安森美 (ON) 2011 Q3 法說會逐字稿

Good afternoon.

My name is Jaree, and I will be your conference operator today.

At this time I would like to welcome everyone to the ON Semiconductor third-quarter financial results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) Thank you.

I'd now like to turn the call over to Ken.

You may begin.

Thank you Jaree.

Good afternoon and thank you for joining ON Semiconductor Corporation's third-quarter 2011 conference call.

I'm joined today by Keith Jackson, our President and CEO, and Donald Colvin, our CFO.

This call is being webcast on the Investor Relations section of our website at www.onsemi.com and a replay will be available for approximately 30 days following this conference call, along with our earnings release for the third quarter.

The script for today's call is posted on our website and will be furnished via Form 8-K filing.

Our earnings release and this presentation include certain non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to the most direct comparable measures under GAAP are in our earnings release and posted separately on our website in the Investor Relations section.

In the upcoming quarter we will be attending the Credit Suisse Technology Conference on November 30.

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 believe, estimate, anticipate, intend, explain, or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are based on information currently available and 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 earnings release, Form 10-K, Form 10-Qs, and other filings with the SEC.

The factors described in our earnings release include the uncertainties regarding the ongoing impact of the flood in Thailand, our estimates may change and the Company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other factors.

Now I would like to turn it over to Keith Jackson, who will provide a few comments regarding our operations in Thailand.

Keith?

Thanks, Ken and thank you to everyone for joining us today.

Before going into the details of our third-quarter results, I wanted to make a few comments regarding our operations in Thailand that have been impacted by the severe flooding in the country, as well as our announced closure of our Aizu wafer fabrication facility in Japan.

The Thailand flood is a natural disaster of unprecedented scale that has killed hundreds of people, damaged thousands of factories, forced hundreds of thousands of employees out of work and impacted the lives of millions.

As we have discussed in prior releases, the relentless flooding in Thailand has had a significant impact to our employees, their families, and our operations located in that country.

The Company has approximately 1,800 employees and approximately 350 contractors in Thailand, which represents approximately 9% of our global workforce.

I am grateful that our employees remain safe at this time and our sympathy goes out to the people of Thailand.

We have 2 main facilities in Thailand.

One is located in the Rojana Industrial Park and another is located in an Industrial Park in Bang Pa-In.

Our Rojana Industrial Park operations produced approximately 10% to 12% of our worldwide output as measured by third-quarter 2011 revenues, and our operations in Bang Pa-In produced approximately 2% to 3% of out output as measured by third-quarter 2011 revenues.

We have not been able to access either of these facilities in Thailand.

Today, our preliminary estimation is that we will be able to enter both locations for large scale recovery within the next 1 to 2 months with earlier access for the purpose of assessing damage.

Site security measures are being coordinated with the government and Industrial Park resources by our local security staff.

During 2011, we have faced 2 significant sizeable natural disasters.

The Japan earthquake and related tsunami in March and the current flooding in Thailand.

These events have impacted our overall Company.

In Japan, we experienced only minor physical damage to our factories as a result of the earthquake and resulting tsunami.

Through the strong efforts of our employees, we were able to fully recover operations in Japan that were negatively impacted by the earthquake within a 6-month period.

In Thailand, however, our facility in the Rojana Industrial Park remains submerged in over 2 meters of water.

Given the length of time this site has been submerged underwater and the indefinite period before we will be able to access the facility, we believe the equipment and inventory at the site may be permanently impaired.

The facility we operate in Bang Pa-In is also submerged under water.

At that location, however, our equipment is located on the third floor and we are hopeful it can be recovered.

With our employees now safe, the Company is focused on bringing online supply and capacity to our customers at other locations within the internal ON Semiconductor manufacturing network, as well as with our external assembly and test partners.

Certain products will be sourced from alternative back-end locations before the end of the year while more complex production alternatives may take multiple quarters.

I am grateful for the significant efforts of our teams who are working tirelessly to make this happen.

In addition to utilizing spare capacity at our other global manufacturing network locations, over the course of the next several quarters we intend to spend a total of approximately $50 million of incremental capital expenditures to more quickly enable the Company to support our customers and their production requirements.

The Company currently carries approximately $50 million of insurance related to our Rojana Industrial Park site and has another $50 million of insurance for our much smaller and probably less damaged Bong Pa-In location.

We are in the process with working with our insurer on these claims processes.

In October we announced a shut down of our Aizu factory in Japan.

This factory is expected to close by the end of June 2012 and we anticipate approximately $8 million a quarter in savings with the full benefits being realized beginning in the fourth quarter of 2012.

This closure is in addition to our previously announced closures of our Japan factories located in Gunma and Gifu related to our Sanyo Semiconductor acquisition and integration.

As a Company we continue to migrate to fewer, larger sites and towards 8-inch wafers where appropriate.

Although we continue to reduce the number of front-end manufacturing sites, we expect that our overall wafer production capacity in 2013 will be greater than our current capacity.

Now I'd like to turn it over to Donald who will provide an overview of our third-quarter results.

Thanks, Keith.

While the flood had no impact on our financial results in the third quarter of 2011, it will impact our financial results in the fourth quarter and well into 2012.

For the third quarter of 2011, ON Semiconductor announced that total revenues were approximately $898 million, down approximately 1% from the second quarter.

During the third quarter of 2011, the Company reported a GAAP net loss of $49.4 million or $0.11 per fully diluted share.

The third-quarter GAAP net loss was impacted by $65.4 million of restructuring, asset impairment and other charges, which are primarily related to the restructuring and asset impairment of our announced closure of the Aizu, Japan factory as well as other special items.

The complete special items are detailed in schedules included in our earnings release.

GAAP gross margin in the third quarter was 29.1%.

Included in our GAAP gross margin is approximately $53.6 million of special items.

Non-GAAP gross margin in the third quarter of 2011 was 35%.

Third quarter non-GAAP net income was $110.5 million or $0.24 per share on a fully diluted basis.

We exited the third quarter of 2011 with cash, cash equivalents and short-term investments of approximately $837.7 million.

During the quarter we repurchased $53 million of principal value of our 2.625% convertible senior subordinate notes.

At the end of the third quarter, total day sales outstanding were approximately 55 days, down approximately 3 days compared with the second quarter of 2011.

Internal inventories were down approximately 6 days to 101 days.

Included in our total inventory is approximately $12 million of bridge inventory associated with the shut down of our factories.

Distribution inventories were approximately 11 to 12 weeks exiting the third quarter.

We expect the weeks of inventory at distributors to decrease in the fourth quarter.

Cash capital expenditures during the third quarter were approximately $86 million.

Now, I would like to turn it back over to Keith Jackson for additional comments on the business environment.

Keith?

Thanks, Don.

Now for an overview of our end markets.

During the third quarter of 2011, our end market splits were as follows.

The Consumer Electronics end market represented approximately 28% of sales.

The Automotive end market represented approximately 22% of sales.

The Computing end market represented approximately 19% of sales.

The Industrial, Military, Aerospace and Medical end markets represented approximately 17% of sales and the Communications end market which includes Wireless and Networking represented approximately 14% of sales.

On a direct billing basis no individual ON Semiconductor product OEM customer represented more than 5% of third quarter sales.

Our top 5 OEM customers during the third quarter were Continental Automotive Systems, Panasonic, Delta, Samsung, and Sony.

On a geographic basis our contribution from sales in Asia, excluding Japan, represented approximately 57% of revenue.

Our sales in the Americas represented approximately 15% of revenue.

Sales in Japan represented approximately 15% of revenue and sales in Europe represented approximately 13% of revenue during the quarter.

Looking across the channels, direct sales to OEMs represented approximately 63% of third-quarter 2011 revenue.

Sales through distribution channel were approximately 31% of third-quarter revenue and the EMS channel represented approximately 6% of revenue.

During the third quarter, ON Semiconductor revenues broken out by our product groups were as follows.

Sanyo Semiconductor products group represented approximately 33% of sales, the Standard Products group represented approximately 19% of sales, the Automotive and Power group represented approximately 17% of sales, the Digital, Mixed Signal and Memory product group represented approximately 17% of sales and the Computing and Consumer group represented approximately 14% of sales.

We will publish our quarterly revenue, gross profit and operating income break out of these segments in our Form 10-Q for this period.

Now I'd like to provide you with an update of progress we've made during the quarter.

Unrelated to the impact of our facilities from the flooding in Thailand on October 31, we signed a Definitive Agreement to purchase a building and related workforce in Vietnam from Sanyo Electric for an estimated purchase price of $8 million to $9 million.

This transaction is expected to close by the end of March 2012.

We expect to continue to operate out of our existing location in Vietnam, but will utilize the new building and related workforce for our additional expansion requirements.

Once this transaction closes, this new site will enable ON Semiconductor to expand its integrated power module capacity and support the rapid growth we are expecting for that business line.

Our existing integrated power module business which resides within Sanyo Semiconductor is currently generating approximately $150 million of sales on an annualized basis, primarily focused on the consumer white goods market.

Over the next several years, we anticipate additional growth opportunities within the consumer white goods market as well as within the Automotive and Industrial sectors.

We believe the purchase of this Vietnam facility and related workforce will provide a site where ON Semiconductor can more than double our production and related revenues in this business line over the next 24 months.

From an end market perspective, our third-quarter Automotive sales were up approximately 3% from the second quarter, despite scheduled customer plant shut downs.

This was due to key wins from our major Automotive customers for our door electronics solutions and for our lighting driver and motor Controller ICs for headless systems.

In addition, we continue to add to our Automotive capabilities with new product launches and wins in a variety of automotive applications such as interior lighting control solutions, park assist, anti-lock brake systems, powertrain systems, and direct gas injection systems with a number of products including custom ASICs, LED drivers, LDOs, IGBTs, and MOSFETs.

In the first half of 2012, we expect to see continued strong activity and growth for the Automotive end market in emerging countries, in North America and in the luxury vehicle market.

The Consumer end market, sales increased sequentially from the second quarter by approximately 3% and we continue to make further inroads with our cross selling activities related to Sanyo Semiconductor.

During the quarter we won 2 key designs for the major LED TV manufacturer for our power supplies.

We also continue to receive awards from our customers and editors for our efficient products and solutions.

In the third quarter we received a 3-Star Supplier Excellence Award from Raytheon Network Centric Systems and an Eagle Legacy Award from Electronic Product Design magazine in the medical advances category for our precision mixed signal controller.

Now I'd like to turn it back over to Donald for other comments and our other forward-looking guidance.

Donald?

Thanks, Keith.

Fourth-quarter 2011 outlook and other forward-looking guidance.

There are a number of significant factors that are impacting our guidance and will influence our financial performance in the fourth quarter of 2011.

As discussed previously, our operations in Thailand remain suspended.

We still have no access to our facilities and we are working to bring up production capacity at other locations.

In addition, some of our customers, suppliers, and subcontractors have also been impacted by the flooding in that country.

We currently estimate that the negative impact to our revenues directly related to the flooding of our Thailand manufacturing facilities is estimated to be approximately $60 million in the fourth quarter.

Our Sanyo Semiconductor division will experience the vast majority of this revenue reduction, resulting from the Thailand flood.

Our overall costs will be negatively impacted by a number of factors, including the under-absorption of our manufacturing and operating support overhead.

Given the fixed cost nature of the Sanyo Semiconductor division, we believe the reduction in revenue will result in approximately $45 million lower total net income for the Company in the fourth quarter as a result of the flood in Thailand.

In addition, we believe the flood in Thailand will negatively impact the operational earnings by approximately $0.10 in the fourth quarter of 2011.

The preceding flood related impact is included in our guidance below.

Our guidance however does not include any impact to our suppliers, subcontractors, and customers, nor any restructuring, asset impairment, or other unusual or incremental charges and expenses we may incur during the fourth quarter as a result of the flood in Thailand and our efforts to restore production capacity.

Additionally, our guidance reflects only our current assessment of the Thailand flood situation and as we have indicated, the situation and our related understanding of its impact to our Business continues to change and evolve.

From a cash standpoint we will attempt to limit our investment in flood mitigation equipment purchases to approximately $50 million that we expect to receive as part of our insurance claims related to the Rojana Industrial Park facility.

Based on product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $740 million to $780 million in the fourth quarter of 2011.

This guidance includes the estimated revenue reduction as a result of the flood in Thailand outlined previously.

Backlog levels for the fourth quarter of 2011 represent approximately 80% to 85% of our anticipated fourth-quarter 2011 revenues.

We expect that average selling prices for the fourth quarter of 2011 will be down approximately 3% compared to the third quarter.

We expect total cash expenditures of approximately $65 million in the fourth quarter and total capital expenditures of approximately $320 million to $330 million for 2011.

For 2012, we currently anticipate capital expenditures of approximately $225 million to $275 million.

This forecast includes the expected $50 million of additional anticipated capital related to the restoration of capacity post the Thailand flood.

For the fourth quarter of 2011, we expect GAAP gross margin of approximately 26% to 28%.

Our GAAP gross margin in the fourth quarter will be negatively impacted by, among other items, lower sales as a result of the Thailand flood, the Sanyo inventory valuation adjustment, and the expensing of appraised inventory fair market value step up associated with our acquisitions of approximately $24 million.

We expect non-GAAP gross margin of approximately 29% to 31% in the fourth quarter.

Our gross margin will be negatively impacted by lower sales as a result of the inventory correction occurring within the overall semiconductor supply chain, as well as the flood in Thailand and the associated under-absorption of our manufacturing network.

We also expect total GAAP operating expenses of approximately $195 million to $205 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges which are expected to total approximately $15 million.

We expect total non-GAAP operating expenses of approximately $180 million to $190 million.

We anticipate GAAP net interest expense and other expenses will be approximately $22 million for the fourth quarter of 2011, which includes non-cash interest expense of approximately $9 million.

We anticipate our non-GAAP net interest expense and other expenses will be approximately $13 million.

GAAP taxes are expected to be approximately $2 million to $4 million and cash taxes are expected to be approximately $4 million to $6 million.

We also expect stock based compensation expense of approximately $6 million in the fourth quarter of 2011, of which approximately $1 million is expected to be in the cost of goods sold and the remaining in operating expenses.

This expense is included in our non-GAAP financial measure.

We believe the current inventory correction should be over by the end of the fourth quarter of 2011.

As previously announced, we expect the negative impact of the Thailand flood to continue well into 2012.

We are taking actions to offset this loss of manufacturing capacity.

By the end of December, we should have better visibility on our recovery plan for 2012.

We currently believe we have excess manufacturing and operating overhead as a result of the impact of the flood in Thailand.

We will complete the review of our overhead costs by the end of the fourth quarter of 2011 in order to begin to align our cost structure with our target operating model.

Unless otherwise noted our guidance does not include any restructuring, asset impairment, or other unusual or incremental charges and expenses we may incur during the fourth quarter as a result of the flood in Thailand and our efforts to restore production capacity.

Our fully diluted share count is approximately 455 million shares based on the current stock price.

Further details on share count and EPS calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K.

With that I would like to start the Q&A session.

(Operator Instructions) Christopher Danely, JP Morgan.

Donald or Keith, can you just talk about what signs you're seeing that lead you to believe that we'll be done with the inventory correction by the end of this quarter?

This is Keith.

We're definitely seeing changes in booking patterns, people starting to order more product and working with our distributors.

We're also looking at modeling out their inventory correction and again, I think in both cases it's pointing us towards here at the end of this year being about at the bottom.

And let's say you guys weren't impacted by the flood in Thailand.

What do you think your overall sort of sales would look like, all else being equal?

Well, I think you can add the $60 million back in to the number we've just forecasted for you, because that's really the Thailand fund piece and what you're left with is down quarter-on-quarter partly due to the market, partly due to the inventory correction and at this stage, we can't give you a precise mix but it's probably close to half-and-half.

And yes, so how much of this do you think is demand versus inventory and what are the customers saying about their demand?

Yes, so again, I think about half of it is probably end markets which means kind of a 4% to 5% drop in the end markets and another 4% to 5% drop from inventory corrections, so that's kind of where I was guiding you there, and that's fairly consistent with what we're hearing.

Great, and then for my last question, can you just run through the end markets and which you see recovering first and which might be taking a little while longer?

We definitely see a continued strength in Automotive and the white goods portion of Consumer.

We're not sure from a recovery part if you want to call it recovery, I don't know if that's the right word but Industrial has the most unknown outlook at this stage and they were down pretty substantially in Q3.

They look like they are going to be also I'm not showing much signs of strength in Q4, so I think that's the one I've got the least visibility into, but all the rest of them we're expecting some positive impact from the Chinese New Year that comes up in Q1.

Great, thank you.

John Pitzer, Credit Suisse.

I guess Keith or Donald, I just want to make sure I'm doing the math right.

Thailand was approximately $100 million of revenue in the third quarter.

It's going to be sort of a $60 million hit in the fourth quarter.

Does that imply that you're finding sort of availability in other factories to recoup $30 million plus or minus, is that how I should think about it?

Well a piece of that is inventory and a piece of that is alternative manufacturing.

There's a combination of the two, John.

And I guess if Thailand takes longer to bring back up, where could that hit be kind of in the calendar first quarter?

If you think about capacity you could move within your global network, how might that look into the March quarter?

We really don't give guidance that far out.

I think our team is finding good solutions for the products.

I think we would say we're fairly confident we'll have the majority of the problems solved by the time you get to Q2.

In between then and now I really don't want to forecast a recovery rate.

And then Keith, you talked a little bit about customer order patterns picking up and that giving you some confidence that will we through the inventory correction in Q4.

Just out of curiosity given the 10% to 15% of your capacity just kind of went off-line, why isn't it that customers are ordering just for fear that they can't get the parts and that, that's more of a sign of what's happening in Thailand than kind of a bottoming in the cycle?

Yes, we do see some of that activity.

It's not widespread but we're getting calls on products that the ON Network makes that were not impacted in Thailand to see if we have excess supply, because other suppliers were impacted there and so we do see some of those orders but it's really not a large percentage at this stage.

And then my last question, Donald, if you go back to the last quarter you had some gross margin headwinds around FX and commodity pricing in the June quarter.

You did a good job in the September quarter.

Any update there from a cost perspective on the gross margin line?

Well, I think the big issue in gross margin is the overhead absorption and so I think the foreign exchange stuff is kind of stabilized.

The dollars can stabilize gold, copper.

So that's actually not being a negative, incremental negative into Q3 and into Q4, as you mentioned, but I think what we've got now is the absorption and we are having to reduce our factory rates to reduce our inventories and with low demand as the inventory reduction takes place in the channel.

So that's having a negative impact on our gross margins and it's going to take some time to work our way through that but I mean, that's the nature of the business.

If you pull apart the Thailand flood, this is a normal albeit painful semiconductor inventory correction.

That's what we are paid to manage, and so we are taking actions to restore our gross margins once demand comes back to its normalized levels.

And as Keith mentioned we've got additional actions to restore the capacity for Thailand and get back to normal levels there too.

Ross Seymore, Deutsche Bank.

The $60 million impact you talk about in Thailand for the fourth quarter, from your comment earlier, Keith about hopefully having this taken care of by the second quarter, should we assume that, that $60 million impact is about as bad as it gets on a quarterly basis?

At this stage, Ross, we don't have any better data.

I mean as we mentioned in our call here, this is based on the best information we have at this stage, so barring any other information I would say yes, but we don't have any other information.

Got you, and then for my one follow-up, I was just looking at your OEM and distributer splits and it looked like your disti business was down about 19% sequentially and your OEM was up about 12% by those percentages you give.

Could you just talk a little bit about the dynamics there, especially on the disti side?

Considering you're a sell-through Company that seems like a pretty large number.

Well actually, that's exactly where you would see it on a sell-through Company, so our sales held up pretty well in the third quarter competitively on a sell-through basis, but we started seeing that inventory correction in the third quarter from a distribution sell-in perspective.

So when we measure those numbers on a sell-in basis they're actually as significant as anyone else's.

James Schneider, Goldman Sachs.

Just in terms of the gross margin trajectory and where we go from here, what do we have to see for gross margins to start moving up?

Is it just revenue growth from a year or are there other levers you can pull out on the cost side to make things start to move up?

Well, obviously we are, this is Donald here.

Obviously we are going to do everything we can and particularly with portfolio management but if you just take aside the Thailand impacted business we would expect our gross margins to go back to recent levels in the second half of next year.

That's the kind of trajectory we're working to but then you've got the impact of Thailand, we expect by the middle of next year to have that handled with additional capacity.

And then the other lever we can pull on is looking at portfolio management and favoring our higher margin products, so these are the classic things we're doing.

We also mentioned as far as gross margin is concerned that the closure of the factory in Aizu which is a high cost location that capacity will be absorbed in lower cost locations and the benefit of that will also be felt in the second half of next year.

So just the classic levers, as we grow the top-line, replace the capacity lost, and shut down the factory in Aizu with looking at favoring trying to rebalance to a richer portfolio mix, all that will help our gross margin.

Fair enough that's helpful.

And then just in terms of pricing environment I think you talked about ASPs being down about 3% in the quarter, maybe a little bit worse than it has been recently.

Can you talk about where you're seeing that pricing pressure and in what markets and how long you expect that to continue if at all?

Well so on this ASP metric, we have always used the same measure we've used now for about 15 years and it tends to be a little bit conservative and that kind of exaggerates a bit the ASP pressure, but we've used it consistently as a measure and reported it ever since I've been here.

So I do think it does tend to exaggerate a little bit the impact on the P&L but that's just an aside comment.

But basically seeing that essentially in standard more commoditized products and obviously, ASICs are not reducing the price of ASICs, so it's basically standard commoditized products and if you read some of the scripts as I do of our competitors, it looks like they're enjoying the same pleasure as we are of a dynamic pricing environment.

John Vinh, Collins Stewart.

To just follow-up on the Thailand disruptions, can you talk about the primary end markets impacted by the capacity there?

It was a fairly broad mixture of end markets.

We had some of the Standard Product discrete business in there which services literally everything.

We had some products aimed at motor controls which could be in fans for PCs or in some of the disk drive industry, probably some consumer goods in there as well but a fairly wide range.

Got it, got it.

And then my follow-up is as you start to find alternative sources of capacity, can you talk about are you having to requalify those components every time you do that?

And then can you talk about it sounds like your service levels have been impacted there.

Do you have some buffer inventory you can kind of lean on in the near term?

Okay, so both questions, yes we always qualify that process in times of trouble is actually fairly speedy, our customers work with us quite closely so that the supply can go uninterrupted, so definitely there's qualifications involved.

We want to make sure the quality of the product is appropriate before we ship anything.

On the other hand, it doesn't take the normal quarters to get that done.

Relative to the alternate sources, they do come up fairly quickly.

We're finding idle capacity as we mentioned before inside of our network and through subcontractors and so it's a quick process right now to get back everybody back on track.

Craig Berger, FBR.

This is Chris Rolland in for Craig.

If you guys could maybe just talk about sort of inventory overhang in some of your end markets, which end markets do you think may have the biggest hotspots or danger points?

I don't know that I would give you any.

We had, if you go to the distributor behavior, they don't do inventory by market.

If you go to the OEMs, frankly we had very similar behavior across-the-board, all of our OEMs last year, they were very aggressive in ordering in the first half of the year and then when they got their supply chain full, they've all backed off.

There's really no pattern that points to the market.

Some other companies have talked about Industrial as potentially being one of those markets.

Have you seen that?

Well, Industrial, our Industrial sales were down in Q3 versus Q2 and definitely, I do believe a piece of that was they found their supply chain quite full and didn't need to order as much.

Okay.

Also, some of our checks we've heard your lead times for your ASICs business were particularly long.

Has it sort of given you a chance to catch up and what have lead times done there?

Lead times are relatively stable now.

They are down from their peaks.

They're not quite down to their mins, but they've been quite stable now for 2 quarters.

Steve Smigie, Raymond James.

Just with regard to margin I know you guys don't specifically guide to that at this point, but given what's happening in terms of markets and inventory corrections, et cetera.

Should we be thinking about March more as a seasonal quarter or more non-seasonal because we'll be recovering, just following up because you sort of indicated you thought we were in the recovery phase or we were through the inventory correction, any color you're willing to give?

Again, we can't give you guidance on the March quarter.

From an end market perspective, I think we can say we're looking for something that's close to seasonal, plus or minus whatever inventory corrections are still being made.

A lot of the growth now in the electronics industry is coming from the emerging markets.

The Chinese New Year has a significant importance in that.

It happens early this year, so we're kind of expecting something from a consumer basis that looks pretty similar to normal.

Again, plus or minus whatever inventories left to correct.

Great.

Thanks for the color and just one quick other one.

Just on the interest expense for Q3, I think you gave relatively similar guidance on that last quarter, if I just take the number you reported for interest expense and back out the $9 million, I get something that's $7 million lower than what I was thinking you might put.

Am I making a mistake in my math or was there some reason the interest expense was lower in the September quarter?

I think the interest expense is cash and other so there's translation in there so we've had some translation variations, but I think it's fair to say that the cash interest expense is running about $8 million or $9 million per quarter, so it's going to stay that way, and any difference would just be the delta because of translation.

Terence Whalen, Citi.

If we were to look beyond the near-term disturbances in Thailand for the Sanyo business I believe historically, you thought you might be able to get to something close to a 35% gross margin at around a $300 million quarterly run rate.

How does what's going on now structurally affect the margin level if you were to return to that sort of a run rate?

Thanks.

Well I think that still remains totally doable.

Indeed we were simulating that this morning.

What's probably fair to say is that we probably need to achieve our gross margin targets and the target model at a lower level of revenue because we have to be realistic, some of the revenue that's going to be lost we will not get back.

And that is something that we are assimilating and but we still are aiming for that target gross margin.

But realistically, it's probably going to be a number inferior to 300 turns.

Okay, great.

You actually preempted my second question, so my third question was if we were to think about operating cash flow, you've actually run a fairly steady $120 million to $135 million the past three quarters.

To what degree will that be affected?

I'm trying to match that up against your $250 million CapEx for next year to annualize out what free cash flow could be in 2012.

Thanks.

Well I think you can expect, I mean our EBITDA is another proxy for that.

We've been running the EBITDA in the $170 million range for the last 3 quarters and it's actually remarkably stable so I think you can expect to see that being negatively impacted by the flood, particularly next quarter and the first quarter as Keith mentioned.

And then as we mitigate that returning to it's historical levels in the second half of next year.

That's the best visibility we see.

Obviously a whole lot of work to make that happen but as you say, we know how to generate cash.

One thing I will draw your attention to is that one positive of the current environment is that we are able to cut back our capital expenditures and that will be a positive to cash flow.

And another thing that I would reiterate is that we don't expect the Thailand specific recovery investments to be superior to our insurance reimbursement, so that will not be a negative to cash flow from the equipment investments and requalified investments.

Obviously, there will be a P&L impact in Q1 and Q4 as a direct result of the lost revenue.

Tristan Gerra, Robert Baird.

Excluding Sanyo, where are your utilization rates currently and when do you expect to wind back up utilization rates?

Is the pick up in orders that you see so far in Q1 sufficient for that to happen or is it more of a Q1 type of trend?

Yes, we don't expect to increase utilization in Q4.

I think it will be early next year but certainly not in Q4.

Okay, and in terms of contract pricing, what should we infer about pricing trends for next year based on I guess the recent negotiations that ON Semiconductor has been taking?

Yes, most of the near term pressure comes from the short-term orders in Asia, so that's where the majority of the pressure's coming from and I don't know that I would translate that as being something that is going to carry forward to all of next year.

We do our annual negotiations in the fourth quarter and first quarter as you know, for that base of customers that do it annually and those numbers look much more normal.

So really it's a lot of pressure, short-term with the corrections going on in inventory in Asia driving most of the increased ASP pressure.

Ramesh Misra, Brigantine Advisors.

Keith, first a question for you.

Your backlog coverage for Q4 obviously is down yet you're saying that order patterns are improving, so I guess you're counting on turns business to improve, just wanted to get a little more color?

Yes, as compared to previous quarters we are expecting more turns and comes from a variety of sources but not the least of which the way we measure that will be sell-through from distribution.

So our sell-through from distribution above what we sell-in will look like a turn of the way we calculate it.

Got it.

Okay, in regards to CapEx for 2012, obviously it looks like a pretty sharp decline.

Is there something we should be reading into that or are there things that you've kind of already invested in and now you've kind of -- ?

No, we made a lot of big investments this year to set up the infrastructure for growth and so we don't have to repeat a lot of those next year.

So we've got the brick and mortar and the factories and the facilities and the plumbing and all those things kind of behind us so now it's just incremental equipment.

Chris Caso, Susquehanna Financial.

I was wondering if you could address as we go forward the leverage that we might expect on incremental revenue and typically what we've done in the past is looked at incremental margins, I think in the 50%s generally, given both the addition of the Sanyo business as well as the impact of the flood in Thailand, is it the right thing to think about going forward?

I think that's a fair thing.

Obviously, I did have some illusions that once we establish the ramp pattern with conviction, we will examine our fixed overhead but aside from that, I think that's a fair assumption in the 50%s, I think that the incremental contribution from the Sanyo business is higher because they've a higher fixed and the ON is slightly lower.

But I think that's a fair assumption to use.

Okay, and I guess going forward, just to clarify the impact of the Aizu closure next year, I guess that wasn't included in the support payments there provided so the Aizu closure does provide that?

No, the Aizu factory is a traditional ON factory.

Okay, I'm sorry.

So that is a true $8 million a quarter savings from the current run rate.

Kevin Cassidy, Stifel Nicolaus.

The $60 million impact coming from the Sanyo product, was that mostly sold into Japan?

No, it was a mixture, I think it's very similar to the overall business, about a third or so goes into Japan, the rest goes into Asia.

Oh, okay and are there employment agreements in place in Thailand?

We have employment regulations there.

There's no individual agreements but there's a government regulated set of standards we have to follow.

But as far as obviously, the employees that we have there cannot be gainfully employed and like all other companies, I think we are paying them guarantee them 6 months from the flood salary but in the overall scheme of things, the labor costs are not really a huge swing factor.

That's not going to dramatically change the P&L outlook.

Okay, great.

Thank you.

Mark Lipacis, Jefferies.

Assuming you can get most of the capacity transferred by the second quarter, can you give us a sense as to how much your revenues that are coming through the Thailand facilities are at a material risk of being permanently lost to competition?

And as part of that, Keith, you said at the high level you'd hope by Q2 of next year you'd hope to have most of the capacity accounted for in other places.

Did you mean like the beginning of Q2 or end of Q2?

Thanks.

I think from a manufacturing perspective, the beginning from a volumes out obviously have cycle times involved, so financially, that will spread out beyond the beginning of Q2.

But I think we'll have solutions in place prior to the second quarter.

And relative to what won't come back, we don't know yet.

We don't have enough information to answer your question.

A significant portion of that business is we believe differentiated by our performance on those products so we're fairly comfortable with most of that revenue.

Some of it is multi-sourced and we would think that it would be more at risk but again there's only about a third of that revenue that was from the multi-sourced discrete nature.

Craig Ellis, Caris & Company.

Don, on the $100 million in potential insurance recovery, first are you expecting any of that to be recovered in the fourth quarter?

And two, when it is recovered, what line will we see that booked in?

Well the actual fact we don't expect $100 million.

The Rojana factory we had the maximum amount of $50 million, so all things are that between fixed cost variable business interruption, inventory that we will max out the $50 million insurance, I believe that, that probably will be paid early next year.

As far as the other factory, we have a $50 million coverage for the other site but we are not expecting the claims to be anything like $50 million.

Don't want to give away our negotiating position with companies but it's certainly unrealistic to suggest anything like $50 million of damage there, and how would that be handled?

I think a lot will depend on how we settle with the insurance companies but clearly, there's property damage, equipment damage that will be first priority and the allocation will be determined afterwards with the insurance companies.

Thanks for that and then just a clarification on something that's come up earlier.

I know there's I think 4 fabs that are either in the process of being shut down or have shut down between Phoenix, Aizu, Gunma, and Gifu, which of those are going to result in incremental cost savings versus may have had operational support, is it the latter 2 that had some operational support?

So the Phoenix factory which is closed, closed at the beginning of Q3 will have positive impact on our cost reduction.

We should start seeing that by the first quarter as inventories are depleted.

Aizu also fits that category, traditional ON site.

There is no support from Sanyo, no connection to Sanyo so all of that savings of $8 million a quarter should be direct.

The Gunma and Gifu do have some operational support so of those, 2 of the 4 fit the category of having operational support.

Suji De Silva, ThinkEquity.

For the $60 million GAAP that you have I know you said by the second quarter next year you feel like you would have that back on.

Can you give us a sense of how far along you can be within 3 months on that based on actions taken outside?

No.

We really can't, again we really can't forecast specific revenue recoveries and even my comments were meant to be we would have solutions, I'm not trying to forecast when all of the revenue is back.

Okay.

Different question on the--

It's just too early.

Oh, understood that's fair.

And in terms of the Chinese New Year being earlier is it possible at all to give a sense of how many growth points you're benefiting from versus a typical timed Chinese New Year in the fourth quarter?

Is that something you can pull off?

That's really difficult when you're looking at a down quarter to give you that answer so I don't know how much impact will be there.

I think we are more hopeful than we normally are for December sales and December turns, but until December comes I just really don't know.

Okay.

Last question, Industrial should be down again for the second quarter in a row.

Is there something perhaps different about the way Industrial is played out that it wouldn't recover after a 2-quarter drop because typically it takes 2 quarters and then it recovers.

Is there something different going on?

No there's really nothing going on there and as long as Global GDP doesn't take a dramatic hit, I would expect that it should recover.

The Industrial story may be mostly an inventory correction story.

Great.

Thanks, guys.

Brian Piccioni, BMO Capital Markets.

You mentioned in the outlook section of the news release that of course your guidance can't or doesn't anticipate the impact to customers and suppliers.

And of course over the last few weeks we've seen a number of companies like companies in the disk drive industry and so on seem to be severely impacted.

I was wondering if you could give us some sense for whether the outlook that you've given has any information in it with respect to suppliers and customers?

Or whether it's simply a case that you haven't been informed yet as to the impact of those affected companies.

Yes, so the guidance includes all of the information we have as of yesterday, which does have some significant impact from some of the disk drive manufactures already built in.

What it doesn't have is all of the impact because we just don't know all of it but certainly everything we know is in that number.

Okay, great, and I know the question is off the beaten track but obviously it's late in the call so I figure I'd ask it.

Can you maybe speak towards how things are going with respect to you mentioned earlier for example, a win in a TV for ON power supplies.

It's basically selling Sanyo products to traditional ON customers and ON product into traditional Sanyo customers, thank you.

Yes, that's actually making good progress.

We've had very good reception from the customers, the database that we track on those design wins and business awards is growing at a fairly good clip, so we're actually quite pleased with that portion of the transition right now.

Betsy Van Hees, Wedbush Securities.

As we look at Q3 on your product segments the way you break it out, Sanyo appears to be up 8% and all your other categories were down ranging from 2% to 13%.

I was wondering if you could help us for Q4 excluding the impact from Thailand, how we should be modeling those product groups within the range that you gave of revenue being down excluding Thailand.

So I would say that ignoring Thailand for a moment both Sanyo and ON are down about the same percentage, and then Sanyo is impacted much more dramatically by Thailand.

Okay, but in terms of for example, Computing and Consumer, it was down 13% quarter-over-quarter.

Are you expecting it to be within that range excluding the Thailand impact or is it above?

Was wondering if you could help categorize for us the different product groups.

Oh, you mean by marketplace?

Yes, so you have Automotive and Power.

I'm not sure I can give you that guidance.

I don't know that I have it split out in that fashion.

Okay, fair enough.

And then in terms of the gross margin impact, are we looking at excluding what's happening with Sanyo, is there any greater gross margin pressure in certain product categories?

Well the greatest pricing pressure is coming in our multi-market businesses, the discrete business, the Standard Products group I guess is seeing most significant pricing pressures, but beyond that from a factory perspective and the utilization, and the internal cost piece, there's really no differentiation between the two of them.

Thanks and my last question in regards to Thailand.

You mentioned that you have property damage and equipment damage.

Are you possibly looking at maybe not rebuilding and refacilitating that factory and going somewhere else?

Is that a possibility?

We have not really evaluated all our options there.

Once we get into the factory and can make an assessment we will evaluate all options but at this stage we are not speculating.

This concludes today's question and answer session.

Thank you for calling the ON Semiconductor third-quarter financial earnings call.

You may now disconnect your lines at this time.