Welcome back. I'm Joe Moore. Very happy to have with us today, the management team from ON Semiconductor, Hassane El-Khoury, CEO, and Thad Trent, CFO. Welcome, guys. Thank you. Thanks, Joe. I wonder if you could talk to, you know, the current environment. You guys saw a fairly sudden weakness, kind of evolve over the course of the last quarter or so. Can you just kind of talk to that and where you think we are now from a visibility perspective overall? Sure. Let me, let me put it, you know, the softness that we, we talked about related to the, a little bit on the automotive with the inventory digestion, specifically starting in the Tier 1, European Tier 1. That's not to say it was specifically limited to, the OEMs in Europe, but thinking about the, the European Tier Ones, it's more of a general broader view of, of, of auto, and that's related to demand. When demand gets a little bit soft, whatever level of inventory you have will seem elevated in, in number of days. You know, the denominator changes. All other markets performed exactly as we expected. Not that they are better than we expected or they're doing any good, but, for example, you didn't hear us talk a lot of commentary about industrial, although some of our peers have called out on specifically industrial, because we saw industrial coming four quarters ago. Mm-hmm. We started adjusting for it, so industrial came exactly where we thought it would come 90 days ago or 180 days ago. So all markets, I would say, are stable, with the small pause in automotive that we're looking at, as far as, you know, the main question is: How long? Yeah. Okay, and, I mean, since I've known you guys, you've talked about not just improving margins cyclically, but understanding the cycles and under- and trying to drive margins up, you know, through cycles and, and prepare yourself for these types of events. You know, how do you feel about that now? How do you, you know, look at this environment? Do you see any indications of pricing pressure or any of those things that are different than what you might have thought? Navigating through kind of this market environment is actually exactly what we've been working on for the last two and a half years. Mm-hmm. You know, we've made a lot of structural changes in our business. We're tackling the business with the use of our LTSAs, which give us that predictability on both volume and pricing. Although we can negotiate on volume, given the demand dynamic, but it's not a conversation about pricing. So that gives us a predictable and a stable pricing environment as far as the majority of our products that are under LTSAs. From a margin perspective, it's not a pricing discussion, as far as we look at it. It's a structural changes discussion. So over the last few years, we've divested four fabs, and here we are today talking about taking utilization down to the high 60s. Mm-hmm .. with maintaining a margin floor in the mid-40s. Now, let me just put that in relative to what the company used to be just three years ago. In 2019, the utilization was in the mid-60s, and margins were in the low 30s. Mm-hmm. So we're there on utilization, but the margins are called 15% or 1,500 basis points higher. That's a structural change that only happens when you make changes fundamental in the company. Those are the changes we've been doing for the last two years, divesting four fabs, moving these products to existing fabs, improving our manufacturing footprint, rationalizing the portfolio, walking away from a lot of the commodity business that is subject to the pricing volatility in a softer environment. All of these things we've done over the last two years are what sets us up now to be able to navigate through the softness while maintaining the predictability of our finances. You mentioned the sort of exiting of the businesses. You guys have given very clear and transparent focus on getting out of some of the stuff that has more of a margin swing. Can you give us context of, you know, where you are with that now? It sounded like from the most recent earnings call, that you're less focused now on y ou know, you sort of feel, like, pretty good about the quality of the existing revenue stream. Can you talk to that? Yeah. Look, to date, we've exited about $450 million of that business. Historically, this was very low margin, you know, sub 15% and some negative in some cases. So how do you exit? You exit by raising the price such that when competition comes in and lowers the price, it disappears. We now have this business that's left, and we've undercalled this for a couple of years here. Yeah. We thought we'd lose this much faster. We always said, the faster we could lose it, the better we'd be. But the fact is, now what's left is kind of in that mid-40% margin range, so it's not bad, as long as we don't need that capacity for something else. So we think there's about another $125 to exit here in Q4, this quarter, and after that, we'll be opportunistic. So if it, if it stays at that margin, we'll keep it as long as we don't need the capacity, and we'll play in those markets. So in a lot of cases, these are SKUs that are really high-value SKUs for auto and industrial, Mm-hmm but low value for consumer. If that consumer wants to buy at a high, high value and a high price, we'll sell it all day long, opportunistically. Yeah. But if not, we'll walk away from it. So, you know, at the end of this year, we're gonna stop talking about these exits. Yeah. Okay. And I guess, you know, the other part of the structural shift that you've talked about is the long-term agreements, and I think this time last year, actually, you guys really broke down this is the benefit that this gives us during a time of potential deceleration in terms of giving you visibility from customers when they have to make changes. You know, where are you with that, and how did, you know, how did the last quarter, you know, how did your LTAs kind of help you navigate that? Yeah, I mean, I'll go back to, you know, the comment I made on, on industrial. When we talked about the industrial softness, I believe it was at the end of 2022 even, we talked about, you know, pockets of softness in the industrial closer to the consumer. That was because customers were giving us a heads-up of, "Hey, we see the demand softening. We need to start talking about what to do to manage through it." So we called it externally. I remember a lot of our peers vehemently denied any softness in, in industrial. Look where we are today, a year later. We believe exactly what you said, the LTSAs, if there's one thing they do very well, is, given the enforceability or the legal enforceability of the LTSAs, customers are very proactive in picking up the phone and saying, "We know what we need to buy and order. We don't see the demand." That's a conversation we need to have because we don't also want to have inventory sitting at the customer if demand is not there. That always starts the conversation. That phone call is what we need, versus depending on a backlog that may, you know, disappear 30 or 60 days before you have to ship it. That's the key for us. That's what the LTSAs do. That's what we started seeing in the automotive market. Great, and then before I get into some of the markets a little bit, just one other big-picture question. You know, the question I get a lot is, China's investment in trailing-edge kind of analog capacity, what do you see coming from that, if anything? Do you see the ability of enablement of Chinese competition, if not globally, for your customers in China? Yes, there's a lot of investments, but it's no different than investments that, you know, I look at for European companies or North American companies. You don't compete on capacity. Mm-hmm. You compete on product and product performance. Just like we compete against European and win on product performance or compete against U.S. companies and win on product performance, the same thing applies with competing in, in China for product performance. So having capacity, you still have to have very good products to build in that capacity in order for it to become a threat. So it's not just the capacity that's a threat, it's what products that go in there, and those products are not yet on par with what we need to do. Now, if you say, you know, oh, for, for local, if the customer doesn't value the product, and the product can be just good enough, then that's not a business we're going to be engaged in anyway. Mm-hmm. It's the same commentary that Thad made about the business we're trying to exit, is it's valuable product. If the customer doesn't see value on it because of a certain market segment, we're not gonna engage in this. Because as soon as it becomes a pricing, i.e., tied to volume and so on, that's not the business we wanna be in, 'cause the value that we provide has to be tied to the product versus a.. think about it as a cost-plus model. Otherwise, the margin expansion is not gonna be where it is. And fundamentally, for us as a company, it's value-based driven versus a cost-based driven. your interaction with Chinese OEMs reinforces that? Yes. You know, I'll give you the example of silicon carbide- Yeah. You know, because there's a lot of conversations also: "Oh, well, you know, there's silicon carbide in China. What does that do for you?" Same thing I would say. You know, last quarter, we talked about NIO, another marquee name in the China EV market, extending the LTSA when they decided to go to 1,200 volts or change to 800-volt battery, which is the brand-new battery rails for EVs, requires 1,200-volt devices from us. That, they came back after evaluating others, I'm sure some of them potentially could be local, they came back and extended the LTSA with us. That's proof that, one, they care about performance and value, and two, we have the best performance and value that they look for, and therefore, they extended the LTSA. So we're still seeing that traction happening in China. Great. So maybe shifting to silicon carbide, you know, you guys, the focus is probably on the downward revision this last quarter, but you've still emerged 2023 as a big winner. The revenue levels are pretty impressive. Can you talk to, you know, how you did that? As, you know, the strength that you saw in silicon IGBT markets and things like that, that you seemed to extend that relatively easily into the silicon carbide domain. Can you talk about the success you've seen so far? Yeah. There's a few things that happened during 2023 to get us to deliver the results. And the results, if I put it in a multiple perspective, is a 4x increase in revenue from 2022, which is a stellar increase in a single year on a brand-new technology. So what happened there? I've always said, number one is technology. We win because of our product performance. That's it. No customer is going to design us in because we have some other mousetrap. We have to have the best product, and when I talk about best product, it's best devices, which is, you know, the silicon carbide die, and best packaging. You know, for silicon carbide, if you can't get the heat out of the power device, you're just not gonna get the performance. You might as well just use silicon. So both of those, you have to be really, really good at in order for the customer to be able to monetize that value on the vehicle side. And monetizing it is using less battery, which is a cost, much better cost benefit by reducing the battery volume. That's what it takes to win. We have that. We will continue to have that. Our R&D investment guarantee that we're always gonna have that. So that's one track. The other side of it is we expanded our substrate manufacturing internally. You know, we've acquired GTAT, a company that does substrates, and we said we were going to scale GTAT 5x in a one-year period. I can get all the headlines, you probably know all of them, of how this cannot happen. Well, we did. We performed very well. We also said we were gonna exit this year with majority of our substrates sourced internally. Our performance has actually allowed us to pull that a quarter. We exited Q3 at, a majority substrates internal. So all of these performance metrics being ahead of our plan is what allowed us to deliver a 4x increase in, revenue in EVs and capture the most share gains as that, technology emerges. Great. To the extent that You know, I guess, where do you go from here with the internal substrates? Do you continue? I know there's quite a bit more margin when you build the substrate. Will you continue to source from Wolfspeed, will you continue to source from China for some of the other pieces, or do you move to entirely internal at some point? So our plan has always been, we're not gonna be 100% internal. Yeah. You know, you can think about it 70%-80% internal, because you want that flexibility to be coming from the outside. You know, if there's any lumpiness, you don't wanna plan for 100%. If there's lumpiness, by definition, you have underloading. So that's a good, comfortable place we are in. As far as who do we source from the outside, look, it's a broader range, and we qualify newcomers. The benefit for us is a few things. One, we are able to benchmark any newcomer or any new supplier of substrates against our own performance, meaning we run it all the way through fab, and we can measure the performance at every step of the way and compare it to the benchmark, which is us. So that gives us a very good objective way or data-driven way to evaluate, is it good quality or not good quality? That's one. Number two is the ability to scale. We can evaluate if somebody's able to scale because we've had to scale substrate businesses. We know the challenges and the opportunities, so we're able to really understand, before we engage, are they able to scale? It's very easy for somebody to give you a handpicked, very good wafer. Can you make it in mass production and get the yield? So that's the other thing we can do. And most importantly is, can they get it at a lower cost than we can? Today, the answer is no. Mm. Is that gonna change in the future? Maybe. As it changes, that's great, that's an opportunity for us, from a margin expansion perspective. We have a great cost structure today. It delivers the best financial performance of a silicon carbide business in the industry, you know, delivering over 40% gross margin on a fully loaded basis. If we are able to source substrates cheaper, great, the margin gets better. Great. And so then, I guess if you could address the shortfall this last quarter, you had originally targeted $1 billion. You're gonna be more like $800 million, but you're still growing sequentially. You know, can you just talk to what happened there, particularly in the context of what we've heard since is STMicroelectronics didn't really change their targets for the year. Yeah. So, at a bottom line, it was related to a single customer, single OEM. So it's not a broader view. We are the market share gainer in that account. So when the demand doesn't materialize, we get a bigger impact than what I would say, when the incumbent. So from a perspective, that was. We focus on one OEM. It's not a market driven, it's not a performance driven. Our performance with that OEM will continue to grow Q4 over Q3 and will continue to grow in 2024. So it was purely an end demand related to, you know, everything that specific OEMs will disclose themselves. Mm-hmm. Now, you know, we've always said that business is supply constrained. So what we're able to do, instead of taking that $200 million, just pushing, kicking the can down the road or pushing it to 2024, we reallocated that volume to other customers that are in need of more volume, that we weren't really satisfying their demand 100%. So that gives you the strength in the business. Of course, we couldn't do that within a quarter- Mm. Okay. Because it takes time. There's latency. Think about it this way, you know, we walk into an account and say, "We can get you 10% more silicon carbide." They say, "Great, we'll take it. I need to go source 10% more of everything else." So that's the latency we're talking about. We're able to do that over the course of 2024. That's why our, our outlook for 2024 remains unchanged, even with that, one OEM. Great. Can you give us some context on the EV market more generally? I mean, our automotive team is quite vocal that some of the U.S. EV programs are too expensive and need to be scrapped from the U.S. OEMs. Wouldn't ask you to comment on that piece of it, but just generally, you know, do you continue to have the same enthusiasm for EVs that you've had? 100%. Whether it's 2024, 2023, it's irrelevant. I think we can all agree on one thing: EVs will continue to grow. EVs will continue to become a higher percent of total vehicle manufactured. What that means is, even in a flat SAAR or flat vehicle made, percent of EVs are gonna be higher year-over-year. Some years, maybe not as high as people anticipate, but it's still a growth year-over-year. That's what keeps us excited. That's what we talk about when we talk about a mega trend happening in electrification. That is not going to change. That is also driving a lot of the industrial or renewable energy, whether it's energy storage and energy delivery, you know, chargers or energy storage systems in tandem with that. Mm-hmm. So that, what we call the sustainable ecosystem, you know, in our world, we look at it as it's a hand-to-hand, and that's growing. You know, we talked about it last quarter, 70% year-over-year growth. That's within an industrial backdrop of softness in industrial. Mm. You have the segment that's growing at 70% year-over-year. That is tremendous growth. That is a mega trend. That will continue, and that's what gets us excited and maintain the focus on electrification in general. Great. So I think to the extent that you've seen these issues in automotive, you know, where's your visibility now? Do you I'm not asking for forecast. Feel free to give us a forecast if you want. But, you know, are you seeing visibility that's, you know, still diminished relative to normal? And when do you see that kind of returning to a more stronger path? Yeah, from an overall perspective, we have visibility. You know, the LTSAs we mentioned earlier give us visibility. Now, is that visibility, you know, going to change? You know, we said that if a customer says, "Hey, demand is getting lower," we're going to engage with customers. This not to our benefit or the customer's benefit to just say, "Well, meet the number. Here's the inventory. Put it on your shelf. We don't care." That's not the business we're in. We wanna be tied to demand. Where we are today, we do have that visibility of where it is going to be. The way we're running the company and the way we're managing, back to the structural changes we're making in the company, you're not going to hear me talk about how 2024 or the second half of 2024 is gonna be a recovery. That's not gonna be where my head is at. We're taking utilization down. We're managing inventory in the channel at the rate that we have, which is historical low. We are maintaining a tight management on inventory on our own balance sheet, so from a cash flow perspective, because if there isn't a recovery, we're gonna get through 2024 stronger than we've ever done and sets us up for a much better 2025. If we're wrong, everything we talked about becomes tailwind. Mm. Utilization goes up, gross margin goes up, revenue goes up. Everything is actually a positive. We'd rather be wrong on that side rather than plan for a recovery that doesn't happen, and now you're stuck with inventory on the balance sheet, and you still have to take utilization down. Look what happened to a lot of our peers that were talking about a second half 2023 recovery. There's over 200+ days of inventory. Yeah And they're still having to take utilization down. We don't wanna be in that position. We'd rather be in a cautious outlook and take advantage of the uptick as a full-on positive performance. Yeah. Okay, that makes a lot of sense. I guess in the context of the shortages that we saw, you know, 2021, 2022, historically, when there's a shortage like that, the customers do want to build inventory, to buffer themselves from that, but you also have given them pretty good visibility through the LTSAs. That's right And things like that. Has that mitigated their desire to build, and do you anticipate that there will be, maybe going forward sustainably, a higher level of inventory? Look, there are with customers? Yeah, there are. I'm sure there are pockets of small inventory here and there just because, you know, we'll be shipping something, they can't get something else from another supplier. So that I don't call as an inventory build. Yeah. You know, the performance against the LTSA has been stellar, where even today, in a softer market, we have customers coming to us, adding more products on the LTSA. So it went from an allocation tool for them to make sure they get what they want, to a management tool, where now we have hundreds of products, whether they were constrained or not on the LTSA. 'Cause that gives the customer visibility that they don't have to manage that themselves by, you know, quote, unquote, "hoarding." Now, moving forward, there are engagement that we're having with the customer on BCP or business continuity planning, where we openly talk with the customer about where we need to stage inventory for us and them, and both parties have visibility on what it is. 'Cause what they wanna be able to do is maybe pull much quicker for a quick ramp from a buffer that we have in between. We see it, we replenish it, versus we ship blindly, some goes on the shelf, some goes to demand, and nobody knows where it is. Those are very constructive dialogue we're having with the customer 'cause none of us wanna deal with disruption. It does- By the way, it doesn't have to be disruption like the COVID. Mm-hmm But disruption like a flood. Yeah Somewhere in a factory. It could be a power disruption somewhere in their factory. You know, all of these are disruptions that we have to plan on business continuity and supply resiliency. That's the dialogue we're having today, and LTSAs are definitely fundamental to that because they give our customers a tool they can use to manage their demand with us. You know, historically, the industry hasn't been great at seeing that, and I guess you're making the case that these things you put in place give you kind of an unprecedented ability to see into that. It gives me, you know, it gives us unprecedented ability to manage Yeah Much better than Yeah it's been. Yeah. It doesn't give me a crystal ball. Right. I understand. So, I just want. It's not. No, but the sort of blindly customer That's right building inventory. So we get a much better view Yeah around the corner. You know, think about it as that concave mirror on a sharp left. Mm-hmm. It doesn't give you the full visibility, but it gives us better visibility than what it is in order to plan better. Think about, again, the industrial commentary I made. It would have been a very different conversation if we had to take down utilization 2x the rate in the second half of 2023 versus starting it at the beginning of 2023 and have four quarters to manage through it. That's what the LTSAs give us. That's what I advocate with, and that's what the benefit is for our customers. And I'll open up for questions, but just one more. Like, you've talked about industrial. You know, you guys did see that well before other people were talking about weakness in industrial. Where are you now in terms of resolving that? Do you feel like you've worked your way through the worst of it in the industrial side? Yes. We are, I would say, we're in equilibrium on the industrial side. You didn't hear me talk anything about industrial in the fourth quarter. Mm-hmm. People ask me, "Oh, is industrial much better?" I said, "No, it just didn't get worse." It's exactly where we thought it would be 90 days ago or 180 days ago. So industrial, I think, is stable. Not recovery stable, but it's stable as far as performance against what our expectations are. So we believe we're in equilibrium, so it's not a, call it, it's not an impact on our outlook. Which makes, you know, the management through it, if it stays that way, we're in a very good spot. You don't see us taking more action to manage through that. And if it starts picking up, we're gonna see that signal pick up much quicker. Great. Let me stop there and see if there's questions from the audience. [Anyone]? Any specific trends in industrials you've seen? Because you say it was very stable, but maybe there was some inventory correction here and there, like in solar maybe, or you haven't seen anything? We haven't seen anything in solar specifically, because the issue in industrial solar is on the residential side. Mm-hmm. We don't do any in residential solar. We have seen a positive trend. So although I talk about industrial in general as being kinda soft and going sideways, within industrial, there are two segments for us that are showing growth: the renewable energy. What for us, it's energy storage and distribution. That grew 70% year-over-year, and medical, specifically on continuous glucose monitor and hearing aid. And the trend for the medical strength is both those devices turn into over-the-counter, which are way more accessible and much broader deployed, and we're seeing that strength translate in demand. So those are the two that I can call out within industrial that are much stronger than the rest of it. But yeah, there's no residential impact for us. That's why we're not seeing the negative side. Thank you for that. So maybe just I'll close with, you know, one of the more impressive aspects you started with is, you know, the mid-40s gross margin on utilizations at this level. Can you talk about your confidence in the ability to sustain that if we remain in a weak environment, and then maybe talk to where those gross margins would go if you get utilizations back up to where you want to be? Yeah, look, in the short term, gross margin is all about utilization. We've talked about bringing utilization down into the high 60s. So worst case scenario, we get to mid-60s, and we hold that mid-40% gross margin floor. Really confident there, pricing stable. The manufacturing footprint as we went through Fab Liter has worked. We can tell it's working. Now, as you think about going forward, and you think about the opportunity, as the utilization improves, obviously that's a tailwind to gross margin. But the bigger drivers are, we have the headwind of East Fishkill that we acquired earlier this year. That's 250 basis points. We'll have that back under control by the end of 2024. You've got silicon carbide that will be at the corporate average here in Q4, and then be at that average through 2024. It'll be at the average, at the average in Q4, and then at that level in 2024, and then 2025 becomes another tailwind. Then additionally, the four fabs that we divested, that Hassane mentioned, that's $160 million of fixed costs that comes off after we fully exit. Mm. So we'll start to see a little bit of that in 2024, and most of it happens in 2025 and a little bit out in 2026. So you've got these really nice tailwinds behind us as the market turns. Even if the market doesn't turn, we've got, you know, East Fishkill rolling off and the fab divestiture is starting to monetize. So if you start doing the math on that, that gets us, you know, starts getting us really close to that 53% target. Mm. Right? So I think we've really positioned ourselves well to come out of this downturn, softness, whatever you wanna call it, in a really favorable way, just given the proactive nature of the structural changes we made. Great. Well, thank you very much for your time. Appreciate it. Thanks, Joe. Thank you. Stanley. And with me, I have the pleasure of hosting Vincent Pilette, CEO of Gen Digital. Before I begin, a brief programming note: For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. With that, Vincent, thank you so much for joining us. Thanks for inviting me. Great. So I'm really excited to have this conversation-