安森美 (ON) 2012 Q1 法說會逐字稿

Good afternoon.

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

At this time, I'd like to welcome everyone to the first-quarter 2012 financial earnings 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.

Mr.

Rizvi, you may begin your conference.

Thank you.

Good afternoon and thank you for joining ON Semiconductor Corporation's first-quarter 2012 conference call.

I'm joined 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 onsemi.com and a replay will be available for approximately 30 days following this conference call, along with our earnings release for the first quarter of 2012.

The script for today's call is posted on our website.

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

Reconciliations of these non-GAAP financial measures to the most directly 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 Deutsche Bank Semiconductor Day on May 9, and the DA Davidson Technology Conference on May 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, 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 related to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our form 10-K, Form 10-Q, and other filings with the SEC.

Additional factors are described in our earnings release for the first quarter of 2012.

Our estimates may change and the Company assumes no obligation to update forward-looking statements to reflect actual results, change assumption or other factors.

Now let's hear from Donald Colvin who will provide an overview of the first quarter of 2012 results.

Donald.

Thanks, Ken, and thanks to everyone joining us today.

ON Semiconductor Corporation today announced that total revenues in the first quarter of 2012 were approximately $744.4 million, a decrease of approximately 3% from the fourth quarter of 2011.

During the first quarter of 2012, the Company reported GAAP net income of $28.2 million, or $0.06 per fully diluted share.

The first quarter 2012 GAAP net income included net charges of $29.3 million, or $0.06 per fully diluted share from special items, which are detailed in schedules included in our earnings press release.

GAAP and non-GAAP gross margin in the first quarter was 32.9%.

First quarter 2012 non-GAAP net income was $57.5 million, or $0.12 per share on a fully diluted basis.

We exited the first quarter of 2012 with cash, cash equivalents, and short-term investments of approximately $892.3 million.

Subsequent to the quarter end, we redeemed our $96 million zero coupon convertible notes at par.

At the end of the first quarter, total day sales outstanding were approximately 52 days, down approximately 2 days compared with the fourth quarter of 2011.

ON Semiconductor's internal inventories were approximately flat on a dollar basis, and on a day's basis were approximately 116 days.

Included in our total inventory is approximately $69 million of bridge inventory, or approximately 13 days, primarily related to the consolidation of certain factories.

Distribution inventories were down sequentially, approximately 14% on a dollar basis in the first quarter and were approximately 11 weeks exiting the quarter.

On a dollar basis, distribution inventory exited the quarter at the lowest level since the third quarter of 2010.

Cash capital expenditures during the first quarter were approximately $50 million.

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

Thanks, Don.

Now for an overview of our end markets.

During the first quarter of 2012, our end market splits were as follows.

The automotive end market represented approximately 26% of sales; the consumer electronics end market represented approximately 22% of sales; the industrial military, aerospace, and medical end markets represented approximately 20% of sales; the computing end market represented approximately 18% 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 first quarter sales.

Our top five product OEM customers during the first quarter were Continental Automotive Systems, Delta, Hella, Panasonic, and Samsung.

On a geographic basis, our contribution from sales in Asia, excluding Japan, represented approximately 55% of revenue.

Our sales in the Americas represented approximately 16% of revenue.

Sales in Japan represented approximately 15% of revenue.

And sales in Europe represented approximately 14% of revenue during the quarter.

Looking across the channels, direct sales to OEMs represented approximately 60% of first quarter 2012 revenue.

Sales through the distribution channel were approximately 33% of first quarter revenue, and the EMS channel represented approximately 7% of revenue.

Now I would like to provide you with some details of our other progress we have made.

As discussed previously, we expect to fully recover our planned production capacity that was lost as a result of the Thailand flood during the second quarter through the use of our global manufacturing network and significant efforts of our employees.

In addition, we have received approximately $50 million in insurance proceeds over the last two quarters which we will have used to restore our production capacity and capabilities at other locations within our global manufacturing network.

Our overall manufacturing related program integration activities also remain on track.

As anticipated, our Sanyo Semiconductor Gunma wafer facility will close this quarter and our Sanyo Semiconductor Gifu wafer facility is on track to close by the beginning of the third quarter of 2012.

Further, we anticipate completing the shutdown of our Aizu wafer facility later this year.

These wafer factory closures should improve the efficiencies and cost effectiveness of our overall manufacturing network.

In the beginning of the second quarter, we also took steps to invest in higher growth segments of our business with the completion of an approximately $8 million purchase of a building and workforce in Vietnam to expand our integrated power module capabilities to service white goods such as air conditioners, washers, and refrigerators.

Now I'd like to discuss some of our end market and product line results from ON Semiconductor's business units.

In the automotive end market, we achieved sales of just under $200 million in the first quarter of 2012, up sequentially from the fourth quarter of 2011.

New vehicle launches utilizing ON Semiconductor solutions for LED lighting, park assist, and start/stop applications helped drive strong results.

Specifically, we saw a ramp up in our park assist ASIC for a key European auto manufacturer and share gains in IGBTs and Smart FETs at top tier automotive customs in Korea and China.

During the first quarter, we also secured several key automotive design wins at top-tier accounts, including a multi-year powertrain MOSFET win, a start/stop alternator ASIC win, and a linear voltage regulator for LED front headlamp wins.

Our design momentum continues to strengthen within the automotive market, and we are looking for another strong year performance within this segment, and with our ability to service up to $90 of content per vehicle.

Sales in the computing end market decreased slightly in the first quarter, but were much better than normal seasonality.

After three quarters of reduced sales levels, we are beginning to see a recovery in the overall computing supply chain which was negatively impacted by the inventory correction in the second half of 2011, as well as the flood in Thailand.

We are seeing new design wins gaining traction in several areas for our mixed signal ASICs and MOSFETs, including 3D projection, HDD, gaming, commercial desktop, and server markets.

We also see positive momentum building for our power system and Vcore solutions within Ivy Bridge platforms at key notebook customers and anticipate growing our share versus the prior Sandy Bridge platform.

Looking forward, we expect to see sequential growth in the computing end market driven by our expansive product line, as well as recovery in the overall computing supply chain.

We are also excited about the design momentum we are seeing in the communications end market.

In particular, we're gaining traction with leading global smartphone manufacturers for our auto focus and image stabilization solutions.

These solutions originate from the Sanyo Semiconductor products group, and represent another example of the growing opportunity to cross sell our product lines.

Overall, as we move through the second quarter, we believe we have passed the bottom of the current semiconductor cycle.

Our backlog entering the second quarter was higher than it was entering the first quarter, and customers are beginning to provide more visibility with their forecasts.

We are also very well positioned with our energy-efficient solution portfolios in our focused end markets, and look to drive improved revenues as economic conditions and customer demand improves in the second half of this year.

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

Thank you, Keith.

Second quarter 2012 outlook.

Based upon product booking trends, backlog levels, and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $745 million to $785 million in the second quarter of 2012.

Backlog levels for the second quarter of 2012 represent approximately 80% to 85% of the anticipated revenues.

ON Semiconductor records revenues on a sell-through basis within the distribution network.

If we recorded revenues on a sell-in basis within the distribution channel, as some of our industry peers do, revenues would be expected to increase approximately 9% sequentially from the historical ON Semiconductor business, excluding Sanyo Semiconductor product group in the second quarter.

We anticipate the average selling prices for the second quarter of 2012 will be down approximately 1% to 2% compared to the first quarter.

We expect total cash capital expenditures of approximately $60 million in the second quarter of 2012.

For the second quarter of 2012, we expect GAAP and non-GAAP gross margin of approximately 34% to 35%.

We also expect total GAAP operating expenses of approximately $240 million to $250 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges, which are expected to total approximately $55 million to $65 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 $16 million for the second quarter of 2012 which includes noncash interest expense of approximately $6 million.

We anticipate our non-GAAP net interest expense and other expenses will be approximately $10 million.

GAAP taxes are expected to be approximately $4 million to $5 million, and cash taxes are expected to be approximately $5 million to $6 million.

We also expect stock based compensation expense of approximately $8 million to $10 million in the second quarter of 2012, of which approximately $2 million is expected to be in cost of goods sold, and the remaining in operating expenses.

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

Our current fully diluted share count is approximately 465 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 10-K.

In the second quarter, we expect to fully recover our plant production capacity that was lost as a result of the flood in Thailand, thanks to the tremendous efforts of our employees.

Our planned production capacity recovery contemplates that approximately $20 million to $30 million a quarter in revenue will not be recovered due to the war or negative return on our investment for these specific parts.

We are expecting revenues for the Sanyo Semiconductor Products Group to remain relatively flat in the second quarter compared to the first quarter.

While the production capacity to service our Sanyo Semiconductor Products Group's customers is now available, the demand environment for these customers is weak.

In particular, demand from customers in the consumer end market in Asia for this product group is expected to remain weak through the second quarter, but we would expect improvement in the third quarter of this year.

In order to align the cost structure of the Sanyo Semiconductor Product Group to its current revenue levels, we plan to implement a cost reduction plan that will reduce the employment levels within this group by up to 500 people.

We expect that this will result in a charge to the Company of approximately $40 million to $50 million in the second quarter, and excludes cash amounts related to pension benefits.

Annual savings from this plan are expected to be approximately $40 million to $45 million.

The Sanyo Semiconductor Products Group was impacted by two significant natural disasters in 2011 -- the earthquake in Japan, and the flood in Thailand.

These events have been disruptive to this product group.

We remain optimistic that the actions we are taking to align the cost structure of this product group to its current level of business will position it for future success and profitability.

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

John Pitzer, Credit Suisse.

Thanks for letting me ask a question.

Keith and Donald, when I look at the results for March and the guidance for June, revenue essentially in line, but you guys have done a little better on the gross margin line than I would have expected both in March and on the forward guide.

Don, I wonder if you could give the puts and takes of what has been helping the gross margin line, remind us of where target gross margins lie, and at what revenue level, and how quickly you think you can get there.

Sure.

I think we did better in the first quarter.

We took some actions to reduce costs in the factories and they were successful in helping the gross margin.

We also had a slightly better mix of higher margin products from internal revenue, and also we sourced more from internal manufacturing than we did from outside, and we got rid of some pretty bad margin products, as well.

So all that certainly helped, particularly in the ON side of the business.

On the Sanyo side, the margin came roughly as anticipated.

We have always said that we believe the business, the ON business, is naturally in the low-40%s gross margin, and we head in that direction.

We believe that the Sanyo business would be in the mid-30%s, at optimum rates.

I think it's fair to say that we are a wee bit behind that currently, because the revenue, the top line hasn't been supporting it in the near term.

We are anticipating with our cost reduction actions, and with improved revenue in the second half of the year, that we should be heading towards the 30% gross margin this year, and hopefully above that in the second half of next year to get to our overall corporate gross margin objective of approximately 40%, John.

And then Donald, you talked about the Sanyo restructuring or resizing.

The 500-person headcount reduction, what percent of the overall operations is that?

And when you thank about the $40 million to $45 million in annual cost savings, what is coming out of the gross versus the operating margin line?

The headcount reduction is less than 10% of the total headcount, but obviously we're focusing it on areas where we believe we have excess requirements because the revenue has come down over the last few years.

I think it's fair to say that the most of these savings are going to come from OPEX, John, and this is in addition to the actions that we had already programmed where we were rationalizing factories in Japan and the closure of these older technology factories is on schedule to be completed by July of this year.

Craig Ellis, Caris & Company

Keith, could you give us some color on how you see the different end markets this year look ahead to 2Q?

Which are performing relatively stronger and which are coming off the bottom a little bit slower?

We see automotive continuing to perform in a strong fashion.

The computing business, as mentioned in Q1, was up seasonally.

I expect that that will continue in Q2 and accelerate in Q3.

We are still seeing some continued weakness in the Asia consumer-based businesses, whether that's white goods, or televisions, or handsets, or whatever that might be.

So that's probably the weakest of the rest of them.

And we're expecting industrial to be flattish in Q2 with some strong signs of improvement here for the second half, based on customer backlog.

Okay.

That's helpful.

And then just a quick follow-up.

On the PC side, you mentioned some share gain that you thought you saw coming your way.

Can you quantify how much that is and on the smartphone side with the dollar content increase on the imaging systems, how much dollar content does ON have now in a smartphone?

So the first piece of that, we're really referring to Ivy Bridge.

We think we can move our notebook content up in into the 30% to 35% market share range on the power systems, and for the smartphones, we're really looking at kind of $3.00 to $3.50 per phone content, including the camera piece.

Thanks, Keith.

Parag Agarwal, UBS.

Thanks for taking my question.

Could you comment on the forecast for auto going forward?

I know you gave second quarter guidance, but how do you see your auto revenue progressing for the remainder of the year?

Well, we do expect to see increases in Q3 over Q2 and our traditional Q4s are sort of flattish.

I would expect that trend would be similar this year, although again, we only give one quarter at a time.

They do the retooling.

There's some down time in Q3, but by Q4, you're back at whatever the auto end rate is driving.

So I think auto was a very good help for us even in Q1, so I think our revenue and margin did well.

As I said, auto mix helped, but going forward to the second half, it's going to be much more computing and consumer.

And address that specifically, but we have felt the pain of the Chinese consumer in our business, and indications are that that's going to come back in the second half.

Okay.

And coming to the end of [silin] market, some of your competitors are seeing some ascent but you are guiding flat for the second quarter.

Just wondering if there is any difference between your industrial exposure and that of your competitors.

And how do you see the gross margin getting impacted from the industrial businesses as we head into the second half?

All right.

So our -- each of the companies has a little different mix in what they call industrials, so I'm sure there are some differences there.

As we look at our industrial customers, a lot of them are in building and construction types of industries, so building controls for environmental, et cetera.

What we have seen there is they continue to be slightly over inventoried.

Their end markets are picking up, and that inventory is bleeding down, so we think that is a second half story as opposed to a Q2 story.

GMs for these product businesses are higher than our corporation average, and should substantially contribute in the second half if the market, as we expect, grows, with the higher margins being good for our mix.

Steve Smigie, Raymond James.

Great.

Thanks a lot.

I really appreciate you guys giving the color on how you would have done if you were a sell-in.

Following up on that, I know you don't give guidance for Q3, but would it be fair to say that given the order patterns, that we could suspect expect to see general trends up sequentially from here throughout the rest of the year or at least into Q3?

Again, I won't give you guidance.

I will say that backlog is filling in much faster for Q3 than it did for Q2 or Q1, so we are definitely seeing customers placing more longer orders in the Q3 or the second quarter out than we saw earlier.

Okay.

And to follow up on the Thailand manufacturing, it seems like -- I believe initially you indicated that would be September time frame when you got that all fixed up.

It seems like you're months ahead of schedule both in terms of the fact of that getting fixed, and also you said that wasn't even the constraint this quarter, it was more just a demand at this point.

So just trying to understand at this point that you are pretty much all back full speed there.

Yes, our teams have done a phenomenal job in pulling in capacity at our other factories to make up for the shortfall.

So they actually are quite a bit ahead of schedule.

We are basically now able to produce all of the things that we planned on producing.

I will remind you, Donald said we did eliminate capacity for some of the very bad margin products.

That won't be coming back.

But for everything else, we're online.

What we have seen, however, is in the consumer businesses, which drive most of that Thailand-impacted product, they remain a bit soft, and the customers did, I believe, some panic buying when the flood occurred to make sure they had enough inventory.

So they're really in a good inventory position, the end market has really not taken off, and so net-net, the demand environment looks very similar to Q1.

Great.

Thank you.

James Schneider, Goldman Sachs.

I was wondering if you could give a little color on your distributors, where their heads are at in terms of their inventory levels.

I think we've heard a number of comments from your peers saying that distributors' inventories are at the lowest levels in quite some time.

So, I was wondering if whether you think they are going to still be in reduction mode, or whether that's done, or whether we could even see some increases in return to distributor restocking towards the back half of the year?

So we have extensive discussions with our distributors.

We are also, as we mentioned earlier, at the lowest levels since 2010 out there in distribution.

We are seeing their order patterns pick up.

They are anticipating increases in the second half of the year that they are preparing orders for.

And, again, if you looked at our guidance, we think the sell-in piece is up 9%, while we're guiding mid-3%s on the sell-through.

So we're expecting some building to occur from an inventory perspective, but it's very dynamic, because, again, right now everybody is expecting significant growth in the Q3 timeframe.

That's helpful.

And then maybe just a follow-up.

In terms of the pricing environment, I think you talked about ASPs last quarter down 2% to 3%, this quarter down 1% to 2%, or maybe for Q2, I think is what you said.

Can you just talk about whether you're seeing that higher ASP pressure continuing into the back half of the year or you think it's going to moderate from here.

Thank you.

I think it will moderate from here particularly if the demand in the second half does grow over Q2.

We've already seen some moderation, as you can tell, from our guidance.

So, again, think it's really all dependent are on what the end markets do, and right now, at least, they're headed in the right direction.

Ross Seymore, Deutsche Banc.

Questions just to clarify.

The revenue guidance, where you said that you're doing some pruning for $20 million to $30 million of the Sanyo side of things, is it fair to assume in the absence of that self-imposed pruning that the guidance would be 790, or is the consumer weakness another part of the variable that we have to put into that equation?

Yes.

So clearly we are -- the products that we have obsoleted, we are selling less of and so I don't know how to speculate on what orders we might have had if we were still selling those products.

That's pretty tough, Ross.

But certainly the consumer weakness is there, but we also know for a fact that we're selling less of those products that we obsoleted, so somewhere in there is a combination.

Got it.

And then for my follow-up question for Donald on the OpEx side of things, with the cost savings that you're putting in, how should we think about the timing, specifically on OpEx, where those savings fold in?

Is that a third quarter event or does it take a little bit longer to fully kick in?

Sure.

It should kick in in the fourth quarter.

We still continue to take tough measures on OpEx.

We had fortification in the first quarter; the bonus accruals are under historical levels.

So on anticipation of additional improvements in the second half, then we should restore some of these exceptional savings, but we will have the fixed cost reduction due to the headcount plan we outlined.

I think it's also fair to say that the pruning we have of products has put us in a pretty good margin profile, and particularly the core ON base business is performing well from a margins standpoint.

On the Sanyo business, we are taking the actions to improve its margin, and the big factor that will help us there will be improvement in the top line with the return of consumer business, which, again, is predicted for the second half.

Terence Whalen, Citi.

This is Ben speaking for Terence.

Regarding your computing business, one of your large competitors in the Vcore power management commented that their market share decreased in Ivy Bridge from Sandy Bridge because of [PI staffing].

Do you see this similar impact for your PC power management, and what do you think are the dynamics here?

Yes, we do not.

We do think that the current market share leader in the notebooks is losing share, but we're anticipating we're going to gain that 10 to 15 points I talked about earlier.

Okay.

Thanks.

And a follow-up to the Sanyo revenue.

You guided flat for second quarter, so if I look at the seasonality, Sanyo business has historically grow about 10% in second quarter and third quarter.

Is the weakness in second quarter mainly because of their obsolete product, and what do you think about the 3Q?

Do you expect there to continue to be an impact, or it will return to the normal seasonality?

Certainly the obsolete products contribute to the slower Q2 environment without question.

In Q3, actually, is when we normally see the biggest sequential gains for consumer, and there the key factors for us are going to be the Asian-based consumers.

That has been the hardest hit portion of the consumer business, particularly in the white goods arena, and particularly with our hybrid IC businesses, which are critical to energy savings in air conditioners, and washing machines, and refrigerators.

We're expecting to see some moves in China for incentives, for their consumer base to buy more of those, and so far that looks like that may be on track for the second half.

So that will be a big piece of it, and the second piece will be in televisions with the Olympics.

We normally see some kind of improvement as you get close to those games, and so we're anticipating some opportunities for growth there.

Great.

Thanks.

Tristan Gerra, Baird.

Given the revenue outlook for Sanyo, any new target in terms of EPS accretions from Sanyo exiting the year?

I'm assuming it's probably a little lower than $0.20?

We never said we're going to make $0.20.

That was on a run rate basis, I think, Tristan.

Yes.

Like $0.05 a quarter.

I think clearly we've had to revise the expectations there in light of the current conditions, but we still remain optimistic that this will be accretive.

Maybe a bit less than the $0.05 that we had previously anticipated.

Remember, we had kind of structured a model around something like a $0.05 contribution on a $240 million to $250 million top line.

Right now we're not seeing $240 million to $250 million, but we're seeing something in between that and the current levels of business, and that certainly should be able to generate a low single digit accretion in the fourth quarter.

So I think, as I had mentioned at the end of one of Keith's comments, our margin profile for ON is in great shape, for Sanyo, it's in reasonable shape, with lots of cost reductions planned to get our cost structure in line, and we do see encouraging signs, some good traction on products that will ramp in the second half of the year.

But it's fair to say it will not be to the levels that we had previously anticipated.

We'll have to wait till next year before we see that.

But we still should see positive earnings accretion in the last quarter of this year.

Okay.

And then in terms of the gross margin increase sequentially for Q2, how much of that is due to potentially higher utilization rates versus mix?

And, also, are you done pruning low margin products for the rest of the year, or is that still a possibility for other quarters this year?

I think the pruning is basically behind us.

We're not actively -- we've pruned what we have pruned, and we paid the price for it on the top line, but it has really helped our margin tremendously.

So I think that's gone.

So it's very much the usual factors.

Our revenue will increase, particularly as we said on a sell-in basis, and we will have higher activity in our factories, and that will be offset by a little bit more expense, as we move from tight cost control to a more normal production environment.

But both these factors, the higher revenue and the higher capacity utilization will help improve our gross margins in the second quarter.

Craig Berger, FBR.

Hi, this is Chris Rolland in for Craig.

My question is actually on utilizations.

Where are they now, and where do you see them going through the year, and how are you guys balancing that with inventories.

Thanks.

So right now they're kind of mid-70s.

We anticipate second half there's an opportunity to get that up into the 80s range, and, as you can tell from our inventory management, we've been keeping a lid on that, and I expect we will continue to manage that fairly tightly.

So we're not looking to grow a lot of inventory as we go through the year.

We're going to pretty much keep up with the consumption rates as we go forward.

Okay.

Sounds great.

Also, you mentioned $50 million in insurance, and I was just wondering how that divided up and how it flows through the income statement.

Is it business continuity insurance, and does it flow through the revenue line, or how did that exactly run through?

Thanks.

Well, the insurance was actually all accounted for in the fourth quarter of last year, and all of the proceeds were essentially used to compensate us for loss of assets, equipment, and inventory.

So none of it flew through the business continuity part of the P&L.

But we had mentioned it because we allocated that $50 million to purchase the equipment that we have installed to recover the production capacity and capability that was lost as a result of the earthquake.

So far, unlike some of our competitors, we have not received any business continuity insurance payments.

So none of any insurance money has flown through the P&L.

Ramesh Misra, National Security.

Hi, guys.

In regards to your Sanyo business, can you help us quantify how it's been doing, say prior to your acquisition or compared to a year-ago levels?

Well, I think the Sanyo business has obviously suffered, as we mentioned, from some exceptional events, earthquakes, tsunami's, and floods, and it's really -- the biggest factory was in Thailand, and as we just mentioned, it was destroyed.

So there's been so many moving parts there that it's very difficult to do a would have, could have.

Would you roughly say it is down 50% from --

No, I think it's probably down about 25% from what we recall kind of adjusted cruising altitude.

I was doing some year-over-year comparisons, and outlook for the second quarter of this year compared to the second quarter of last year.

I chose from many of our competitors that didn't have floods and tsunami's, and they were down, like, 15 points year-over-year.

So I think certainly 25% is in the range, and it's certainly been clouded by these events, and also the slowdown in the Asian consumer, particularly in China.

These are the elements impacting it.

It looks, now, as if the business has bottomed.

This is the trend we are seeing today, and we are also seeing good evidence that it will grow modestly in the second half of the year, as I had stated previously.

So we --

That is not just for the overall semicycle, but Sanyo, as well.

Correct.

And it's a function of many factors.

They have traction on new designs, they have all designs that will come back.

All of these kinds of factors.

Got it.

In regards to your CapEx plans, any updates to full year levels, and are you -- what is this CapEx being allocated to?

Is it for bringing up parallel processes at multiple factories, or is this for new products, new equipment, or capacity?

Well, I think we basically -- our business is not as strong at the top line as it was last year.

So absolute capacity is not so much, it's more capability.

So basically think about capabilities, more advanced packages, more advanced technologies, and also $50 million of Thailand recovery.

We actually probably cost us a bit more than Thailand recovery.

But we do anticipate that our cash capital expenditures will fall from current levels as we exit the year, and so that should certainly help improve our cash flows, and certainly this year's projection, if you take out the one-off $50 million for Thailand, it was down over last year, and we should start to see the benefit of slightly more capital expenditures as we exit the year, resulting in a greater cash generation.

Kevin Cassidy, Stifel Nicolaus.

Thanks for taking my question.

Keith, just to go back to your comment about white goods in China, in your prepared remarks, you said you're expanding your Vietnam facility for integrated power.

Is that in anticipation of demand to pick up or --

It is.

We have basically, from a design win perspective, a very strong pipeline.

And we've talked to our customers about what they're going to need, and it was clear that we did not have enough floor space to handle that nor equipment to handle that.

So we have now made that investment.

Floor space is online.

We have the workforce, and the equipment is being installed so that we can indeed ramp in the second half for that business.

Okay.

So you're not seeing an inventory problem, this is a new product design?

These are all new product designs.

The only inventory issues we have in that market is some of our customers are over inventoried on their finished goods.

Our pipeline is actually quite lean, and again, based on their forecasts, we needed the expansion to meet their demand in the second half.

Okay.

Great.

And one other, just a clarification.

You had mentioned a design in a smartphone for focus and image stabilization.

Is that a Japanese-based smartphone, or was that an ON design and you brought in Sanyo, or Sanyo design and brought in ON?

You said cross selling.

Yes, they're non-Japanese based handsets at the top, I guess two of the top five providers.

Patrick Wang, Evercore Partners.

Great, thanks for letting me ask the question.

My first question is just on Sanyo, you guys got it at flattish into Q2.

I was just hoping you could help us out with what you guys did in the first quarter.

And then also you talked about -- Keith, you talked about -- you sounded pretty confident that that was going to ramp in the third quarter with Japan, just hoping you could actually go into a little more detail of what gives you that confidence.

Okay.

So the results of the Sanyo division were just over $200 million in revenue in the first quarter, and we see as we stated on the guidance roughly flat in the second quarter.

So that's absolute numbers.

And as I stated before, we'd previously been modeling something like $245 million for the fourth quarter, and we don't think we'll get there, but it will be something in between current levels and the previous $245 million.

So that's the kind of frame work we're giving around the financial modeling.

As far as improvement in the business, Keith?

So from a business perspective, again, I mentioned some of the design win momentum.

What we've done is we've looked at the key design wins in handsets, televisions, and white goods, and talked to the customers there.

And they are all setting expectations and backlog on us for increasing in the Q3 time frame, which obviously gives us more confidence that we're going to have a better second half.

And then you add on top of that to their traditional positions in the other areas like gaming machines, and all of the other consumer-based things, and there is a normal seasonality that goes up, as well.

So you take the normal seasonality, you add to that your key design wins.

Yes, we're feeling very good about the second half.

Okay.

That's helpful.

And then just secondly, you talked about taking $20 million to $30 million of capacity offline.

Just curious where the Sanyo capacity does go, and when it tops off, think you talked about $280 million before, so curious if that goes down to $250 million.

And then also Don, you said OpEx would be lower in Q4 on a dollars basis than what you guided here in the second quarter?

Well, I said that we would get the benefit of Q4 of all of the cost savings.

I did say as well that there would be a restitution of certain actions that we've taken that would negatively impact that, like bonus accruals, and fortification.

So I think it's fair to say that one should offset the other and should be relatively flattish for the fourth quarter, because we have been operating on a very strict cost control regime recently, and if we get a much better revenue outlook in the fourth quarter, then we will certainly be accruing bonuses and things that we haven't been accruing.

So I should say very simply put, it should be relatively flat with the cost savings of certain restitution.

So just to make sure that that's the case, I think it probably would -- as far as a capacity is concerned, we did state that we withdrew all came from the fact that we did not restitute the about $20 million to $30 million of Thailand capacity that was destroyed.

So all of that is in our current model, and the capacity we have restored will be restored by the end of this quarter.

As far as the total revenue potential of the Sanyo business, I mean, that's more of a theoretical question.

I don't think it has been significantly impaired, but it would not be reasonable to expect the Sanyo business to snap back to its historical levels.

I don't think we believe we have a capacity restriction there.

It's much more of a demand restriction.

Yes, I would just remind you, we did just add capacity for the power module business.

So net-net, you should be able to meet or exceed previous highs in total capacity.

Aalok Shah, D.A.

Davidson.

Keith, you discussed this a little bit already, but I'm curious.

In your discussions with some of your distribution partners out there, how are they feeling about holding inventory now?

Are they starting to get a little bit more comfortable holding inventory, and do we think we'll get back to more normal inventory levels as we exit the year?

They've all got aggressive ROIC numbers, so they're trying to keep the inventories down.

We're spending a lot of dialogue talking about how do we, in essence, move to a more velocity based models, and how we work together, rather than having more inventory point on their shelves.

But I will, again, reiterate that they are certainly not wanting to be caught short, and so as they're anticipating higher Q3, they are placing more orders.

So either that will turn into higher on the sell through, or will turn into inventory.

At this stage, it's too early to stay.

And Donald, one quick question in terms of seasonality.

Could you remind us again how we should be thinking about seasonality for your business as we go into the back half of the year?

Every year you get different seasons, you know, tsunami's, and floods, and all the rest.

But, normally we see a seasonally stronger third quarter, up probably high-single digits, and that's on the back of consumer strength so there's no reason to believe that we wouldn't see that consumer strength in the second half.

And I will remind everyone that the current levels of business are significantly less than all companies achieved at the same time last year, and so there is an inventory correction.

End markets are down nothing like our business is down.

So we are encouraged by the prospects for the second half, and seeing certainly something in line with normal seasonality taking place.

Thank you.

Betsy Van Hees, Wedbush Securities.

Thank you for taking my questions.

You mentioned that you're having better visibility on your backlog and your customers are more willing to place backlog for a longer period.

Is that because there is actually demand there, so that the concern that they don't want to get caught short of expectations for a very strong Q3?

The indications, at least from the customers feedback to us, is they believe they will have that demand, and so they're placing orders to make sure that we're going to be able to service those.

There's no indication that there's any panic buying or position hedging that's going on at this stage.

Lead times typically are what drive that behavior.

They're out slightly here in the Q2 timeframe from Q1, but there hasn't been a significant move which normally precedes any kind of panic buying.

Okay.

Thanks.

Can you remind us what lead times are?

They're kind of in that 8-week range for most of the high volume products.

Thanks.

And you've done a really great job during this tough time of making hard decisions, in terms of the cuts that you're going to make.

If things don't work out in the back half of the year, are you guys prepared to continue to make those cost cuts, or more cost cuts?

We have demonstrated that we're always willing to putting our cost structure where it needs to be for the future, and there's no reason to believe that will change.

Mark Lipacis, Jefferies.

Hi, thanks for taking my questions.

Keith, you said you could get to the mid-80 utilization.

Did you infer a timing on that?

It would be sometime toward the middle of Q3, typically we don't see a lot more pick up from a loadings perspective as you go into Q4, because you're usually building a quarter ahead.

So really you're kind of mid-Q3 time frame.

And you also talked about your lead times coming up off of, sounded like pretty low levels.

Can you give us a sense historically, what utilization rate do you see the lead times starting to stretch out farther?

That is -- yes, I don't know about that.

The best way to look at that one is lead times do matter.

We don't normally see the 90%-plus utilization rates until we're out towards 13 weeks or so.

So right now we're kind of at the 8-week range, so somewhere between 8 and 13 weeks, you go from kind of 70%s to 90%.

And that does conclude the question and answer portion of today's call.

We would like to thank everyone for joining.

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