Good day, ladies and gentlemen, and welcome to the ON Semiconductor Close of Fairchild Acquisition 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 follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Gaurav Agarwal, Vice President of Investor Relations and Corporate Development.
Please begin.
Thank you, Natayo, and good afternoon, everyone. Welcome to ONS Semiconductor Corporation's conference call to discuss the close of transaction of our acquisition of Frasier's Semiconductor. Joining me today are Keith Jackson, our President and CEO and Bernard Gutman, our Chief Financial Officer. Earlier today, we distributed a press release announcing the close of the transaction to Kraft Paychai Semiconductor, a leader in energy efficient power and analog semiconductor solutions. The press release and the supplemental presentation slides summarizing the transactions are available in the Investor Relations section on the ON Semiconductor's website at www.awnsemi.com.
This call is being webcast on the Investor Relations section of our website. It will also be archived for approximately a year in the Investor Relations section of 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, plan, position, 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 Form 10ks, Form 10 Qs and other filings with the Securities and Exchange Commission. Our estimates may change and the company assumes no obligation to update forward looking statements to reflect actual results, changed assumptions or other factors except as required by the law. As we are in the quiet period for the Q3 of 2016, we will not be able to answer questions related to current business trends for the company, current industry environment and outlook for the Q4 of 2016. For all synergy related discussion on this call, we have used Fair Child's 2015 results as a base for our comparisons. Now, let me turn it over to Keith Jackson, who will provide details on the strategic implications of the transaction.
Keith?
Thank you, Parag, and good afternoon, everyone. Let me start by welcoming the employees of Fairchild Semiconductor to the ON Semiconductor family. I am confident that the immense talent and dedication of our newest employees will accelerate our progress towards building a world class power management company with industry leading profitability. We are very excited about the strategic opportunities and financial benefits our acquisition of Fairchild Semiconductor will create for us going forward. The combination of ON Semiconductor creates a new leader in the power semiconductor with annual revenues of approximately 5,000,000,000 dollars Fairchild's strength in medium and high voltage power management coupled with our leadership in low voltage power management and analog control devices propels us to a leadership position in the power management market with a broad portfolio of products across the complete voltage spectrum for automotive, industrial and communications end markets.
The acquisition of Fairchild Semiconductor provides us platform to aggressively expand our profitability in a highly competitive industry. With an expanded revenue base and the addition of Fairchild's manufacturing network, we expect that our industry leading cost structure will further improve. And we expect this cost structure to accelerate our margin expansion towards our target margins, which we announced at our Analyst Day in February of 2015. We expect that the combination of the 2 companies should generate significant shareholder value from incremental free cash flow resulting from synergies between the 2 companies. We expect annual synergies run rate of approximately $225,000,000 annually as we exit 2019 and incremental free cash flow of approximately $235,000,000 from the acquisition in 2019.
Free cash flow is defined as cash flow from operations less capital expenditure. As indicated earlier, our target of $225,000,000 of annual synergies is based on Verichal's 2015 results. Bernard will provide additional details on synergies in his prepared remarks. As we've indicated earlier, our acquisition of Fairchild is highly complementary and the revenue overlap between On Semiconductor and Fairchild is small. Fairchild significantly boosts our capabilities in mid to high voltage power management, which is highly complementary to ON Semiconductor's strong presence in low voltage power management and analog control devices.
The addition of medium to high voltage products and technologies to our portfolio significantly expands our capabilities in the automotive, industrial and communications end markets. In terms of end market exposure, our exposure to our strategic end markets of automotive, industrial and communications remain unchanged at approximately 75 percent. However, the customer overlap between the two companies is small and given the highly complementary nature of products of the 2 companies, there is potential for revenue synergies resulting from the combination of the 2 companies. The small customer overlap between the two companies helps in driving further diversification of our customer base. While the number one customers of the 2 companies contribute approximately 5% 8% of revenue in 2015, the top customer of the combined company would have contributed 4% of revenue based on 2015 revenue of the 2 companies.
Despite being highly diversified, we expect to grow at a rate higher than that of the overall semiconductor industry. Given our approximate 75% exposure to automotive, industrial and communication markets and leadership in growth areas such as ADAS, electrical vehicle electrification, LED lighting and automotive, quick charging solutions for mobile devices and industrial motor control, we expect to continue to outgrow the semiconductor industry. Now I'll provide additional details on the complementary capability that Fairchild provides us in various end markets. As I indicated earlier, the revenue overlap between the product portfolios is small. Even in areas of overlap, the overlapping products are optimized for different operating parameters such as current and voltage.
In the automotive end market, Fairchild significantly enhances ON Semiconductor's capability in the rapidly emerging electric vehicle and hybrid electric vehicle market. The combination of Fairchild's Automotive qualified medium voltage and high voltage MOSFETs with ON Semiconductor's extended portfolio of automotive qualified power management solutions positions the company as an unrivaled supplier of power solutions for traditional internal combustion engines, vehicles as well as fast growing EVHEV vehicles. As automotive manufacturers turn to next generation semiconductor materials to improve power density and efficiency in hybrid and electric vehicles, Fairchild's 1200 volt silicon carbide power devices coupled with ON Semiconductor's 650 volt Gallium Nitride power devices provide market leading solutions. The industrial end market, Fairchild is an established market leader in industrial motor power solutions with its discrete and power module product portfolio. Combining these products with ON Semiconductor's BLDC motor control ICs and IPMs provides our internal industrial customers with comprehensive solutions for the extensive range of motor based systems.
The combination of ON Semiconductors and Fairchild's AC to DC, DC to DC and power discrete portfolios creates industry leader in high performance power conversion serving a broad range of applications traversing the high, medium and low voltage spectrum. Fairchild's superjunction MOSFETs and ON Semiconductor's GaN power switches enabled significantly improved power density and efficiency for industrial variable speed drives as well as uninterruptible power supplies used in networking, telecom and data center applications. In addition, Fairchild has established footprint in cloud power solutions that includes networking equipment and data center servers. In the communications end market, with the addition of Fairchild's portfolio, ON Semiconductor's addressable content per device increases to $11 from $9 The combined company is now a market leader in wall to battery power solutions and USB Type C peripheral connectivity. Beartchild Semiconductor has a leading position in fast charging AC to DC power adapters with support from multiple industry protocols.
Fairchild's strength in power adapters is now augmented by ON Semiconductor's growing portfolio of power adapter products. In addition, ON Semiconductor offers complementary magnetic resonance wireless charging products to provide our customers a broad portfolio of wired and wireless charging solutions. Bringing together the low power portfolio creates a comprehensive catalog of DC to DC and battery management solutions for applications ranging from smartphones to ARVR glasses. Our business evolved over the last several years and we've moved away from being just a supplier of standard products to being a provider of highly differentiated power management and analog solutions. With a vastly improved product profile and a larger revenue base resulting from the acquisition, we have reorganized our businesses into 3 business segments: Power Solutions Group or PSG, Analog Solutions Group or ASG and Image Solutions Group or ISG.
Personnel, assets and resources of System Solutions Group or SSG have been reallocated among PSG, ASG and to a lesser extent, ISG. PSG focuses on semiconductor components for multiple applications and functions, including power switching, signal conditioning, circuit protection, signal amplification and voltage references. PSG is headed by Bell Hall. ASG focuses on analog, mixed signal and advanced logic ASICs and ASSP solutions for a broad base of applications in the automotive, industrial, communications, medical, military and Aerospace Markets. ASG is headed by Bob Plasterbauer.
ISG focuses on CMOS and CCD image sensors, proximity sensors and image signal processors for automotive, industrial, medical, military and aerospace markets. ISG is headed by Tanner Ozelik. With that, let me now turn the call over to Bernard, who will provide an update on financial details of the Fair Child acquisition. Bernard?
Thank you, Keith, and good afternoon, everyone. Let me start with a discussion of our target model we provided at our last Analyst Day in February of 2015. Our target model calls for non GAAP gross margin of 40% and non GAAP operating margin in the range of 17% to 19% on revenue of 4,000,000,000 Our progress towards the margin detail in our financial target model has been hampered in large part by the current microeconomic environment and semiconductor industry conditions. However, we believe that the acquisition of Fairchild should accelerate our progress towards the margin targets detailed in our target model despite a modest revenue growth assumption of 2% per year. We will provide additional updates on the target financial model for the combined company at our next Analyst Day in the spring of 2017.
Moving on to the synergies target we provided in November of last year. We now expect that the total synergies resulting from the combination of ON Semiconductor and Fairchild Semiconductor to be approximately $225,000,000 annually as we exit 2019, as compared to $150,000,000 exiting 2017 that we announced in November of last year. The increase of $75,000,000 in annual synergies is expected to come from manufacturing and operational improvements on the combined company and from in sourcing of production. Apart from cost savings from elimination of redundancies, we expect to benefit from operating leverage and efficiencies resulting from our significantly expanded scale. As indicated earlier, for purposes of our discussion of synergy targets, we have used ON Semiconductors and Fairchild's 2015 results as the baseline.
On the manufacturing front, we intend to leverage Fairchild's 8 inches manufacturing capacity to improve the cost structure of the combined manufacturing network. Also, given that manufacturing networks of the 2 companies have been running below optimal utilization, there is room for savings from consolidation of facilities. Further savings are expected to come from in sourcing of production, especially for Fairchild's back end operations. As a reminder, ON Semiconductor has one of the most efficient back end operations in the industry and our back end cost structure is significantly superior to that of contract manufacturing houses. Additional scale from Fairchild should help further improving our front end and back end manufacturing cost structure.
With the substantially improved scale transition to 8 inches front end manufacturing and in sourcing of production, we feel confident in our ability to achieve our target non GAAP gross margin of 40% for the combined company. Moving on to operating expenses. As a matter of policy and in the best interest of our shareholder, we are committed to retaining the best talent from both the companies and decision to curtail functions and programs will be taken solely based on business consideration. In research and development, both companies have been investing in similar areas and we expect savings as we curtail or redirect our R and D investments. In sales, general and administrative, we expect savings through the elimination of duplicate corporate functions.
Also, a significantly larger revenue base of the combined company should drive operating expense leverage, which in turn should drive operating margin expansion. Based on our early assessment of Fairchild's operations, we feel comfortable in achieving our non GAAP operating margin targets of 17 percent to 19% for the combined company. In terms of time line, in keeping with our previous announcement, we expect a synergies run rate of $75,000,000 after the first 6 months of close of the transaction. We expect to exit 2017 with a synergies run rate of approximately 160,000,000 dollars Approximately $130,000,000 of the synergies in the 1st 18 months are expected to come from operating expenses and the remaining $30,000,000 of synergies are expected to come from cost of goods sold. We expect to exit 2018 2019 with annual synergies run rate of $200,000,000 $225,000,000 respectively.
Synergies in 2018 2019 are expected to come from the consolidation of manufacturing facilities and the in sourcing of production. Given that our visibility has improved preparation activities since the announcement of the transaction, our confidence in achieving these synergies has improved meaningfully. Moving on to accretion targets. The acquisition is expected to be accretive on a GAAP EPS basis in the latter half of twenty seventeen and immediately accretive on a non GAAP basis. Non GAAP EPS excludes such items such as step up valuation of our acquired inventory, amortization of intangibles, restructuring expenses, non cash interest expenses and one time items.
We expect Fairchild to contribute approximately $0.20 to our non GAAP EPS in 2017, which is lower than our initial estimate as it took longer than expected to receive all necessary regulatory approvals. The accretion is expected to be approximately $0.38 in 20.18 $0.43 in 2019. We expect robust free cash flow contribution from Fairchild starting with approximately $100,000,000 in 20 17. The $100,000,000 incremental cash flow includes approximately $25,000,000 in restructuring cash costs and approximately $110,000,000 of incremental interest expense related to the acquisition. In 2018, we expect incremental free cash flow of approximately $200,000,000 which includes approximately $100,000,000 of acquisition related incremental interest expense.
In 2019, we expect incremental free cash flow of approximately $235,000,000 from Fairchild. Acquisition related interest expense is expected to be approximately $90,000,000 in 20 19. Our previous experience indicates that free cash flow will occur in any year to be weighted towards the second half of the year. With the acquisition of Fairchild, ON is now one of the most diversified companies in the semiconductor industry, not only in terms of end market exposure, but also in terms of customer concentration. While the number one customers of the 2 companies contributed approximately 5% 8% of revenue in 2015, the top customer of the combined company would have contributed 4% of revenue based on 2015 revenues of the 2 companies.
We believe that a diversified customer base coupled with a diversified exposure to attractive end markets and a vastly improved scale should result in a company that can deliver highly stable results on a sustained basis. Moving on to the use of capital. We intend to aggressively delever the company in the 1st 2 years with the aim of achieving net leverage of 2 times adjusted EBITDA by the end of 2018. Following delevering of the company by late 2018, we plan to reinitiate our shareholder capital return program. We will also explore the possibility of divesting certain non strategic assets in order to raise capital to aggressively delever our balance sheet.
With that, let me now turn the call over to Keith. Keith? Thanks, Bernard. We are
very excited about the expected benefits that the combination of ON Semiconductor and Fairchild will bring to our customers, shareholders and employees. I also take this opportunity to thank the leadership and staff of Fairchild Semiconductor for their efforts in ensuring the close of this transaction. This concludes our prepared remarks and we will now take your questions. Latoya, please open up the line for
The first question is from John Pitzer of Credit Suisse. Your line is now open. Yes, good afternoon guys.
Thanks for letting me ask a question. Congratulations on getting the transaction done. Guys, I'm just kind of curious given that you're using 15 results as the basis for accretion. As you know, Fairchild was sort of embarking on its own restructuring, sort of story with fruits to come. I'm just kind of curious, how does that play into the accretion numbers?
Is that sort of part of the accretion numbers you gave? Or is that are your accretion numbers on top of what Fairchild was already doing?
No, the accretion numbers we gave you are updated for the synergies as we expect them to roll throughout the period. So the $0.20 for 2017, dollars 0.38 for 'eighteen and $0.43 for 'nineteen are with the most updated synergies reflected there.
Okay. That's helpful. And then Bernard, in your sort of prepared comments, you talked about the potential for some divestitures. Keith, I'm just kind of curious, can you give us some broad strokes of what that might be? Is that stuff that was core on, core Fairchild?
And any sense of sort of the magnitude of what divestitures could look like?
Yes. So it is a combined business analysis really looking at further concentrating our investments into the areas we think are going to generate the best margin growth. And so there are businesses now where we've got enough critical mass in both the application and with the customers that the lower margin product businesses can be looked at for divestiture. So they'll be across all the businesses and generally those speaking in markets that are not core.
Thanks guys. Appreciate it.
Thank you. The next question is from Vivek Arya of B. O. A. Merrill Lynch.
Your line is open.
Thanks for taking my question and congrats on completing the transaction. First question is, can you give us a sense for where factory utilization is right now? And where does it need to get to? Whether you can describe it as a factory utilization or top line? Where do you need to be to get towards the 40% gross margin targets?
Yes. So utilization, one of the factors in that gross margin target, we are running kind of low 80s on the on part of the business and less than that in the 70s on the Fairchild part. When we look to get into the 40s, kind of a mid-80s target is what we've got for the combined company that gets us to the 40%. But as
I said, that's one of
the factors also you have to take into account growth and mix into those equations as
well. Got it. And as
a follow-up to that, Keith, I think you mentioned that you expect to outgrow the semiconductor industry. So I'm just curious what you're assuming for industry. I think expectations are 3% to 4% kind of growth. Is that a reasonable target that you hope to exceed over the next 2, 3 years?
Yes. I think industry prognosis is slightly less than that, but we do expect to exceed that again, with most of our revenues coming from markets that should be growing kind of in the mid single digits.
Thank you.
Thank you. The next question is from Ross Seymore of Deutsche Bank. Your line is open.
Hi, guys. Congrats on closing the deal. A follow-up question to the last one, Keith. When you look at your key markets versus the consumer and computing side of things, can you talk about some of the growth drivers you see on kind of the key side versus the non key side?
Yes. So key side growth drivers clearly on the automotive side, all of the new safety features are a big deal from growing automotive content and we think we're extremely well positioned there. Key drivers for fuel efficiency as well, whether that's combustion engine or EV, those are really going to be very key drivers there, giving us I think an opportunity for double digit growth in automotive. On the industrial side, there's a range of things there, but more efficient variable speed motors going to DC DC motors in many applications for energy savings. And then, the new wireless communication protocols for factory and building automation will drive, we think, some very significant growth, along with, in the medical industry, the personalization of electronics with medical applications is a big deal.
Communications wise, we know that handsets. But with the changes going on with the battery charging and control and handsets, we think our dollar content will continue to increase. So giving those three legs, I'd say they're the most significant. In the near term, the Skylake transformation in computing is going to provide some horsepower. But then as you get to the second half of twenty seventeen, it will start being much more like the rest of the computing industry.
That's helpful. I guess as my follow-up, Bernard, one for you. When you put the 2 companies together, what sort of tax rate should we be assuming?
It's in a 10% to 12% rate over a longer period of time.
Thank you. The next question is from Chris Caso of CLSA. Your line is open.
Yes, thank you. Congratulations on getting the deal done. Bernard, if you could just update us on the financing on basically where the debt and the cash will sit after the acquisition is closed and what we should expect for cash balance?
So on a combined basis, after the deal pro form a for the deal, we'll have about 3.8 percent gross debt and about $3,100,000,000 net debt. It turns out in the leveraging coverage ratios to be about very similar to that, about 3.7x and 3.1x adjusted EBITDA. And as we said, we intend our goal is to pay aggressively during the 1st 2 years to achieve net debt leverage of about 2 times.
Okay, great. As a follow-up, you had talked about some of the manufacturing cost savings you were anticipating as a result of this. Could you talk about timing in terms of when customer qualifications need to occur? How long that will take to achieve and therefore when we could see the different buckets of manufacturing cost savings realized in the numbers?
There'll be some small savings from the supply chain in the 1st 9 months. At about the 1 year to 18 month range, our in sourcing activity should start to contribute. And then after 18 months, then you start seeing any factory consolidations. So it'll be toward the end of 2018 before the consolidation portion of it really starts kicking in.
Great. Thank you.
Thank you. The next question is from Craig Ellis of B. Riley. Your line is open.
Thanks for taking the question and I'll echo the congratulations on getting the deal done guys. Keith, I was hoping that you could profile the growth and margin parameters of the 3 new segments. It's nice to see the business slim down into 3 legs. Where do you think we'll get the better growth out of the 3 that you have now? And from a margin standpoint, which lead and which leg?
Yes. So, the 3 we've chosen, quite serendipitously, not only have the best growth, but the best margins for the company. Industrial houses some of our best margins greater than 50%. For many of the businesses I mentioned, they're growing medical, the communications part of building and factory automation, etcetera, has some very good margins. Automotive, our 2nd best margins.
And again, all of the electrification in that vehicle continues to drive in the mid to upper 40s for us from a growth perspective. And then lastly, communications really hovers just around that 40% mark. So the 2 segments that are significantly less than 40% are consumer and computing.
Thank you. I was really referring to the new organization, Power Solutions. Business group wise,
our Power Solutions Group, actually one of the most effective high volume manufacturing groups out there, should be approaching 40, again driven by the markets I just elaborated on, but their content there is quite strong. The ISG, the lowest margin of the groups, but growing as we continue to diversify out of consumer and increase the automotive and industrial segments there. So that one will be right now kind of high 20s, low 30s growing from that stage. And then ASG should have the strongest margin profile already being above our targets for the corporation.
Thanks for that. And then tying that into the target model, as you look ahead to the 40% gross margin target, Bernard, where do you need to drive improvement across those three business segments? Is it disproportionately out of 1 of them? Or do you expect to expand margins about equally amongst the 3?
There is a mix shift in ISG as we talked about. But in general terms, because a lot of the improvements will come from mix, which are within each of the groups as well as manufacturing consolidation and other self help. It will be across pretty much across all three groups.
Okay. And then just lastly for me guys. With respect to the synergy targets for 'seventeen old and new, we're getting started on the close of the deal later than we had previously expected. Are there any other changes that impact how we look at the timing of accretion that comes in? Or is it simply a matter of just the later start?
It's mainly a matter of a later start.
All right. Thank you.
Thank you. The next question is from Steve Smithee of Raymond James. Your line is open. Hi, Steve. Please check to see if your line is on mute.
Hi, can you hear
us now?
Yes.
Great. Hey, guys. Just
I think any shareholder return until you got the debt paid down. So should we therefore assume no stock buyback at this point? Or might you do just a little bit to offset stock grants, etcetera?
In the immediate term, in the short term, the goal is to focus on delevering.
Okay, great. And then Keith, just as you think about the businesses now, you've got a lot more scale. You mentioned you might sell off some non strategic assets. Are there certain businesses though that might not even be worth selling, maybe just makes sense to sort of deemphasize those businesses? Just a little bit around your prioritization of revenue growth versus say margin?
Yes. I think really the only analysis Steve is going to be around cash growth and how that helps us continue to delever and get back to returning to shareholders. So it's not so much the absolute gross margin that's going to drive all those decisions, but really how much cash we're generating and what kind of investment it takes to get there. So, low margin business generally will be the best candidates.
Okay, great. Thanks and congrats again.
Thank you. The next question is from Ian Ng of MKM Partners. Your line is open.
Yes, thanks. Sharon, my congratulations. Also congrats on the revised synergy targets here. Just a clarification, it looks like you're not providing any product or revenue synergies just to be conservative. I mean, are there still scenarios where you feel that that could be possible as you combine the 2 companies in the portfolios?
And where could this be and how could that play out? Thanks.
So it has taken us quite a while to get to close with the regulatory agencies and what that has provided us is renewed confidence in the execution on the synergies, but we're really not ready to give you numbers that are larger than we've already displayed.
Thanks. And then clarification on the current quarter, you're not revising guidance, but isn't there some partial revenue from Fairchild? And also I believe you're selling some assets to Littelfuse. Does that also happen in the current quarter?
Yes. Obviously, we'll have a small stop period for a few days during the quarter, and that should be somewhere around $50,000,000 in revenue and probably around neutral in terms of attrition.
Okay. Thank you.
Neutral to maybe a little bit positive.
Okay. Got it.
Thank you. The next question is from Rajvindra Gill of Needham and Company. Your line is open.
Yes, thank you and congrats as well. Just a housekeeping question. What was the interest rate that you guys finalized on the debt?
It's the current interest rate on the term loan B is LIBOR plus 4.50 with a LIBOR floor of 75.
Okay, got it. And in terms of the competitive landscape, how do you look at your position in the power management business, in the power management market relative to the number one player in that market as well as some of the other Tier 3, Tier 4 suppliers given it's fairly fragmented?
Purely numerical basis, we would be the 2nd largest. But I believe our portfolio is going to provide the broadest spectrum of solutions. And in the specific markets we're targeting, I think is one of the strongest portfolios out there. So pretty excited. We should be able to outgrow that power market.
And from a customer perspective, they should be pleased to see the combinations we can provide them and the solutions we can put together.
And just last question on the competitive landscape for me. Given NXPI divesting a Standards Products business to a Chinese entity, how do you see that affecting your business given the acquisition of Fairchild or maybe it doesn't? If you can maybe elaborate on that, that would be great.
Short term, I think the new owners may provide us an opportunity to pick up some business. But in the longer term, not a significant amount of change to the competitive landscape. It really doesn't create a stronger competitor. Thank you. Thank you.
And the next question comes from Kevin Cassidy of Stifel. Your line is now open.
Thanks for taking my question. With reference to your consolidation of facilities, I guess once you're through that, what revenue can your facility support, I guess, as a if you move to say 90% utilization?
So I don't know if I can give you an exact number with 90%, but we are looking at facilities in kind of the post consolidation mode that should be able to drive us north of 6,000,000,000 dollars and in a fairly well utilized fashion. Because remember, there's a lot of outsourcing that goes on.
Okay, great. And of the $75,000,000 that you've pointed to us in the 1st 6 months of synergies, how much of that would go towards COGS?
It's a very small amount. The majority is OpEx related. It's only a few items on the supply chain side.
Okay. Congratulations. Thank you.
Thanks.
Thank you. The next question is from Sean of Longbow Research. Your line is
Clarification for me first, if I may. The synergies targets for within the 1st 6 months, does that contain any of the fab closure synergies that Fairchild was targeting for 2016? Or are all those incremental synergies to ON post the date of the close?
The synergies for stuff that we are doing is all incremental. There is a little bit of remnant from what Fairchild did back in their 2014 timeframe, but it's pretty much under a bridge right now.
Okay. That's helpful. And then second, as I'm looking at the incremental interest expense highlighted for the acquisition in say 2017, 2018 2019, It's only stepping down around $10,000,000 a year and at least understanding maybe back end loaded, it looks like there's not a lot of it from the face of it, the math debt reduction. So I'm trying to, I guess, put that up against the statement that most of the free cash flow will be deployed toward debt reduction and just wondering what I'm missing in my math.
If you look at it, the initial level on an annualized basis is somewhere like $135,000,000 So we're going from $135,000,000 stepping it down to about $90,000,000 by 2019. So it is still a quite sizable amount.
Okay. That's helpful. And then lastly, as we think about the final timing of the manufacturing saves in 2019, is that something that by the Q4 of 2019, you'll have all those or is it mid-twenty 19 where that run rate should be realized?
Yes, you should be seeing most of it well, all of it by the second half of twenty nineteen, most of it starting to kick in beginning of twenty nineteen.
Perfect. Congratulations on the acquisition.
Thank you. The next question is from Tristan Gerra of Baird. Your line is open.
Hi, good afternoon. Could you give us a sense of what your exposure will be for the combined entities from your largest lower end customer? And also what type of market share the combined company is going to have in their ACDC charging business?
So, the largest customer overall will be 4% or less, and that's for all markets overall. And the ACDC, I don't know that I've got a new market projection on that Tristan, sorry.
Okay. And then a quick follow-up. What type of mix should we expect from 8 inches capacity post the production consolidation?
From a dollar value, it will be significantly more than half. I don't again haven't got exact numbers with me today.
Great. Thank you.
Thank you. And our next question is from Craig Hettenbach of Morgan Stanley.
Yes. Thank you. And anything to note from a geographic or distribution perspective in terms of as you combine the companies where you could maybe gain some synergies?
Well, certainly, the distribution channel will be of utmost important and we will be a very significant player in that channel. Well, more than half of our business going through distribution. I think it will put us in the top handful of suppliers to each of our distributors. So certainly looking for opportunities in the distribution side. Geographically, there are some minor differences between the companies, but both were pretty diverse to start with.
Got it. And then just as a quick follow-up, you mentioned in the prepared remarks in terms of employee retention. Anything of note in terms of some of Fairchild's key product or business segments in terms of people maybe coming on board?
So we basically have adopted all of the key segments. The leaders of many of those segments from Fairchild are still the leaders of those segments in the combined on. And we're pretty excited about the teams that will be joining us.
Got it. Thanks for the color there.
Thank you. We have another question from Ross Seymore of Deutsche Bank. Your line is open.
Hi. One quick one for Bernard on housekeeping. Could you just tell us what the blended rate of your debt is going to be? I know what it is on the $2,200,000,000 but with all the floating, can you talk about what that's going to be, please?
The overall average should be under 4.
Perfect. Thank you.
Thank you. I'm not showing any further questions in queue at this time.
Okay. Thank you everyone for joining us today.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect today.