspective. The East Fishkill fab should significantly improve our competitive position as it is expected to improve our manufacturing cost structure and technical capability with access to new process technologies. Over the next several years, these fiscal fab will provide capacity to support our growth in power and analog semiconductors and will also enable savings of approximately $1,000,000,000 in capital expenditures. This acquisition should accelerate our progress towards our financial target model we unveiled at our Analyst Day on March 8, 2019. We believe that this transaction is a win win for both ON Semiconductor and GlobalFoundries.
The agreement provides us with almost immediate access to GlobalFoundries market leading and highly cost competitive 300 millimeter capabilities and allows us to ramp our production in a measured way while GlobalFoundries transitions its production to other 300 millimeter fabs. This arrangement avoids stress to our financials and at the same time enables GlobalFoundries to improve the efficiency of its 300 fab network. As we indicated at our recent Analyst Day, our decision to invest in 300 millimeter capacity will be guided by economics. We believe that our investment in the 300 millimeter fab at East Fishkill will provide a very solid return on our capital. We intend to make additional capital investment over the next several years and with these investments, the total cost of the East Fishkill fab is expected to be approximately $700,000,000 including purchase price of $430,000,000 With our capital investments, the East Fish Kill Fab is expected to provide us with incremental annual revenue capacity of approximately $2,200,000,000 We estimate the equivalent greenfield capacity would have cost us $2,000,000,000 or more and similar 200 millimeter brownfield capacity would have cost us $1,500,000,000 to $1,700,000,000 We believe that a manufacturing cost structure enabled by a highly efficient capital investment should significantly improve our competitive position and our margins.
This transaction also includes a technology transfer and development agreement and a technology license agreement. This agreement provides a world class experienced 300 millimeter manufacturing and development team to enable conversion of our wafer processes from 200 millimeter to 300 millimeter. We also have immediate access to advanced CMOS capability, including 45 nanometer and 65 nanometer technology nodes. These processes will form the basis for future technology development activity. Our plans for these fish kill fab provide sufficient capacity and to support growth in our analog and power products over the next several years.
We expect strong demand for our power and analog products to continue for the next several years. As we indicated earlier, key megatrends such as vehicle electrification, ADAS, energy efficiency and industrial applications and cloud power will be key drivers of our power and analog semiconductor products. Based on our growth expectations, we expect to fully grow into the East Fishkill fam in approximately 5 to 6 years. With that, let me turn it over to Bernard for additional details on the transaction.
Thank you, Keith, and good morning, everyone. Let me start by summarizing the benefits of this transaction from a financial perspective. With a highly competitive cost structure, the East Fishkill Fab should accelerate our gross margin expansion and our progress towards our financial our target financial model, which we unveiled in our last Analyst Day on March 8, 2019. At the same time, it should speed up our free cash flow generation by enabling savings of approximately $1,000,000,000 in capital expenditure over the next several years. As a result of this transaction, we expect our capital intensity to decline to 6% to 7% in the medium to long term as compared to our target capital intensity level of 8%.
Let me now go over the details of this transaction. ON Semiconductor has agreed to acquire 300 millimeter East Fishkill fab from GlobalFoundries for a total cash consideration of $430,000,000 Of the total consideration, $100,000,000 has been paid to GlobalFoundries at signing and $333,000,000 will be paid at the end of 2022, at which point ON Semiconductor will gain operational control of this cash flow path. ON Semiconductor will use cash at hand and its revolving line of credit to fund this transaction. In the near term, the transaction is not expected to have any meaningful impact on our financials. However, we expect that access to highly competitive 300 millimeter capacity should drive gross margin expansion and accelerate our progress towards our financial our target financial model, which we unveiled in our last Analyst Day on March 8.
We expect that initial production of our 300 millimeter wafers will start in 2020 and we expect to significantly ramp production of our 300 millimeter wafers thereafter. On a longer term basis, we believe that our purchase of the East Dishkill 300 millimeter fab should result in savings of approximately EUR 1,000,000,000 in our capital expenditures over the next several years, and our capital intensity should subside to 6% to 7%. With an investment of approximately €700,000,000 we are able to get access to capacity that would have cost us approximately $2,000,000,000 In addition, the fab should enable us to optimize our network and we will now have access to enough capacity to be able to move production within different tabs of our network to maximize gross margin of our product lines. The transaction has been structured in a manner to avoid our financial to avoid stress on our financial metrics. ON Semiconductor will begin to ramp its production at the fab starting in 2020.
GlobalFoundries will begin to transition its production to into its other 300 millimeter fab starting in 2022 and is expected to exit East Deschkill by no later than 2025. GlobalFoundries will maintain operational control of the fab until the end of 2022. After ON Semiconductor gains control of FAB at the end of 2022, it will manufacture wafers for global foundries to as long as 2025. The completion of this transaction is subject to regulatory approvals. We believe that the structure is a win win for both parties and as it allows for GlobalFoundries to exit the fab in an orderly manner while allowing for ON Semiconductor to increase its utilization of the fab in a measured manner and consequently avoid burdening its income statement.
With
that, let me turn the call over to Keith. Keith? Thanks, Bernard. We are very excited about the plan to add the first 300 millimeter fab to our manufacturing network. The East Fishkill fab should help power on semiconductors growth for the next several years and at the same time help strengthen our leadership in power and analog semiconductor market.
I'd like to take this opportunity to thank our partners at GlobalFoundries for their efforts and cooperation in this process and look forward to working with them during the transition and in the future. This concludes our prepared remarks and we will now take your questions about this transaction. Sonia, please open up the line for questions.
Thank Our first question comes from Ross Seymore of Deutsche Bank. Your line is now open.
Hi, guys. Congratulations on the deal. I guess a couple of quick questions. First, the gross margin benefit that you talk about, is that going to be more about more efficient use of capacity or the lower cost of using 300 millimeter overall? It's
a combination
of Between fabs, I mean.
Yes. It's a combination of several factors, including the additional just the scale in the wafers, but also the pricing is quite good.
And then I guess the follow-up here, you guys have been busy on the capital front, not only with this deal, but buying Quantenna as well. How should we think about the target capital model you have and return of cash to shareholders and any impact this deal might have on that process?
We have already paid the $100,000,000 that we have to pay on this deal right now. It's only out of our cash coffers. The rest will come 4 years down the road. So in general terms, we don't believe that this will have any significant change in our capital allocation plans.
Got you.
Thanks, guys. Congrats.
Thank you. And our next question comes from Mark Delaney of Goldman Sachs. Your line is now open.
Yes, good morning. Two questions for me. First is a follow-up on the gross margin question. Can you elaborate a bit more how you expect gross margins to compare to your target model both in this intermediate period when you start to make wafers in 2020 before you acquire the fab and then also over the longer term?
So we would expect we're not ready to change our model yet, but we would expect after we start using them in volume production in stressing
the financial model, but maybe stressing the financial model, but maybe help us understand what may need to be done as you start to get ready to manufacture on 300 millimeter in terms of any incremental R and D expenses or other work you may need to do with GlobalFoundries in order to allow for this transition to take place? Thank you.
Yes. The R and D piece is comprehended in our current model. So there's no delta there. The teams are working together now to bring up those processes. And as we mentioned earlier, we expect to be in full manufacturing next year.
Thank you. And our next question comes from Vivek Arya of Bank of America Merrill Lynch. Your line is now open.
Thanks for taking my question. Congratulations on the announcement. Keith, at your Analyst Day, you had outlined $1,200,000,000 as a 2022 free cash flow target. And I think you outlined that these new manufacturing capabilities will let you avoid spending a lot of CapEx. So is there a new 2022 goal that we should be thinking about from a free cash flow perspective?
Or this kind of just helps you get to like or what is already sort of contemplated when you set out that target?
So at this moment, we are not ready to change our target that we just unveiled. Definitely, this should make it easier and better and will allow us to
follow-up, when I look at a number of your competitors who have 300 millimeter capability, they have had to spend a lot more in CapEx, right, often on the order of 1,000,000,000 of dollars, whereas you're only spending about $100,000,000 this year and I think $330,000,000 at the end of 2022. So what's letting you how are you making this deal possible? And what proportion of your products will be on 300 over the next few years?
So this clearly is a benefit to GlobalFoundries and on Semiconductor. It's a transition factory. It's not completely dissimilar to what we did in Aizu, Japan with Fujitsu. It allows for orderly transitions between the two companies and there's benefits in that. So indeed, we are able to get very significant purchase price benefit and capital spending benefit over time.
And as we mentioned in the call, we expect that this will be give us capacity for about $2,200,000,000 in revenue capability in the long run.
Is there a certain target though or not that you think your products will be on $300,000,000 in the next handful of years?
Again, it would be a quarter of our production or so, if you do the math.
What we said also in the prepared remarks, he said it will probably take us 5 to 6 years until we get this factory fully transitioned and fully utilized.
Okay. Thank you.
Thank you. And our next question comes from Kevin Cassidy of Stifel. Your line is now open.
Thanks for taking my question. How many employees are you acquiring with this?
There's roughly 450.
Okay. Any long term employment agreements in place?
No, just standard employment.
Okay. Thank you. Maybe one other question is, as this fab gets fully utilized, does one of the other fabs come down or do you have less utilization, say, in Gresham?
Yes. Well, certainly not in Gresham. We are expecting this to handle growth in the company and are not expecting this to trigger restructuring.
Okay, great. Thank you.
Thank you. And our next question comes from Rajvindra Gill of Needham and Company. Your line is now open.
Yes, thanks. And I echo my congratulations on the deal. With respect to the strategic importance of this fab, you talked about ramping 300 millimeter to support the vehicle electrification, cloud power, industrial. I was wondering if you could kind of give us a sense of how much of these products will be on 300 millimeter over time? How important 300 millimeter is to compete in these kind of significant growth trends in ADAS and industrial in terms of what the benefits are of moving to the 300 millimeter?
Yes. Specifically, going to 300 millimeter does not change the characteristics of the device performance. And so that is not a significant motivation here. It is really a good cost structure and a very capital efficient way of expanding our manufacturing and capacities. Got it.
And does this change your relationship with any of your existing fab partners for any of your products? None at all. Okay. Thank you.
Thank you. And our next question comes from Craig Ellis of B. Riley FBR. Your line is now open.
Thanks for taking the question and congratulations team on the deal. It looks like just the latest of many nice supply agreements you've done. Keith, on the aspect of the agreement that relates to providing capacity for GLOBALFOUNDRIES after the termination or after you take full control of the deal, what percent of output of the fab would you expect to be initially dedicated? And how would you expect those volumes to play out over time?
Yes. I would expect it to be a relatively small amount, no more than 5% would be the current outlook.
Okay. So significant minority. And then with this capacity, you've certainly got a clear path on your front end growth capability. What does this mean for any plans that you had in place on the back end? And does it accelerate those?
Or what are the implications for back end spending over the next 4 years?
Yes. The back end spending still fits in the models we talked about. There's not a significant difference in cost for the equipment. It will change the specific type of equipment purchased. But it was all the back end pieces already comprehended in our models for this
revenue bill.
Thank you.
Thank you. And our next question comes from Vijay Rakesh of Mizuho. Your line is now open.
Yes. Hi, Keith and Barnard, I think you guys probably went to this, but with the CapEx for this 12 millimeter fab, how much savings do you expect over the next 5, 6 years does your CapEx
percent come down spending?
Yes. We mentioned it. It's approximately $1,000,000,000 as compared to building it ourselves on a greenfield or a brownfield. And we basically said that we are going to be able to get our intensity back to 6% to 7% from the current 8%.
Got it. And as you transition products into this new fab, I think you said fully utilized in 5 to 6 years, would this be newer products or would you move existing product lines into the new fab
and what would those be? Thanks.
Yes. We are moving power products and some mixed signal processes into the fab right now. And so the products in 2020 will be expanding our capacities on existing designs. After that, new designs will be ramping and filling it up.
All right. Thank you.
Thank you. And our next question comes from Shawn Harrison of Longbow Research. Your line is now open.
Hi. Good early morning for everybody and congratulations. Two questions just to be a bit more explicit. On the portfolio right now that you have it on, what percentage of that would make sense to be on 300 millimeter? Just kind of putting a fine point on the questions everybody has asked.
Yes. I don't know that I've got that calculation, John. It certainly the MOSFET portfolio and portions of our by CMOS processes would make sense right now. So less than $1,000,000,000 or around $1,000,000,000
Okay, great. And then as
a quick follow-up, I know you mentioned OSA in terms of that transfer, but I think a portion of that business came over with very low gross margin and no gross margin. Is that going to be the dynamic of the 5% of fab that's associated with GlobalFoundry that you'll have a gross margin drag associated with that business or the economics any different?
Yes, we don't have data on the economics yet. That's something we'll pass when we know what those numbers are. Okay. Thank you.
Thank you. And our next question comes from Daimur Srivastava of BMO. Your line is now open.
Yes. Hi, good morning. Thank you and I apologize for the background noise. Barnard, I just want to make sure I understood this point correctly. You said this transaction accelerates your free cash flow.
What does that mean? Are you closing in the target? Or should we expect to
I think we lost you for a little while, but if I understood the question, we are not changing at this moment our free cash flow target of $1,200,000,000 by 2022, But we believe this definitely will be tailwinds that will allow us to achieve it in a stronger way and better way.
Okay. Thank you.
Thank you. And our next question comes from Christopher Rolland of Susquehanna. Your line is now open.
Hey, guys. Congrats on buying this fab pretty cheap here. So what about specialty materials? Is this just going to be kind of CMOS or are there also things like FDSOI or are you going to do silicon carbide and GaN here as well?
Yes. Current plan is we think we can fill this factory up with silicon based processes and there may be certainly some specialty processes like SOI, but not the silicon carbide or GaN.
And looking out 5 years, what in terms of utilizations, where do you think you might be loaded on this fab?
We should be loading it to our models above 85%. Great.
Thanks guys.
Thank you. And our next question comes from Harsh Kumar with Piper Jaffray. Your line is open.
Yes. Hey, guys. Congratulations on the deal. So just a broader question. ON has always been acquisitive, but now you're at 2 acquisitions and call it month and a half month or so.
How should I read into the business environment in your eyes and also your manufacturing strategy mid to longer term?
Yes. No comment on the current business environment, but the manufacturing piece, there's no question we've been struggling to meet customer demands in the power and analog space. We think this significantly gives us the opportunity to avoid restrictions on our supply in the future and addresses the longer term growth of aspects that we laid out in our Analyst Day plan.
Okay, Keith. And one more for you. Could you remind us how you are spread today on 300, 200 and other technologies and how this will change the dynamics going forward?
Yes. So we have no 300 millimeter production internal to the company. We do have some external 300 millimeter products, a minority, but nonetheless significant portion for image sensing, for example. So this will be the first 300. Most of our production is on 200 millimeter and there is some remaining small signal products on 150.
Thank you and congrats.
Thank you. And our next question comes from Harlan Sur of JPMorgan. Your line is now open.
Good morning and congratulations on the manufacturing footprint expansion. Is the $2,000,000,000 $2,200,000,000
run rate, is that with
the current cleanroom space or does the team have to build out more shell capacity? I have a follow-up question.
Yes. No, no shale expansion required.
Okay. Thanks for that. And then just thinking longer term, given the growth dynamics of the business, do you guys have the capability to expand this 200 millimeter facility beyond the target $2,200,000,000 run rate? In other words, is there more land or cleanroom space at the East Fishkill site to be able to scale this higher as your business grows?
Pretty much no more land, but there is more space that has not been comprehended in the revenue capacity we've given you.
Great. Thank you.
Thank you. And our next question comes from Craig Hettenbach of Morgan Stanley. Your line is now open.
Yes. Just a follow-up question on the Global Foundry, just manufacturing wafers for them from 2022 to 2025. Do you have a rough sense of how much that would be annually? Again, we don't know yet. Their objective is to get their production into their factories.
This is basically just a service we're providing if needed. So we don't have any more details at this time. Okay. Thanks.
Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Parag Agarwal for any closing remarks.
Thank you, everyone, for joining the call today. We look forward to talking to you again next Monday after the release of our Q1 results. Goodbye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.