Good day, ladies and gentlemen, and welcome to the ON Semiconductor Close of Fairchild Acquisition conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Parag Agarwal, Vice President of Investor Relations and Corporate Development. Please begin.
Thank you, Nataya, and good afternoon, everyone. Welcome to ON Semiconductor Corporation's conference call to discuss the close of transaction of our acquisition of Fairchild Semiconductor. Joining me today are Keith Jackson, our President and CEO, and Bernard Gutmann, our Chief Financial Officer. Earlier today, we distributed a press release announcing the close of the transaction to acquire Fairchild Semiconductor, a leader in energy efficient power and analog semiconductor solutions. The press release and the supplemental presentation slide summarizing the transactions are available in the investor relations section on the ON Semiconductor's website at www.onsemi.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 10-Ks, 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 third quarter 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 fourth quarter of 2016. For all synergy-related discussion on this call, we have used Fairchild's 2015 results as a base for all 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 billion. 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 two companies should generate significant shareholder value from incremental free cash flow resulting from synergies between the two companies. We expect annual synergies run rate of approximately $225 million annually as we exit 2019, and incremental free cash flow of approximately $235 million 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 million of annual synergies is based on Fairchild'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%.
However, the customer overlap between the two companies is small, and given the highly complementary nature of products of the two companies, there is potential for revenue synergies resulting from the combination of the two 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 two companies contribute approximately 5% and 8% of revenue in 2015, the top customer of the combined company would have contributed 4% of revenue based on 2015 revenue of the two 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, electric 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. I 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 EV, HEV vehicles. As automotive manufacturers turn to next generation semiconductor materials to improve power density and efficiency in hybrid and electric vehicles, Fairchild's 1,200 volt silicon carbide power devices, coupled with ON Semiconductor's 650 volt gallium nitride power devices, provide market-leading solutions. In 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 Semiconductor's and Fairchild's AC- to- DC, DC- to- DC, and power discrete portfolios creates an industry leader in high performance power conversion, serving a broad range of applications traversing the high, medium, and low voltage spectrum. Fairchild's super junction MOSFETs and ON Semiconductor's GaN power switches enable 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. 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.
Fairchild 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. 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 AR, VR glasses. Our business has evolved over the last several years, we have 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 three business segments, Power Solutions Group or PSG, Analog Solutions Group or ASG, and Intelligent Sensing 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 Bill 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 Klosterboer. 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 Taner Ozcelik. With that, let me now turn the call over to Bernard, who will provide an update on financial details of the Fairchild 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%-19% on revenue of $4 billion. Our progress towards the margin detail in our financial target model has been hampered in large part by the current macroeconomic 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 million annually as we exit 2019, as compared to $160 million exiting 2017 that we announced in November of last year. The increase of $75 million in annual synergies is expected to come from manufacturing and operational improvements on the combined company and from insourcing 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 Semiconductor's and Fairchild's 2015 results as the baseline. On the manufacturing front, we intend to leverage Fairchild's eight-inch manufacturing capacity to improve the cost structure of the combined manufacturing network.
Given that manufacturing networks of the two companies have been running below optimal utilization, there is room for savings from consolidation of facilities. Further savings are expected to come from insourcing 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-inch front-end manufacturing, and insourcing 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. Decisions 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&D investments. In sales, general, and administrative, we expect savings through the elimination of duplicate corporate functions. A significantly larger revenue base of the combined company should drive operating expense leverage, which in turn should drive operating and margin expansion. Based on our early assessment of Fairchild's operation, we feel comfortable in achieving our non-GAAP operating margin targets of 17%-19% for the combined company.
In terms of timeline, in keeping with our previous announcement, we expect a synergies run rate of $75 million after the first six months of close of the transaction. We expect to exit 2017 with a synergies run rate of approximately $160 million. Approximately $130 million of the synergies in the first 18 months are expected to come from operating expenses, and the remaining $30 million of synergies are expected to come from cost of goods sold. We expect to exit 2018 and 2019 with annual synergies run rate of $200 million and $225 million respectively. Synergies in 2018 and 2019 are expected to come from the consolidation of manufacturing facilities and the insourcing of production. Given that our visibility has improved significantly from integration 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 2017, and immediately accretive on a non-GAAP basis. Non-GAAP EPS excludes such items such as step-up valuation of 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 2018 and $0.43 in 2019. We expect robust free cash flow contribution from Fairchild, starting with approximately $100 million in 2017. The $100 million incremental cash flow includes approximately $25 million in restructuring cash costs and approximately $110 million of incremental interest expense related to the acquisition.
In 2018, we expect incremental free cash flow of approximately $200 million, which includes approximately $100 million of acquisition-related incremental interest expense. In 2019, we expect incremental free cash flow of approximately $235 million from Fairchild. Acquisition-related interest expense is expected to be approximately $90 million in 2019. Our previous experience indicates that free cash flow will, in any year, 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 1 customers of the two companies contribute approximately 5% and 8% of revenue in 2015, the top customer of the combined company would have contributed 4% of revenue based on 2015 revenues of the two 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 use of capital. We intend to aggressively delever the company in the first two years with the aim of achieving net leverage of 2x adjusted EBITDA by the end of 2018. Following the levering 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. We will now take your questions. Nataya, please open up the line for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Once again, if you do have a question, please press star then 1. The first question is from John Pitzer of Credit Suisse. Your line is now open.
Yeah, good afternoon, guys. Thanks for letting me ask the question. Congratulations on getting the transaction done. Guys, I'm just kind of curious, given that you're using 2015 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 are your accretion numbers on top of what Fairchild was already doing?
The accretion numbers we gave you are updated for the synergies as we expect them to roll throughout the period. The $0.20 for 2017, 38 for 2018, and 43 for 2019 are with the most updated synergies reflected there.
That's helpful. 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?
Yeah. 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. 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. 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 BOA 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 of where factory utilization is right now and where does it need to get to, whether you can describe it in terms of factory utilization or top line, where do you need to be to get towards the 40% gross margin targets?
Yeah. 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%. As I said, that's one of the factors. Also, you have to take into account growth and mix into those equations as well.
As a follow-up to that, Keith, I think you mentioned that you expect to outgrow the semiconductor industry. 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 two, three years?
Yeah, I think industry prognosis is slightly less than that. 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?
Yeah. 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. 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 there's saturation going on with handsets, but with the changes going on with the battery charging and control in handsets, we think our dollar content will continue to increase. 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 2017, it'll 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 two companies together, what sort of tax rate should we be assuming?
It's in a 10-12% rate.
Great. Thank you.
Over a longer period of time.
Thank you. The next question is from Chris Caso of CLSA. Your line is open.
Yes, thank you, and 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.
On a combined basis, after the deal, pro forma for the deal, we'll have about $3.8 gross debt and about $3.1 billion net debt. It turns out the leveraging coverage ratios to be very similar to that, about 3.7 times and 3.1 times adjusted EBITDA. As we said, our goal is to pay aggressively during the first two years to achieve a net debt leverage of about two 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 first nine months. At about the one year to 18-month range, our insourcing activity should start to contribute, and then after 18 months, then you start seeing any factory consolidation. 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, I'll echo the congratulations on getting the deal done, guys. Keith, I was hoping that you could profile the growth and the margin parameters of the three new segments. It's nice to see the business slimmed down into three legs. Where do you think we'll get the better growth out of the three that you have now? From a margin standpoint, which lead and which leg?
Yeah. The three 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 there, growing medical, the communications part of building and factory automation, et cetera, have some very good margins. In automotive, our second-best margins. Again, all of the electrification in that vehicle continues to drive in the mid to upper 40% for us from a growth perspective. Lastly, communications really hovers just around that 40% mark. The two segments that are significantly less than 40% are consumer and computing.
Thank you. I was really referring to the new organization, Power Solutions.
Oh, the business group.
Analog Solutions.
My apologies.
Yeah.
Business group wise.
Yeah, no problem.
Yeah. Business groups 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. Their content there is quite strong. The ISG, the lowest margin of the groups, growing as we continue to diversify out of consumer, and increase the automotive and industrial segments there. That one will be, right now, kind of high 20s%, low 30s%, growing from that stage. ASG should have the strongest margin profile already being above our targets for the corporation.
Thanks for that. 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 one of them, or do you expect to expand margins about equally amongst the three?
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'll be pretty much across all three groups.
Okay. Then just lastly from me, guys. With respect to the synergy targets for 2017, 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? Is it simply a matter of just the later start?
It's mainly a matter of the later start.
All right. Thank you.
Thank you. The next question is from Steve Smigie of Raymond James. Your line is open. Hi, Steve. Please check to see if your line is on mute.
Hi, can you hear me now?
Yes.
Great. Hey, guys. Yeah, I just had some questions also on the closing deal. You said of, I think, any shareholder return until you got the debt paid down. Should we therefore assume no stock buyback at this point, or might you do just a little bit to offset stock grants, et cetera?
In the immediate term, in the short term, the goal is to focus on de-levering.
Okay, great. 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 de-emphasize those businesses? Just a little bit around your prioritization of revenue growth versus, say, margin.
I think really the only analysis, Steve, is going to be around cash growth.
Okay
How that helps us continue to de-lever and get back to returning to shareholders. It's not so much the absolute gross margin that's going to drive all those decisions, but really how much cash are we generating and what kind of investment it takes to get there. Low margin business generally will be the best candidates.
Okay, great. Thanks, congrats again.
Thank you. The next question is from Ian Ing of MKM Partners. Your line is open.
Yes, thanks. I share in my congratulations. Also congrats on the revised synergy targets there. Just a clarification. It looks like you're not providing any product or revenue synergies just to be conservative. Are there still scenarios where you feel that that could be possible as you combine the two companies and the portfolios, and where could those be, and how could that play out? Thanks.
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. We're really not ready to give you numbers that are larger than we've already displayed.
Thanks. Clarification on the current quarter. You're not revising guidance, isn't there some partial revenue from Fairchild? Also, I believe you're selling some assets to Littelfuse. Does that also happen in the current quarter?
Yeah, obviously, we'll have a small stub period for a few days during the quarter, and that should be somewhere around $50 million in revenue and probably around neutral in terms of accretion.
Okay, thank you.
Neutral to maybe a little bit positive.
Okay, got it.
Thank you. The next question is from Rajvindra Gill of Needham & Company. Your line is open.
Yeah, thank you, and congrats as well. Just a housekeeping question. What was the interest rate that you guys finalized on the debt?
The current interest rate on the term loan B is LIBOR plus 450 with a LIBOR floor of 75.
Okay, got it. 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 second largest. 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. Pretty excited. We should be able to outgrow that power market. From a customer perspective, they should be pleased to see the combinations we can provide them and the solutions we can put together.
Just last question on the competitive landscape for me. Given NXPI divesting its standard 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 would be great.
Short term, I think the new owners may provide us an opportunity to pick up some business. 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. 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 facilities support, I guess, if you move to, say, 90% utilization?
I don't know if I can give you an exact number with 90%. We are looking at facilities in kind of the post-consolidation mode that should be able to drive us north of $6 billion, and in a fairly well-utilized fashion. Remember, there's a lot of outsourcing that goes on.
Okay. Great. Of the $75 million that you've pointed to in the first six months of synergies, how much of that would go towards COGS?
It's a very small amount. The majority is OpEx related. Yeah.
Okay, great.
It's only a few items on the supply chain side.
Okay. Congratulations. Thank you.
Thanks.
Thank you. The next question is from Shawn of Longbow Research. Your line is open.
Hi, good afternoon. Clarification for me first, if I may. The synergies targets for within the first six 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. Second, as I am looking at the incremental interest expense highlighted for the acquisition in, say, 2017, 2018, and 2019, it is only stepping down around $10 million a year, and at least, understanding it may be back-end loaded, it looks like there is not a lot of, from the face of it, the math, debt reduction. I am 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 am missing in my math.
If you look at it, the initial level on an annualized basis is somewhere like $135 million. We are going from $135 million, stepping it down to about $90 million by 2019. It is still a quite sizable amount.
Okay. That is helpful. Lastly, as we think about the final timing of the manufacturing saves in 2019, is that something that by the fourth quarter of 2019, you will have all those, or is it mid-2019 where that run rate should be realized?
Yeah, you should be seeing most of it, well, all of it by the second half of 2019, most of it starting to kick in beginning of 2019.
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 mobile phone customer, and also what type of market share the combined company's going to have in their AC/DC charging business?
The largest customer overall will be 4% or less, and that's for all markets overall. The AC/DC, I don't know that I've got a new market projection on that, Tristan. Sorry.
Okay, then a quick follow-up. What type of mix should we expect from eight-inch 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. Our next question is from Craig Hettenbach of Morgan Stanley. Your line is open.
Yes, thank you. 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 importance, and we will be a very significant player in that channel. With well more than half of our business going through distribution, I think it'll put us in the top handful of suppliers to each of our distributors. Certainly looking for opportunities in the distribution side. Geographically, there are some minor differences between the companies, both were pretty diverse to start with.
Got it. 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?
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. We're pretty excited about the teams that'll be joining us.
Got it. Thanks for the color there.
Thank you. As a reminder, if you do have a question, please press the star then one key on your touch-tone telephone. We have another question from Ross Seymour 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 $2.2 billion. With all the floating, can you talk about what that's going to be, please?
The overall average should be under four.
Perfect. Thank you.
Thank you. Once again, if you do have a question, please press star then one on your touch-tone telephone. 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. Good day.