Good day, ladies and gentlemen. Welcome to the ON Semiconductor Fourth Quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will have a question and answer session and instructions will be given at that time. [Operator Instructions] It is now my pleasure to turn the conference over to your host, Parag Agarwal, VP of Investor Relations and Corporate Development. Please go ahead.

Thank you, Hade. Good morning. And thank you for joining ON Semiconductor Corporation's fourth quarter 2018 quarterly conference call. I'm joined today by Keith Jackson, our President and CEO, and Bernard Gutmann, our CFO. This call is being webcast on the Investor Relations section of our Web site at www.onsemi.com. A replay of this broadcast along with our earnings release for the fourth quarter of 2018 will be available on our Web site approximately one hour following this conference call, and the recorded broadcast will be available for approximately 30 days following this conference call. The script for today's call and additional information related to our end markets, business segments, geographies, channels and share count are also posted on our Web site. 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, which is posted separately on our Web site in the Investor Relations section. 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, project, anticipate, intend, may, expect, will, plan, should 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 from projections. Important factors which can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-Ks, Form 10-Qs and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for fourth quarter of 2018. Our estimates may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other factors except as required by law. As announced earlier, we will host our 2019 Analyst Day on March 8th in Scottsdale, Arizona. If you would like to attend the event and haven’t received an invitation, please let us know. Now, let me turn it over to Bernard Gutmann, who will provide an overview of fourth quarter 2018 results. Bernard?

Thank you, Parag. And thank you everyone for joining us today. We delivered yet another quarter of strong financial results despite challenging macroeconomic conditions. Key secular drivers powering our business remain intact, and our execution on operations remains solid as evidenced by margin performance in several quarters. Our design win pipeline in our strategic markets, which include automotive, industrial, and cloud-power, continues to grow and we continue to strengthen our competitive position in those markets. We remain upbeat about our future. Since our last earnings call in November of last year, we have noticed a significant slowdown in demand from Greater China region. This slowdown further accelerated early this year, when we noticed a sharp slowdown in bookings, especially from the distribution channel. This steep decline in bookings has reversed course over the last couple of weeks, and we have seen a modest pick-up. Demand from other geographies appears to be in line with seasonality. Although, weakening macroeconomic conditions could pose challenges based on current macroeconomic outlook, we expect to continue to grow our revenue and expand our margins in the current year. Based on our current outlook, we believe that after greater than seasonal decline in first quarter of 2019, we should grow sequentially in second quarter of 2019. Key megatrends driving growth in our content in automotive, industrial, and cloud power applications remain intact, and we expect to continue to benefit from these trends in foreseeable future. Although, we remain confident in our outlook, we are managing our business prudently to rapidly adjust to slowing macroeconomic growth. We are taking measures to control our expenses and we intend to adjust our working capital in line with our expected revenue. We plan to continue to expand our margin and grow our free cash flow, despite current macroeconomic slowdown. We…

Thanks, Bernard. The fourth quarter of 2018 was yet another strong quarter for ON Semiconductor. Despite a meaningful slowdown in demand from the Greater China region, we delivered strong revenue and margin performance. Though the current macro economic outlook has impacted our near-term outlook, we remain upbeat about our mid to long term prospects. We believe that secular trends in our key markets driving our revenue will continue to strengthen and we expect to outgrow the broader Analog and Power Semiconductor Group in a meaningful manner. Our design win pipeline in our strategic markets is growing at a strong pace. Our customer engagements are strengthening and our competitive positioning is improving significantly. As I mentioned earlier, key megatrends driving our business continue to strengthen. In the automotive market, accelerating adoption of electric vehicles and active safety is driving strong growth in our power semiconductor and sensor businesses. In the industrial markets, we are seeing steep growth in our power semiconductor content, driven by higher power efficiency requirements for industrial systems. In the cloud-power market, we are seeing robust growth for our analog power management products for servers and power semiconductors for 5G infrastructure markets. Before I get into details of the fourth quarter, let me highlight the business performance for 2018 and lay out priorities for 2019. 2018 was a strong year for ON Semiconductor and we delivered solid results on all fronts. Our 2018 revenue, excluding OSA, grew by 9% year-over-year. Our 2018 non-GAAP gross margin expanded by 120 basis points year-over-year. We achieved this strong gross margin expansion despite significant year-over-year increases in raw material costs in 2018. Our non-GAAP operating margin expanded by 170 basis points year-over-year. On year-over-year non-GAAP revenue increase of 9%, our non-GAAP operating income increased by 22% in 2018. Our 2018 free cash…

Thank you, Keith. Based on product booking trends, backlog levels and estimated turn levels, we estimate that total ON Semiconductor revenue is expected to be in the range of $1,365 million to $1,415 million in the first quarter of 2019. Included in our first quarter revenue guidance is approximately $20 million revenue from manufacturing services provided by OSA. As I indicated earlier, the greater than seasonal decline in the first quarter is primarily driven by weakness in Greater China region. Based on our current outlook, assuming no further decline in macroeconomic conditions, we expect to grow sequentially in the second quarter of 2019. For the first quarter of 2019, we expect gross margin to be in the range of 36.4% to 37.4%. Our first quarter gross margin guidance includes the negative impact of 50 basis points from the manufacturing services provided by OSA. We expect total GAAP operating expenses of $330 million to $348 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges, which are expected to be $30 million to $34 million. We expect total non-GAAP operating expenses of $300 million to $314 million in the first quarter. We anticipate first quarter 2019 GAAP net other income and expense, including interest expense, will be $31 million to $34 million, which includes non-cash interest expense of $9 million to $10 million. We anticipate our non-GAAP net other income and expense, including interest expense, will be $22 million to $24 million. Cash paid for income taxes for the first quarter of 2019 is expected to be $16 million to $20 million. We expect total capital expenditures of $170 million to $180 million in the first quarter of 2019. We expect capital intensity for 2019 to be approximately 9%.We also expect share based compensation of $19 million to $21 million in the first quarter of 2019. Of which approximately $2 million is expected to be in cost of goods sold, and the remaining amount is expected to be in operating expenses. This expense is included in our non-GAAP financial measures. Our diluted share count for first quarter of 2019 is expected to be 420 million shares, based on the current stock price. Further details on share count and earnings per share 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. Thank you and Hade please open up the line for questions.

[Operator instructions] Our first question comes from Chris Danley of Citigroup. Your line is now open.

Can you just talk about the pickup in order rates recently and then if you've talked to the customers and the disties, what's the reasoning they are giving for the recovery in orders?

Again, I don't know there's a lot to talk about. We saw in early January, we normally would see a pickup in orders after decline at the end of December and it didn't happen. And then here in the last week, it did start to pick up against and really have no more color beyond that.

And for my follow-up, can you just give us your take on what the plans are for utilization rates and then how do we get the gross margins up to 40%?

So the utilization rates in the in the short-term are flattish to slightly down compared to Q4 it's about in the low 80%. The elements to grow gross margin continue being the same that we have talked about. A 50% fall through on incremental revenue, nice and significant help from the mix in our products. And probably the moderation of the increase in headwinds that we had from cost increases in 2018 that we do not expect will continue in 2019.

Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is now open.

Keith, first one for you, given the volatility of the bookings, as you described it week-to-week and month-to-month. What gives you the confidence to believe you can grow into 2Q and 2019 as a whole?

Well, certainly, backlog indicates that at this stage and our design wins, as reported from the customers and their ramp dates is reported to us, support ramp Q2 and onwards this year.

And I guess for my follow on one for you on your side Bernard. The OpEx you mentioned about controlling that tightly. In the amount you guided to for the first quarter, is there any one time benefits in that or is that the run rate you guys can hold until you get the revenue growth actually coming back?

We do have some permanent cuts. At the same time, our first quarter is also shorter on date, so in that sense you can call that a little bit of one time. But in the long run, we expect to continue driving to our 21% target and expect to be gradually getting there.

Thank you. Our next question comes from Vivek Arya of Bank of America Merrill Lynch. Your line is now open.

Keith, it's interesting that overall sales grew 9% on last year, but your Intelligent Sensing Group sales were kind of flat. I'm curious, what is the autos versus non-autos exposure in that segment? And what's going to be needed to make that business grow more in-line with other segments? And when will you see some of the benefits of the ADAS that you outlined?

So the automotive piece continues to grow very significantly. As we have set expectations for, it's about half of the total number in intelligent sensors group. The flatness that you see there is really us not participating in some of the low end security market, which declined year-over-year.

And then in communications, could you also give us a breakdown of handsets versus infrastructure? And on the 5G side, what content rates are you seeing? And is there a way to quantify how much your 5G exposure can be in 2019?

So kind of try and take those as best I can do. About 16% is handsets of sales, 4% is infrastructure of the 20% total. So, it's mostly handsets. From a 5G infrastructure perspective, obviously, that's small now. It just starts to ramp. It can be very significant for us. Depending on the type of 5G installation, it can be anywhere from $10, $150 or so.

Thank you. Our next question comes from Shawn Harrison of Longbow Research. Your line is now open.

Keith, if you look at 2019, just hazarding a guess or maybe which end markets would you expect to be able to grow year-over-year versus maybe one that we're trying?

So, I would expect automotive and industrial, in the cloud-power, 5G, server business grow very nicely. I would expect that consumer probably will not be growing as nicely. And the handset business will not grow very much.

And then as my follow up. Bernard, I think you mentioned looking to net working capital down a little bit. Do you have a target either for the entire year in terms of days to come out or just progress you want to make in the first half of 2019?

So as we have historically talked about, we do have some seasonality pattern, which is free cash flow. First half is typically lower than the second half but we expect to grow year-over-year.

Grow free cash flow?

Yes.

Thank you. Our next question comes from Vijay Rakesh of Mizuho. Your line is open.

Just looking at the compute site, looks like it grew pretty nicely at 22% year-on-year. Just wondering as you look into 2019, how do you look at your market share in that segment exiting '18 or exiting '19? And is your share actually going up on a cash basis?

So we expect to increase share on the server side, because we're very low and growing quite rapidly. But on the notebook and desktop side, we're remaining roughly flat where we had significant share before.

And on the 5G side, I know you've talked about it briefly here. But how do you see growth in 2019 year-on-year? And what do you think your market share is there on the 5G side?

So 5G will grow significantly in the second half. There was very little revenues in 2018, so you should see double digit growth. And our presence in 4G was quite low. So for us, the 5G switch should be very significant.

Thank you. Our next question comes from Kevin Cassidy of Stifel. Your line is now open.

The pick-up you've seen, especially when you pointed to China. Could that be just some ordering ahead of Chinese New Year? Or how does that compare to past years in front of Chinese New Year?

Actually, normally we see bookings and fill come in January, because basically December is declining. And so we would normally expect that. We didn't see it couple of weeks there early January is now returning to something of a more normal pattern.

And on the content increases you're seeing in servers, both AMD and Intel has talked about going to a chiplet or a multi-chip package devices. What changes with the power control on that?

That's been out. The control piece doesn't change dramatically nor does the power content, because it really is a total power determination for the dollars in there.

Thank you. Our next question comes from Anthony Stoss with Craig Hallum. Your line is now open.

Keith, can you talk about the Silicon Carbide contribution in Q4 and also how you expect that to ramp throughout 2019, and a similar follow-up on EVs in terms of what you expect year-over-year? Thanks.

So Silicon Carbide itself is still young and ramping for us. We're talking as I mentioned in the last call tens of millions last year, ramping to hundreds of millions in the next couple of years. So, it's still pretty early in that. We did see our first usage in EV automobiles for Silicon Carbide in both third and fourth quarters. I'm expecting EV to ramp quite nicely with all of our related products this year. I don't have an exact growth number but it's certainly going to be very high-double-digit numbers.

Thank you. Our next question comes from Craig Ellis of B. Riley FBR. Your line is now open.

Keith, this time of the year is typically when where the company would do pricing negotiations and updates with its long-term customers. Can you give us an update on how that is playing out and how pricing faired in the fourth quarter?

So our annual contracts are usually completed in the show-up in our books in the first quarter here, as you mentioned. Those numbers were better than we've had quite benign, and should not be declining or should not provide a decline in ASP for the first quarter.

And the follow-up is for Bernard. Bernard, very strong share buyback quarter in the fourth quarter 200 million. On a full year basis, share buyback and get paid on were about equally split. As we look to how should we think about your redeployment of free cash flow across those two parameters? Thank you.

So we'll continue having a balanced approach. And definitely, we'll take advantage of these locations in the market as it relates to share buybacks.

Our next question comes from Harlan Sur of JP Morgan. Your line is now open.

On the recent pick-up in bookings, the Greater China bookings. Is this more distribution inventory replenishment or are you also seen a pick-up in re-sales out of this year as well? Just want to get a sentence if this is more replenishment or you guys are actually seeing the demand pull through as well?

I mean, we don't have exact data from distribution, as you might guess. But the pattern would suggest they've grown low on certain items and just need them for consumption.

And then we just got the SIA data for the month of December and the power transistor segment of the market was down only 3.5%, sequentially it was up I think 11% year-to-year. This is significantly better than the overall semiconductor industry. And I think even within that power MOSFETs stood even better. So you guys have a pretty strong portfolio here. Is just all content gain driven or also a function of just end market exposure?

Clearly, the end markets are valuing higher power efficiency. We've talked about those relative to cloud and the communications infrastructure, but also automotive. And so those are really key factors for electric vehicles. The mileage that you get on the charge is a key parameter. And so they're using not just more MOSFETs, but they're using very high performance MOSFETs, which drives, from a dollar perspective, good content gain.

Thank you. Our next question comes from Tristan Gerra of Baird. Your line is now open.

Given the slowdown in end markets like auto. What are the plans to shift external capacity to your internal fabs? And could you help us quantify how much reduction in demand can you weather without incurring any underutilization charges? And also even these trends, is it fair to assume that lead times could come down this first half?

So we do have significant flexibility in bringing things inside. We won't bring everything back inside. But you could see a point or three change in the amount of outsourcing that we do. So it is significant amount. Relative to lead times, we do expect as we go through the first half of the year, to be able to help somewhat in lead times, perhaps not as much in the power area. But in the non-power area, our capacity, equipment deliveries are now coming in and hopefully, we'll see some improvements by mid-year.

And then my follow up, how long do you think the Chinese industries are going to be in inventory deleveraging mode? You mentioned some stabilization recently. I am assuming it doesn't really address the high inventory levels across the board. And also if you could help us quantify the slowdown in the China auto market sequentially in Q1. Is it fair to assume that this is going to be down double digit?

Okay, lot of questions there. So, on the distribution side, I can't imagine them being in a decline mode much longer than the first quarter, because they still have to service their customers. There is lots of reasons they might be doing it, but their demand is not off that far. Relative to autos, they are weak in China as all of us know. I don't expect double digits in the first quarter though. Our backlog again is a little weaker than normally seasonal for Q1, but not much.

Thank you. Our next question comes from Rajvindra Gill of Needham and Company. Your line is now open.

Yes, thank you, and congrats on solid results in light of this volatility. A question on the automotive as well. I was wondering if you could maybe break out your exposure of auto across China, Europe and the U.S.? And also with respect to Europe, are you seeing a rebuilding by the Europe, automotive OEMs after they have transitioned to the new emission standard and how does that affect that part of the business?

So our market is basically ranked, Europe is our largest market, U.S. second and China third. And we're not seeing anything significant in Europe. They're still kind of flattish at this stage. In China, it is slightly down.

And my follow-up on the sensor side, the sensor segment was flat last year, mainly because of the nonautomotive. You mentioned automotive being about half of the sensor business. When will you give us a sense for how the auto sensor business grew last year if you have those details? And what are the other segments that make up that in the sensor business outside of auto?

So auto grew nearly 20% year-on-year, the other segments are consumer things like drone usage and home camera usage. And then the other piece is industrial, which had a very strong segment in machine vision, et cetera, but has some security portions that were not quite as strong.

Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is now open.

It sounds like the pricing environment for you is still holding up fairly well? I'm just curious, Bernard, can you help quantify the headwinds you guys saw on the cost side in calendar year '18? And as we go throughout calendar year '19, either because demand is a little bit weaker and supplies freeing up a little bit and/or because you guys are spending on CapEx to try to offset some of these headwinds. What kind of tailwinds on the cost side could you see this year?

So we don't have a precise number, but we think it was a fairly meaningful number that I think we lost in 2018. Maybe somewhere around 50 basis points and we should recover some of that in 2019 with a combination of the pricing and less headwinds on this one.

And then, Keith, relative to your comments for Q2 sequential growth and full year growth, I'm just curious. You have to grow above seasonal every quarter this year to get to some top-line growth for the full year. Do you see that mostly as a second half phenomenon? Or do you think we'll start to see evidence of that in Q2? And I think as to an earlier question. What bottoms up markets do you feel like you're most best positioned to see outsized growth?

I think outsized growth in 5G infrastructure starting in Q3 would be above seasonal, above normal. We think that the slowdown in some of the server purchases will also pick up about that time. So those two markets should be significant. The new automobile models start ramping in Q3, and we think that content goes up quite significantly. So simple answer to your question is, I do think Q3 will be more outsized from a content perspective, significantly outsized. Q2 will it be outsized or yet more or not, it's a little too early for me to tell. But certainly, backlog indicates some good growth in Q2.

Thank you. Our next question comes from Ambrish Srivastava of BMO. Your line is now open.

You commented on what are your lead times currently?

They remained extended in the teens. They have not changed significantly.

And my follow up is just trying to tie up all your comments about order trends your guidance and then second quarter. Can you just throw in or enlighten us what are cancellations doing that gives you confidence that Q2 should recover? And also are the LTAs helping on that front that you signed, which I think is different than the past several cycles where you now have a lot, should have a lot more visibility?

The LTA is definitely providing stability. The net change we talk about pickup in order rates here toward the end of January reflect the absence of cancellations. And we saw some of the cancellations early in the month. So they seem to be largely behind us.

Thank you. Our next question comes from Mark Delaney of Goldman Sachs. Your line is now open.

I had a question on the smartphone market. Do you guys have a sense about how much inventory there may be at your customers that you need to work through in the near term? And then as you think about that business over the intermediate to longer term based on your discussions with your customers. Is there any increasing preference for your smartphone customers that start to focus more on lower cost side models and maybe the content opportunities may not be as much as we had expected six to 12 months ago?

Okay, lot of questions there. From a content perspective, going forward, we're expecting increases as they put 5G in the handsets. So that is a nice pickup. And from the 4G systems, the actual mix of what they plan on making, they don't share with us in advance. So, I can't really comment on their strategies. And then from an inventory perspective, we're seeing a little greater than normal downturn here in Q1, which we assume is to address those inventories. But no indication that we'll continue be on the first quarter.

Thank you. Our next question comes from Chris Rolland of Susquehanna. Your line is now open.

Perhaps one for your, Keith. I know content games are great driver for you guys, but more broadly for the power management industry. We've seen probably some relatively better results here. Do you think something's changed this down cycle? Or is it from consolidation or lack of capacity adds across the industry, or perhaps just not that severe of a downturn this fall? What do you think the puts and takes are there?

I mean I think capital has come on relatively slowly compared to the content gains for the last few years. So clearly, the industry is very tight on capacity, in general. I think that the content gains, however, as I mentioned earlier, we'll continue to have some very significant momentum and much faster than in the unit markets that we support just based on the power efficiency requirements and the continued increase in electric vehicles in 5G infrastructure. So, I think you've got a rapidly growing market and you've got relatively constrained supply.

And you guys planning to be control on Aizu by 2020, but if we move into a pretty good upcycle here. What are your plans or preferences for capacity after you -- would you guys rather do internal, external or more JVs, do you have a preference?

I don't know, we have a strong preference for JV versus internal. We look for the most cost effective capacity adding that we can get. And we use a combination of outside inside in JVs. So whatever the best deal we can find is where we'll be heading.

Thank you. Our next question comes from Chris Caso of Raymond James. Your line is now open.

Just wonder if you could give a little more color on some of the cancellations that you spoke about at the start of the month. Was that geographically based and then a lot of folks have been talked about weakness in China, I presume it's there. Was it broader geographically? And also anything say about particular end markets? For example, some of the handset space we've seen some weakness or perhaps, and your side the difference between some of the power components that have longer lead times and some of the other components whatever color you can provide?

Most of the weakness is in the smartphone side, which is also mostly in China. From a build perspective as you would guess. And so it does still look mostly like China on that weakness side, any way you want to slice it. So, the rest of the market seemed relatively stable and their order patterns appear more secure.

So basically those cancellations were isolated to the smartphone side more or less?

Well, mostly smartphone. But also some of the consumer markets in China as well.

Just as a follow-up then, with regard to distribution. You talked about distribution inventory increasing in Q4 and you talked about how much, and it sounds like you expect that to be cleaned up during the first quarter?

I expect it to be relatively stable in the first quarter. It expanded by a few days in Q4, but nothing significant.

[Operator Instructions] Our next question comes from Craig Hettenbach of Morgan Stanley. Your line is now open.

Keith, just a question around lead times in the context of some of the trends you're seeing. So even though the business has weakened a bit, you're still looking up about 1% year-over-year for guidance. If I look at some other analog companies, they're down as much as high-single-digits to mid-teens and they have shorter lead time. So anything you're doing in terms of scrubbing the lead times and matching up versus what you're seeing from a demand perspective?

So we've been working with our distributors for some time to make sure that we are not basically getting an order pattern for immediate delivery for things they don’t need for some time out. We do that by looking at their lead times and our lead times, and trying to get a pipeline. So part of our extended lead times is really just a good management of our pipeline of products. And so folks have ordered on us basically within the lead times we've given them and they just -- that just keeps rolling forward. So I mean that certainly company specific there, but we do expect that. And so our understanding is the consumption that you're having in Q1 is really consumption, not a reflection of major inventory changes other than the ones we talked about in China.

And then just as a follow up since China you had seen the weakness first and the last year, particularly in appliances and industrial. Any thoughts there in terms of how far along they are and if those markets got hit first, would you expect them to recover right at this first as well?

We are seeing increased orders in the light good piece, but that's the only piece so far that has shown any pick up.

Thank you. And at this time, ladies and gentlemen, this does conclude our question-and-answer session for today. I would like to turn the call back over to Parag for any closing remarks.

Thank you everyone for joining the call today. We look forward to seeing you at our Analyst Day on March 8th in Scottsdale. Good-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.