ON Semiconductor Corporation (ON) Deutsche Bank 2024 Technology Conference (Transcript)

Market Recovery and Demand Outlook - The company maintains an L-shaped recovery outlook, emphasizing the need for steady end-demand recovery rather than short-term backlog improvements [3] - Stabilization in automotive markets is observed, with some areas showing flat to positive growth, while energy infrastructure has seen strong recovery [5] - Industrial markets remain soft, with structural changes made in previous years contributing to current results [5] Inventory Management and Customer Behavior - The company has been aggressive in inventory management, starting earlier than peers, but customer behavior varies widely, with some taking inventory down to low single-digit weeks [7] - Long-term agreements (LTSAs) provide visibility into demand and pricing, with some customers now seeking LTSAs to secure future supply [11][16] Pricing Strategy and Product Value - The company does not follow a cost-plus pricing model, focusing instead on value-based pricing, with recent pricing actions in 2022 setting a baseline [9] - New product generations offer cost efficiencies and higher margins, with customers benefiting from conversion to newer, more efficient products [10] Silicon Carbide and EV Market Dynamics - Silicon carbide penetration in EVs is at 6%, with significant growth potential as most new designs are now silicon carbide-based [18][21] - The company sees lumpy growth in EV adoption, driven by factors like charging infrastructure and battery technology advancements [19] - Hybrid vehicles, particularly range extenders, offer significant content opportunities, with China leading in this segment [25] Commoditization and Substrate Supply - The company does not view silicon carbide as a commodity, emphasizing the importance of device and package technology over substrate availability [29] - Internal substrate production provides flexibility, allowing the company to navigate geopolitical risks and supply chain challenges [31] Vertical Integration and Strategic Wins - The company's vertical integration, from substrate to system-level solutions, has been key to winning major contracts like VW, highlighting its capability to deliver high-value products [32][33] Gross Margin and Structural Improvements - The company has set a new gross margin target of 53%, driven by utilization improvements, the roll-off of dilutive contracts, and the monetization of divested fabs [39][41] - New products are designed to meet or exceed corporate average margins, contributing to favorable mix and long-term margin expansion [41]