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ON Semiconductor Corporation (ONNN)

February 15, 2013 10:30 am ET


Sloan Boss

Keith D. Jackson - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of Semiconductor Components Industries LLLC and President of Semiconductor Components Industries LLC

Robert Charles Mahoney - Executive Vice President of Sales & Marketing and Executive Vice President of Sales & Marketing of Semiconductor Components Industries LLC

Robert A. Klosterboer - Senior Vice President and General Manager of Digital & Mixed-Signal Group

William M. Hall - Senior Vice President of Standard Products Group, General Manager of Standard Products Group, Senior Vice President of the Standard Products-SCI LLC and General Manager of the Standard Products-SCI LLC

Mark Goranson

Bernard Gutmann - Chief Financial Officer and Executive Vice President


Sloan Boss

All right. Hello, everyone. Thank you, all, for coming out. My name is Sloan Boss with Investor Relations. And I just wanted to start off with just a few kind of items for the people here. Restrooms are in the back, if needed, and we'll have some drinks throughout the day over here.

For those of you, lunch will be provided after the event. For those of you that will be coming to the golf with us, we actually are -- our teatime is starting at 1:00. So and we'll have lunch at the course provided. So feel free to just -- after the event, go change real quick, if needed. There will be a shuttle starting at 12:15 that will be out in front of the hotel to shuttle people to the golf course. And then feel free to just go straight to the golf course. There'll be boxed lunches there for us, and we'll have a good time out there. So thank you, all, for coming, and let me start with -- I'll read our Safe Harbor and then I'll introduce our first speaker.

So during the course of this conference, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words believe, estimate, anticipate, intend, expect, plan, 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. Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-K, Form 10-Qs and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for the fourth quarter and year ended 2012. Our estimates may change and the company assumes no obligation to update forward-looking statements to reflect the actual results, changed assumptions or other factors. Some data in this presentation may include non-GAAP financial measures. You can find reconciliations of these non-GAAP financial measures to the most directly comparable measures under Generally Accepted Accounting Principles within the following presentation appendix, and on our website at in the Investor section under the category Annual and Quarterly Results.

So with that, I'd like to introduce our first speaker, Keith Jackson, our CEO and President. Keith?

Keith D. Jackson

Thank you, Sloan. Welcome, everyone. Glad to see you here in sunny Phoenix. I think we're going to have a good day, quite informative for you. We would ask you to hold questions until the end. So we're going to go through the presentations in a fairly efficient manner here and then at the end, you can have the entire team available to you for questions.

So what we're looking forward today, give you a picture of the company, what's been changing here, what was going on behind the scenes in the last 7 or 8 quarters of slow industry growth. And I think what you should be hearing from us today is we think we're positioned very well for both improvement in the marketplace, but more importantly, as a company how we repositioned ourselves with our design wins and our importance to customers. We have continued to improve our manufacturing situation. We continue to be more efficient, continue to execute. And of course, we're trying to turn all that stuff into value for our shareholders and figure out how to get that back to them in a faster fashion. I'll start off with just a little bit of survey -- or summary of 2012.

One of the things that happens each year in our industry is you have to become more competitive, and I can tell you that we have done that. We were very successful in reducing our cost structure, reducing number of plants that we have to produce the same number of units, keeping our OpEx in control and making sure that even in trough sales through the cycle, we generate cash. I think the most exciting thing to me though is the design win acceleration we had in 2012. We came out with some just fantastic products in 2012 that are designed into the next generation of platforms, which we think positions us for very, very strong growth going forward.

We did expect the market to recover in the second half of 2012. It was a complete head fake for us, and we'll talk a little bit about why we don't think this year will be a repeat of that, because we are expecting the market to strengthen as we go through this year, with Q1 as a trough. We had some very since substantial hills to climb, they're specific to the company, recovering from the revenue loss that resulted from the floods in late 2011 and from the share loss that their customers had in Japan, putting a lot of pressure on our revenues last year more so than just the general market. We think we're through that portion of it. We think we're going to be able to start growing that business again. And we think the market will help us as we go through this year. I think the last thing I would say about 2012 is we did see continued destocking in the channel throughout the entire year, including the very end of the fourth quarter. So that sets us up very well for the next up cycle.

What's changed in the company? Automotive is now our largest segment. We haven't had an Analyst Day in a couple of years. A couple of years ago, the answer would have been computing, but we've been growing that business and investing in that business for several years now and it's now showing. As we look forward to 2013, we're expecting the communication segment to be the fastest-growing segment. We really increased the product content that we've got in the smartphones, and we see good design wins there that we think will make that the fastest-growing marketplace. Computing, we'll talk about each of these markets separately, but we think they're all going to be able to bring some growth to the company and certainly, improve our margins over time.

What's our expectations from a market perspective? We have all of the access to data that you have. And so I won't belabor things like GDP. However, I will point to what we think are very good signs for this up cycle here in the industry. In your top right-hand side, what you've got is a couple of line charts. One shows the revenues of electronic systems and the other one shows semiconductors. So the pink one, or the light pink one, is the hardware revenues; and the blue one, with the very sharp ups and downs, is semiconductors. It is clear that we have sold fewer semiconductors than our customers have sold electronic systems in the last 2 years. So you had 2 years, basically, of draining inventory in the supply chain from the semiconductor perspective.

That happened before, it happened in 2007 and 2008, and we all know what 2010 looked like. We're not up here projecting there's going to be a huge spike here in 2013, but I am suggesting that you can only go so long in under-shipping that channel before something has to change. And generally, semiconductors react in a much more aggressive manner than the overall market does. So we do think between this year and next, there should be some good growth opportunities for semiconductors and of course, the rest of the charts here, I'll let you look at your leisure, but they all suggest the same thing.

So what's our strategy been? Basically, we have been making ourselves more valuable to the customers that matter. And specifically focusing all of our resources on markets that we think will drive sustainable growth. You've been hearing from us, the automotive sector is one of those sectors that we think is outstanding, not so much because we think there's going to be more cars sold every year but because the buyers of those automobiles want more and more electronics, whether that's safety, whether that's things that drive fuel economy or things that drive driver convenience. In all cases, we think the content is growing there and so flat number of cars should drive growth, and any increase in cars should drive greater growth. And so we continue to invest there. We'll tell you stories on that or tell you the background on that as we go through the day.

In addition to automotive, we are also expanding in the types of products that we participate. One of the big changes the company, traditionally, has been in the low-power arena. Medium power, when it comes to automobiles but generally, low-power, types of products. In the last 2 years, we've been investing heavily in high-voltage and high-powered products. This gives us some opportunities. We think we've got leading technology now to gain share in markets that we did not formerly play. Specifically, on top of that, our module capabilities, we think is pretty exciting to bring additional growth to the company. Frankly, with much higher ASPs by providing our customers a module that replaces their entire function instead of having them trying to build that up discretely. And you'll hear more about that today as well.

One of the few markets that we think has significant organic growth is in LED lighting for general purposes. We do think that market is growing, it has been growing, it's been growing very quickly for us. But we think as we get to 2014, there may be inflection points with the prices of bulbs reaching the point where the general populace will do much more conversion from their current solutions.

Wireless. I mentioned earlier to you, we think that's the highest growth market opportunity for us. We do think smartphones are going to continue to grow. But again, similar to the automotive statements, ON Semiconductor's products, we've more than doubled our content opportunity in each of those smartphones. So we think we will be outgrowing the wireless market as we go through 2013 and '14. And again, our team will talk to you about the details on that.

And then lastly, from a profit perspective, we have been struggling to get the SANYO group for us at breakeven. We've had to put a lot more energy into cost reductions there and a lot of energy into selling the products to get the revenues turned around so they can start to grow again. We think we've got the plans now to have breakeven below 190 middle of this year, and specifically, have the activities on the sales side to start growing that revenue line, again, as we go through 2013.

I'm not going to go through each of these markets here where we have leading positions from our traditional marketplaces. You know what those are, you've seen those develop over the years. What I will say as you look next year, 2 old friends, automotive and the smartphones, but the power modules and LED lighting are real opportunities for us to differentiate ourselves in the marketplace.

With that, we'll be talking today, I'll have each of the presenters come up, we'll go through the markets, we'll go through the products, we'll go through the manufacturing that will separate us from our competitors. And then Bernard will also go through the financials and how we get more of that money back to our shareholders.

So if I could have Bob Mahoney come up, and he'll go through the markets.

Robert Charles Mahoney

Thanks, Keith. So Keith went through most of my pitch already about the design activity and the improvement that we're making in penetrating our customers. So what I want to do this morning is give you an update in the market in terms of how we see it. I'll talk about some of the applications that we're focused on, also our design activity in terms of how we're doing with new products. And then I'll give you an update on the organizational structure in terms of how we're changing that.

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