安森美 (ON) 2003 Q3 法說會逐字稿

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  • Operator

  • Hello, and welcome to the ON Semiconductor third quarter 2003 earnings teleconference.

  • At the request of ON Semiconductor, this conference is being recorded for instant replay purposes.

  • At this time, I would like to turn the conference over to Mr. Scott Sullinger, Director of Investor Relations.

  • Scott Sullinger - Director of Investor Relations

  • Thank you, Jenna.

  • Good afternoon and thanks for joining ON Semiconductor's third quarter 2003 conference call.

  • I am joined today by Keith Jackson our CEO and Donald Colvin our CFO.

  • This call is being simultaneously Web cast on the Investor Relations section of our Web site at www.onsemi.com, and the Web cast will be available on our Web site for 30 days.

  • In addition, our earnings release for the third quarter of 2003 is available on the Investor Relations section of our Web site.

  • Now, I would like to highlight our upcoming event calendar.

  • We will be presenting at the Morgan Stanley Small Cap conference on November 18.

  • The Lehman Brothers Semiconductor and Computer Systems conference on November 20, and the needham and company growth conference on January 8.

  • During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company.

  • The words estimate, intend, expect, plan, 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 and other filings with the SEC.

  • The company assumes no obligation to update forward-looking statements to reflect actual results or change assumptions or other factors.

  • Now, let's hear from our CFO, Donald Colvin, who will provide an overview of the third quarter.

  • Donald?

  • Donald Colvin - Chief Financial Officer

  • Thank you, Scott.

  • And thanks to everyone for is joining us today.

  • Our third quarter revenues were $265 million, an increase of 3% from the second quarter of 2003.

  • During the third quarter, the company reported a net loss of $16 million or 10 cents per share.

  • This included a net gain of $3.3 million or 2 cents per share from restructuring and asset impairment and other.

  • The $2.9 million or 2 cent per share loss on debt prepayment resulting from a Q3 refinancing.

  • During the second quarter of 2003, the company reported a net loss of $58 million or 34 cents per share, that included a net charge of $35 million, of 20 cents per share, of restructuring asset impairment and others.

  • On a mix adjusted basis, selling prices in the third quarter of 2003 were down approximately 3 1/2% from the second quarter of 2003.

  • Included in the 3.5% was approximately .5% due to adverse exchange rate movements.

  • This decline in obvious selling prices combined with a change in sales mix resulted in a slight decline in the company's third quarter 2003 gross margin to 28%.

  • EBITDA for the third quarter of 2003 was $51 million, and included the net gain of $3.3 million from restructuring, asset impairment and other, and the $2.9 million was on debt prepayment.

  • A full reconciliation of this non-GAAP financial measure to the company's net loss and net cash provided by operating activities prepared in accordance with U.S.

  • GAAP is included in our earnings release and related 8-K filed with the SEC today.

  • The net gain of $3.3 million in restructuring asset impairment and other for the third quarter included a $4.6 million gain on the sale of the company's assembly and test facility in Guadalajara, Mexico, offset by approximately $1.3 million of net restructuring charges.

  • During the third quarter, ON Semiconductor completed the sale of approximately 37 million shares of common stock, and used the net proceeds to reduce bank debt.

  • As a result of this equity offering, ON Semiconductor's bank debt under its senior secured bank facility has been reduced from $521 million to $369 million.

  • An important first step to deliver the balance sheet.

  • In addition to this financing, we used the net proceeds of an additional term loan to refinance approximately $100 million of term loans under our senior secured facility.

  • As a result of this additional term loan, the company now has no principal payments on term loans under a senior secured bank facility prior to the 4th of August, 2006.

  • During the quarter, cash and cash equivalents increased by $2 million from the end of the second quarter.

  • To $184 million.

  • At the end of the quarter, DSOs, deals of sales outstanding, were 52.

  • Inventory increased slightly from our -- decreased, sorry, slightly from our last quarter to $172 million.

  • Our 83 days on a cost basis.

  • Capital expenditures during the third quarter were $17 million, compared with $18 in the previous quarter.

  • Distributor weeks of inventory went up approximately 13 weeks and flat over the prior quarter.

  • I would now like to turn it over to Keith Jackson, our CEO, for additional comments on the business environment.

  • Keith?

  • Keith Jackson - Chief Executive Officer

  • Thank you, Don.

  • A breakdown of our third quarter revenues, of $265 million by end market showed some shifts from the previous quarter.

  • We saw strong growth in executing and wireless, moving the percentage of sales to 26% for computing, from 23% in the previous quarter, and moving sales for wireless to 14% from 10% the previous quarter.

  • There were modest changes in the consumer and networking which moved the percentages to 17% of sales for consumer, and 7% for networking.

  • And we saw a decline in the automotive sector to 21% of sales from 25% the previous quarter.

  • During the quarter, our sales to Motorola increased $22 million or approximately 8% of revenues, from $15 million or approximately 6% of revenues in the second quarter.

  • On a geographic basis, our contribution this quarter from sales in Asia, excluding Japan, was up dramatically, while North America, Europe, and Japan represented a smaller percentage of sales.

  • Specifically, Asia now accounts for 50% of the sales, America, 28%.

  • Europe, 17%, and Japan 5% of our total sales.

  • Our channel breakout remains about the same as for the previous quarter.

  • Looking across the channels, distribution accounted for 48% of revenue, direct sales to OEMs accounted for 41%, and the EMS channel accounted for 11%.

  • Now let's review some of our new product opportunities.

  • We strengthened our presence in the computing market in the third quarter with the introduction of the industry's first integrated controller designed to deliver the demanding power management requirements for DVR 1, 2, and 3 memories in next generation desktop executing platforms.

  • This family of devices expands our portfolio of products that deliver power system solutions for a growing number of functions inside the rapidly-evolving desktop executing environment.

  • By introducing these power management device, just as the industry unveils its next generation mother boards, we have providing a clear indication of our commitment and capability to deliver advanced products that our customers need to drive aggressive development schedules.

  • We are already providing a power management solution that lowers the cost and reduces the complexity of the mother board designs for 64-bit processors that we now see in advanced servers and work stations.

  • In the portable and wireless arena, we introduced the industry's first analog device to feature an overvoltage tolerant switch that enables multiple input, output and USB connections to be shared on the same connector pins.

  • We introduced a dual mode volage regulator that delivers 92% power efficiency at heavy current loads and reduces noise at light loads.

  • We have integrated moss fess into the device providing engineers with an effective solution for simplifying circuit board design for systems that drive the power management in today's advanced portable and wireless products.

  • I think we have all seen the exciting array of smart phones and the integrated phone game consoles that recently hit the market and ON Semiconductor is contributing to the increased functionality that you see in many of these innovative devices.

  • Our strength in the delivery of innovative power management devices was highlighted during the third quarter when electronics product China named our NCP 1560 as one of the year's top 10 DCBC products in China.

  • This [INAUDIBLE] is designed for tell come power converters, synchronous, bert, high toll vag power module us and 42 volt automotive systems.

  • Not only are we introducing great products, we are delivering them with world class service, and our customers are recognizing our efforts.

  • During the third quarter, Celestica presented us with its partner in performance award for the fourth consecutive year and continental Temic, a major automotive supplier in Europe named ON Semiconductor supplier of the year for 2002 in the active electronics category.

  • As part of our effort to increase margins and grow revenues would he have placed considerable emphasis on intellectual property and innovation.

  • In the third quarter we filed for 16 patents and we were awarded 9.

  • This bring brings our total number of patents to 651 with 465 granted, and 186 pending.

  • We have added new talent to our management ranks with the hiring of Dr. Frank Zang as President of our China operations.

  • In this capacity, Frank will work to develop the synergies among our partner, customers, employees, and government officials to help us grow our business in China.

  • Now, I would like to turn it back over to Donald for our forward-looking guidance.

  • Donald?

  • Donald Colvin - Chief Financial Officer

  • Thank you, Keith.

  • Regarding fourth quarter outlook, we anticipate that total revenues will grow by 2 to 3% compared to the third quarter.

  • Backlog levels at the beginning of the fourth quarter of 2003 were up from backlog levels at the beginning of the prior quarter of 2003.

  • And represented between 80 and 85% of our latest revenue guidance.

  • Our third quarter on October month date, book-to-bill ratios were about one and we were assuming that [INAUDIBLE] levels in the fourth quarter will be more than a third -- in the third quarter, in line with historical items.

  • We have noted historically that business is slower in the second half of December.

  • We expect that our gross margins will remain roughly flat and with the third quarter.

  • We expect that our research and development expenses should be approximately 6% of total revenues in the fourth quarter.

  • Our sales and marketing expenses should be approximately 6% of revenues in the fourth quarter.

  • And our general and administrative expenses should be approximately 7% of our revenues in the fourth quarter.

  • During the fourth quarter, we also expect a slight reduction in our cash balance primarily due to some [INAUDIBLE] working requirements [INAUDIBLE] in the $5 to $10 million range.

  • In addition, we expect capital expenditures to be $15 to $17 million for the fourth quarter.

  • For depreciation and amortization take $28 million for the fourth quarter.

  • With that, I would like to start the Q-andA session.

  • Operator

  • Thank you.

  • At this time, we will begin our question-and-answer session using our polling feature.

  • If you have a question or a comment, you may press star one on your telephone touch pad.

  • And should you need to cancel, or if your question has already been answered, please press star two.

  • If are you using speaker equipment, you may need to pick up your handset prior to pressing star one.

  • Once again, if you have a question or comment, you may press star one and star two should you need to cancel.

  • One moment while the questions register in the order in which they were received.

  • The first question comes from Tristan Gerra from SoundView.

  • Tristan Gerra

  • Good afternoon.

  • Typically, a lot of the annual contracts with OEMs get renegotiated in the March quarter, some in the December quarter, I was wondering if you could quantify the percentage of your business, if your OEM business, which is dependent on the annual contract, and also, whether this has to do, you know, what type of impact do you think this could have on gross margin similar to what we're seeing in the industry at this time of the year?

  • Donald Colvin - Chief Financial Officer

  • Hi, Tristan.

  • This is Donald.

  • As I think Keith gave in his presentation, OEM business is just over about 40% of our total business.

  • EMSI and distribution make up about 60%.

  • Of the OEM business, approximately at 50% of it is renegotiated, in the fourth quarter.

  • We are in the process of renegotiating all these contracts currently.

  • Tristan Gerra

  • Okay.

  • And I just have a follow-up.

  • What type of opportunities do you see from Fairchild and International Rectifier , discontinuing some of their discrete lines of business going forward?

  • Keith Jackson - Chief Executive Officer

  • Certainly, we have a very broad portfolio and we will be looking at the opportunities for increased sales.

  • At this point, it is too early to tell the specific impacts.

  • Tristan Gerra

  • Great.

  • Thank you.

  • Operator

  • Thank you.

  • And our next question comes from Mark Edelstone from Morgan Stanley.

  • Mark Edelstone

  • Good afternoon, guys.

  • A couple of questions if I could.

  • The first one is, if you look at the backlog that you have now, what is the implication there for ASP erosion in Q4?

  • Donald Colvin - Chief Financial Officer

  • We reported a decline in the ASP erosion in the third quarter.

  • It was 3.5 with a negative exchange rate component so 3% with exchange rate component.

  • Stripped out.

  • We are currently in the negotiation phase with contracts and is a clear intention to walk away from pure margin business and that is a policy that we are implementing now.

  • This negotiation phase is still not complete.

  • Therefore, it is difficult to calibrate exactly what we see.

  • But I think the best estimate we have is a continued decline in ASP erosion for a total combined erosion in the 1 to 2% range for the fourth quarter.

  • Looking out to the first quarter, again, it is early yet, but remember, this year, the first quarter was a major disappointment with us with an exchange adjusted ASP erosion of 6%.

  • I see no reason today to anticipate that there will be anything like that type of erosion, and we can anticipate it will be no worst than the fourth quarter.

  • So clearly, the trend is in the good direction.

  • And we are diligently working to pare our product portfolio and take advantage of the strong order increase we are seeing, extension of weak times, to make sure that we optimize our product mix on higher margin products.

  • Mark Edelstone

  • Great, Donald.

  • Thanks on that one.

  • I guess but if you just look at your backlog that you have entering Q4 versus what the backlog looked like on entering Q3, does that support that 1 to 2% decline in ASPs?

  • Donald Colvin - Chief Financial Officer

  • The backlog number is probably showing something like a 1% as of today.

  • And there are certain contracts that are negotiated with effective dates during the quarter.

  • So the backlog is not a fixed -- a price that we are going to invoice in the fourth quarter.

  • But that as supports the range I gave you, Mark.

  • Mark Edelstone

  • Okay.

  • Great, understood.

  • I just had a follow-up on gross margins.

  • With the fourth quarter gross margins being flat, I guess can you just help to reconcile that?

  • I know there is obviously a lot of things that go into that mix, and so on.

  • But would the ASP pressure continuing to be mitigated here, what is causing the gross margins to be flat in the fourth quarter?

  • And then if you could also kind of give us a sense into 2004, what kind of gross margin leverage do you have based on just the prior restructuring efforts that have been done?

  • Or is it simply just going to be a mix in ASP-related question for 2004?

  • Donald Colvin - Chief Financial Officer

  • That's an excellent question.

  • Remember, I did say that we would see something in the 1 to 2% of ASP erosion in the fourth quarter.

  • So our continued cost reductions will mitigate that to give us a roughly flat gross margin.

  • Looking at a rather lower gross margin this quarter than we would have anticipated, what has happened, Mark, and Keith explained the mix change in our end markets, is that we did have a mix moving against us.

  • To be specific, we had a kind of war percentage of our much higher margin high frequency business and also a lower percentage of some of our higher margin standard components.

  • Replaced by a higher percentage of our moss spent business.

  • The [INAUDIBLE] spent business has enjoyed very strong order entries and a strong backlog build.

  • Stronger than anticipated.

  • And we are still working to bring the cost model to an optimized position.

  • We estimate that that will take another 1 to 2 quarters, and by the second quarter of next year, we will be back to our normal margin on that business.

  • Therefore, we don't see this as a permanent situation.

  • We have the fix in hand.

  • And see our margins growing starting clearly in the beginning of next year.

  • So we believe that we do have additional cost reductions that will allow margin to grow.

  • We also believe that we will have the benefits of a stronger mix of higher margin products that will also allow our margins to grow.

  • And without counting on any significant capture of pricing power, which could also take place next year, we believe we can still grow our gross margins in the low 30%, throughout next year.

  • Mark Edelstone

  • Great.

  • Thanks for the complete answer.

  • Operator

  • Thank you.

  • And our next question comes from Romit Shah from Lehman Brothers.

  • Romit Shah

  • Great, thank you.

  • Wondering if you guys -- do you guys have in mine, you know, when you might hit break-even, at what point next year?

  • I mean is it something that could be the back half of 2004?

  • Or is it just too early to tell?

  • Donald Colvin - Chief Financial Officer

  • I was specific in my reply to Mark on gross margin.

  • I think it is very difficult to recite what will be a good number for revenue growth.

  • As we still have to capture some pricing power.

  • For the time being, our internal projections are -- with a modest growth in their high single digits, in the 8-10%.

  • Although many external people see that our business can grow higher.

  • Assuming 8-10% top line growth next year, and the positive impact of some cost reduction in our power moss area and the improved mix of products, we believe that we can reach break-even in something just under between $290 and $300 million of revenue in the middle of next year.

  • Romit Shah

  • Okay.

  • Great.

  • And then maybe a question for Keith.

  • You know, with the renewed focus on new product development, do you guys see your mix of sales changing by an end market, you know, drastically, in 2004?

  • Or you know, overall, should we assume that the mix going forward should be roughly the same?

  • Keith Jackson - Chief Executive Officer

  • Well, I think there will always be some minor shifts in mix.

  • I would not be expecting significant shifts.

  • The major markets that we participate in today all have significant new product activity.

  • And so we would expect both the margins within those markets, and those markets to grow accordingly.

  • So the simple answer is I wouldn't expect dramatic shifts unless there is some dramatic change of course in the overall economic conditions, but steady improvement both within the sector, and steady growth in all the sectors.

  • Romit Shah

  • Okay.

  • And then just final questions, could I just get the utilization in turns as a percentage of revenue for Q3?

  • Donald Colvin - Chief Financial Officer

  • The overall weighted average capacity utilization of our internal manufacturing facility was approximately 85% at the end of the third quarter.

  • And I think we stated our in this quarter was approximately 25% of our revenue.

  • Romit Shah

  • Thank you.

  • Operator

  • Thank you.

  • Once again, that's star one if you have a question or comment.

  • And star two should you need to cancel.

  • And our next question comes from Eric Rothdeutsch from Friedman, Billings.

  • Eric Rothdeutsch

  • Thank you.

  • Keith, a question for you, in terms of your end market growth expectations, for Q4, how do you see that trending by the different segments in accordance with your 1 to 2% revenue growth overall?

  • Keith Jackson - Chief Executive Officer

  • Yeah, we continue to see strength in executing.

  • Probably the strongest sector.

  • Wireless, I think, will hold up substantially well, as it did in Q3.

  • Although certainly the pace of improvement is much less.

  • And the rest of the marketplace performing on a relative basis slightly slower than those two.

  • Eric Rothdeutsch

  • In terms of the automotive market, would you expect that to continue to decline?

  • Or would that be more flattish look to Q3?

  • Keith Jackson - Chief Executive Officer

  • Yeah, our expectation for Q4 is probably a bit flattish but we are expecting to start picking up as we hit the first quarter of next year.

  • Donald Colvin - Chief Financial Officer

  • And if you analyze our business over the last few quarters, you would see -- you can see that the automotive segment, which is our biggest end market segment, has been a major disappointment for us, especially starting in the second quarter.

  • Which was a disappointing quarter.

  • Indications are that that segment will go back to a modest growth trend line starting in the first quarter of next year.

  • And we see that as being a useful return to balance to some of our more cyclical consumer-oriented end marks.

  • So I think it is useful, we have swallowed the bitter pill of this quarter and last quarter when that segment, especially due to our North American exposure, has been very weak.

  • But indications are that it will come back stronger at the beginning of next year, and as a nice kind of cyclical balance to the other passover business.

  • Eric Rothdeutsch

  • Donald, what is going to drive that growth in the automotive sector?

  • Is that new design wins in any particular types of applications?

  • Donald Colvin - Chief Financial Officer

  • I think it is a mixture of the normal things.

  • Some new products are ramping.

  • Some new define wins are ramping.

  • We are also looking at optimizing the mix of our product.

  • As I mentioned.

  • A paring back some war margin business, and then our major customers in the U.S. automotive market are indicating that they are starting to assemble more parts, build more things, and the whole business is starting to do a bit better.

  • They have had -- they have worked off a lot of inventory, in the second half of this year.

  • The build plans will improve.

  • And there is, as you know, a continued growth in the safety features in cars, air bag, et cetera, which benefit us, and also the [INAUDIBLE] segment which also benefits us.

  • Eric Rothdeutsch

  • And you see that more as an overall market pickup as opposed to any particular positioning issues with ON?

  • Donald Colvin - Chief Financial Officer

  • I think it is fair to say that we are well positioned in that market.

  • It is not easy to become an accredited automotive supplier.

  • There is a significant barrier to entry.

  • As you will know, it sometimes can take three years for a new product win to bring you any dollar revenue.

  • So really, I think our position is as much due to our entrenched position in that market as the good relationships we have, and the awards we have won from our customers, helping us as they start to rebuild inventory.

  • Eric Rothdeutsch

  • Thank you very much.

  • Operator

  • Thank you.

  • And our next question comes from Jeff Harlib from Lehman Brothers.

  • Jeff Harlib

  • Good afternoon.

  • Keith, could you talk a little bit about some of the major new product drivers going forward that will maybe improve your margin and improve your mix?

  • And also, do you track new product sales as a percentage of sales any more?

  • And if so, has the trend been there?

  • Keith Jackson - Chief Executive Officer

  • We do track new product sales percent of revenue.

  • Our systems are such that we get these sell-in data, in other words what we sell to our distributors very quickly, it takes a bit longer to get the sell-through.

  • So at this point, I can tell that you in the third quarter, we saw a very nice rise to about the mid-20s as a percentage of sales on the sell-in basis.

  • Versus the lower 20s from previous quarters.

  • So we're seeing a nice trend there.

  • Relative to drivers, it really is a power management story for us and most particularly in the portable domain.

  • So doing much more integrated power management products for the cellular side of the business, the notebook side of the business, and the consumer side.

  • So, you know, basically, it is where there is more value, if you will, to efficiency and battery life.

  • Jeff Harlib

  • Okay.

  • And just looking at the additional cost reduction actions that Don mentioned, what are some of the actions to be implemented over the next six months or or so?

  • And is that something that you can quantify at all?

  • And should we expect meaningful restructuring charges?

  • Donald Colvin - Chief Financial Officer

  • We have no -- we are not planning any major restructuring charges currently on -- either on a cash or noncash basis, Jeff.

  • But we are constantly looking at rationalizing our manufacturing platform.

  • To make it more cost efficient to qualify war cost manufacturing capabilities, to reduce the cost on existing products, and to rationalize the number of sites we have.

  • We believe that in itself will give us a cost savings, a significant cost savings, a well in excess of the tens of millions of dollars for next year.

  • In addition to that, we are reviewing our SG&A, particularly in the I.T. area, where our spend is too high, and we believe that will also give significant cost savings.

  • So the results of these two things, we are still confident that we can take costs out of our model, but on the other hand, cost reduction, one thing that is important is to manage mix and to manage margin.

  • And we are taking a significant initiatives in this area, in line with what we hear our competition is also doing, in a much more receptive end market, with things stretching out in capacity utilization rising, we are paring world margin product and that has a very beneficial impact on our margins and on our costs.

  • At the same time, when we see that the rate of price reduction is coming down, we believe that that will also give a very strong impetus to our business next year.

  • And as Keith mentioned, we are successfully introducing lots of newer products which have higher margin.

  • So this year, a lot of the efforts in our cost reduction and new products have been taken up by the ASP decline, the mitigation of that ASP decline next year, and we're seeing the things that clearly now is something that will be very beneficial to our financial results.

  • Jeff Harlib

  • Okay.

  • And one last question on capital spending, you said you were about 85% capacity utilization.

  • If you grow 8-10% in '04, where do you see your CapEx?

  • And do you see yourself doing some outsourcing?

  • Or will you meet that additional demand from your internal facilities?

  • Keith Jackson - Chief Executive Officer

  • Yeah, the numbers we give for capacity utilization are for manned equipment that we have inside our factories, so kind of two comments there.

  • One, certainly, we have been reducing the total amount of outsourcing we've done this year, because we get a definite cost advantage for that.

  • If there is, you know, some fairly rapid expansion beyond what we're planning, we certainly have the capability and relationships to increase the portion of our business which is outsourced for manufacturing.

  • And then secondly, like all companies, we are in various stages of employing new equipment, and bringing on new head count, to manage that.

  • So at this point, as we've stated before, we do not think there is significant changes in capital requirements, as we move forward, even for some very significant rises in revenue.

  • Jeff Harlib

  • Okay.

  • Thank you.

  • Operator

  • Thank you.

  • And our next question comes from James Croom from Morgan Stanley.

  • James Croom

  • Good afternoon.

  • I guess if you could talk a little bit about some utilization, with the revenues up, and even with the ASP pressure, in the fourth quarter, do you expect any improvement in capacity utilization?

  • Donald Colvin - Chief Financial Officer

  • I think if you look at the fourth quarter, the math should be pretty straightforward.

  • We stated 2 to 3% top line growth, with a 1 to 2% ASP erosion, which will probably lead to something like I think an average of say 2 to 3% internal capacity utilization improvement.

  • So we will probably go up from about 85 to 88%, something in that range.

  • James Croom

  • And do you think that this gets to 90?

  • I mean what is the point where you need to start spending, you know, building on kind of Jeff's question --

  • Donald Colvin - Chief Financial Officer

  • I think let me make me make two comments.

  • One, as Keith mentioned we have external sourcing.

  • Two, as I also mentioned, part of our cost reduction actions are to cost reduce, and move products to more cost effective world ye graphy manufacturing processes and also, belay the fear of any monster imminent investment requirements in that we have calibrated that we can buy equipment, especially for the front end manufacturing, on the open market, for under 5 cents in the dollar.

  • So we have a significant possibility.

  • We are not aligned to the -- to any capital intensive leading edge equipment.

  • There is a lot of good quality equipment available in the market where we get -- we buy at a few cents on the dollar.

  • So we are obviously always working at opportunities and requirements, but we don't believe that there are any major capital expenditure hurdles that we have to overcome.

  • Keith Jackson - Chief Executive Officer

  • We -- I will just add to that, we have been investing as you see from our numbers, $15 million or so a quarter.

  • And of course, that's capacity that comes on in a more continuous basis that would not be reflected in a rearward measurement of capacity utilization.

  • James Croom

  • And you mentioned that are you going to burn some cash through working capital.

  • Has that improvement pretty much done at this point?

  • Any chance to improve working capital, maybe in '04?

  • Donald Colvin - Chief Financial Officer

  • Yes, I think projections are we are -- have still to pay off some of our restructuring, there is still some employees leaving this quarter.

  • That will consume some cash.

  • I think, as we grow our margins next year, I will repeat my comments on that, as we go towards break-even, then clearly, the amount of EBITDA that we generate will improve with a level of capital expenditures similar to this year, and no increase in interest expense, than we believe that we can generate more cash -- free cash from our operations.

  • James Croom

  • Thank you.

  • Operator

  • Thank you.

  • And once again, that is star one, if you have a question or comment.

  • And star two, should you need to cancel.

  • And our next question comes from Tristan Gerra from SoundView.

  • Tristan Gerra

  • Hi, just a quick follow-up.

  • Given that your utilization rates are already at 85%, and I just wanted to get a sense of whether that could help you, you know, push the trench [INAUDIBLE], which are currently [[wimping]], as as opposed to if you have lower utilization rates, and I wanted to kind of get a sense of what this new product could be as a percentage of revenues, you know, by the end of this year and what kind of progress you would expect into next year.

  • Keith Jackson - Chief Executive Officer

  • Yeah, I will pick up on that one.

  • The trench capacities are not being challenged at this point.

  • In any way shape or form.

  • That has been a part of our capital plans this year.

  • As you know, we introduced those toward the first half of the year.

  • And are -- have been driving design wins throughout this year.

  • So we will start to see some significant number of millions of dollars of sales here in the fourth quarter.

  • But next year, we would expect that to ramp very nicely quarter on quarter.

  • And again, capacity should not be an issue.

  • Tristan Gerra

  • Okay.

  • Into next year, I mean is it fair to say that it could be as much as, you know, 20, 30% of [INAUDIBLE] mix?

  • Keith Jackson - Chief Executive Officer

  • You know, I would not say that high.

  • It certainly could approach double digits, but I'm not sure that you can move the percentage of the total that rapidly because we continued to gain very nicely in the planer side.

  • So there is going to be very nice growth in the planer as well.

  • So I mean, you know, we will be looking at, you know, doubling and tripling on a quarterly basis but I don't think you quite get to that high.

  • Tristan Gerra

  • Great.

  • Thank you.

  • Operator

  • Thank you.

  • And our final question comes from Eric Reubel from Miller Tavik Roberts.

  • Eric Reubel

  • Good afternoon, gentlemen.

  • Could you update us on the percent of revenue by product analog moss, logic and standard components?

  • Donald Colvin - Chief Financial Officer

  • I think we have it.

  • I don't know whether we normally give this percentage out.

  • Keith Jackson - Chief Executive Officer

  • Yeah.

  • Donald Colvin - Chief Financial Officer

  • Okay.

  • Let's see here.

  • We've got it.

  • Third quarter, the analog division was just over 30% of our revenues, the moss power where we have all the exciting trench and pointer technology was just over 15% and our standard components was around 45%.

  • And the remainder was the ECL business.

  • Eric Reubel

  • Within the declines in the quarter can you talk a little bit about the pricing within the product groups?

  • There has been some discussion of pricing in the commodity logic area, firming.

  • What are you seeing?

  • Donald Colvin - Chief Financial Officer

  • I think when I did my analysis, there was no specific customer or product ASP issues.

  • There -- it was essentially across the board, and was very much related to some business probably being negotiated during the weak second quarter, where we suffered from a poor business environment due to the SARS and do to the weak automotive business.

  • So there was no customer-specific issue.

  • The main negative we had on the margin was essentially due to the change in mix, where our moss fet margin is less than our average corporate margin, and replaced products in the high frequency and standard come specific products from these divisions that were significantly higher than our corporate margins.

  • So we had additional sales of lower margin replacing sales of higher margin product and that was the -- that mix change was something that hit us more than anything else.

  • Specifically, to your comment, clearly, all our intelligence suggests that the pricing pressure, the pressure on prices to come down is clearly [abating] across the board.

  • And specifically, in the standard logic and the standard analog area, we are very encouraged by the latest data we get from the market.

  • Eric Reubel

  • Donald, the cash restructuring charges in the quarter, could you update us on what they were?

  • What you expect for fourth quarter?

  • And what they could be for -- what you anticipate now, for remaining for '04?

  • Donald Colvin - Chief Financial Officer

  • I think the -- this quarter, it was in the high single digits. $8, 9 million and that was a drain on cash.

  • And we believe in the -- this has already been accrued.

  • We believe in the fourth quarter, it will probably be in the mid single digits, in the $4 to $5 million range.

  • Eric Reubel

  • And will that leave already any announced cash restructuring charges remaining for '04?

  • Donald Colvin - Chief Financial Officer

  • Yes, some of the restructuring charges that we took relating to contract termination have not yet been resolved.

  • And we are currently reviewing our legal options there.

  • But we do not see that as being above the single digit amounts.

  • Eric Reubel

  • Per quarter?

  • Donald Colvin - Chief Financial Officer

  • Overall.

  • Eric Reubel

  • Overall.

  • Okay.

  • Thank you very much.

  • Operator

  • Thank you.

  • This concludes today's ON Semiconductor third quarter 2003 earnings teleconversation.

  • Thank you for attending.

  • You may disconnect at this time.