ON Semiconductor Corporation (ON) Earnings Call Transcript & Summary

Thanks for tuning in, everybody. I am Chris Danely, your friendly neighborhood semiconductor analyst here at Citigroup. Up next, we have the pleasure of ON Semiconductor. We have both the CEO, Hassane El-Khoury; and the CFO, Thad Trent. As you hopefully all know, ON is one of our favorite names out there because it is one of the few semiconductor companies that is not even close to peak margins at least in [indiscernible]. Last month, they had a very nice Analyst Day where they outlined some targets, and so we believe that they have 85% EPS upside to peak from what the current EPS is right now. So gentlemen, thanks for coming. [Operator Instructions] Let's start with maybe a quick summary of the Analyst Day, Hassane and Thad. Just talk about the main points there, and then we'll dig into some of the questions there.

Sure. Let me start. Thanks for having us. It's a great opportunity to be able to talk about the company and the transformation we're going through. So look at a high level, Analyst Day was about refocusing the company in technologies and in markets that are allowing us to grow but more importantly, growth and expanding gross margin. Those technologies are intelligent power, intelligent sensing. And from a market perspective, it is automotive and industrial as the focus market. That's going to drive net-net growth of 7% to 9% for the company over the next 5-year period. Margin expansion for a model, reaching the 45%. 28% operating margin with a CapEx intensity about 9% when we get there. And that is going to yield a free cash flow of about $2 billion. So a pretty good model. We feel it is achievable given our repositioning of the company in the growth markets that I described with the technologies that we have. And there are, of course, in the short term, a transition period, just like with any transformation, as we reposition the company. The growth will be muted, still growth but muted. Think about it at market. About 4% growth and a CapEx intensity going to 12% in the short term before it lands at the 9% longer-term target. Net-net, we're very bullish about our capabilities as a company and really, like you said, at the remaining upside that we have on the value creation for shareholders.

Sure. Good summary there, Hassane. I guess just to run down the main points in the numbers. So on the revenue growth targets, you talked about pruning some of the product lines and then focusing more on others. Can you maybe give us some sort of some sense or some color on how to achieve your revenue growth target while pruning some of the products?

Sure. So we have -- within that 7% to 9%, we have -- for example, automotive is growing at a 17% rate. So we do have inherent growth under that 7% to 9%. Now like you said, in order to get there with the gross margin expansion, part of the focus is shifting our portfolio to those growth markets at the expanding margin. That's at the expense of what we call the noncore product lines. Those noncore product lines, we expect about 10% to 15% of our revenue to exit over -- and that -- we expect that to happen in the short term. Think about it between now over the next 2-year period. And that's going to mute that 7% to 9% growth at the top line that I mentioned, where in the short term, you may see kind of a 4 -- about a 3% to 4% growth on the top line because of that exit. Net-net, that transformation still is you're going to yield growth at the top line. But what we're focusing on in the model is really the gross margin expansion. So we're ready to kind of sacrifice the growth in the short term to reposition the company, so the growth that we will get in the long-term model of that 7% to 9% will be at expanding margins.

Great. Yes. Let's dig into the gross margin drivers. You're getting pretty close to 40%, and you had a target of 45%. You've had some pretty spectacular gross margin growth in just the first couple of quarters this year. Maybe talk about the drivers so far, and then go through the drivers to get to the targets. And I already have 1 question. Hassane's gross margin target seems conservative. So maybe you could address that. These guys want more. Geez. And it's only been 8 months.

I'd rather be accused of being conservative than a number that I can't achieve. And this is something I stand behind. I would not put a number out there, neither would Thad let me put a number out there unless is driven by our own execution and achievable. So what happened kind of the quick wins that we've had that helped us get to that margin results that you've seen us deliver over the last 2 quarters. If you look at it, I keep referring to the price-to-value discrepancy. Those are wins that those are sustainable. People think about, oh, this is only because the -- there's strength in the market. Let me explain. We're forcing a mix shift where if I know a product is selling everywhere in the market at a much higher value than some of my low-margin tail customers are getting, I'm going to adjust that because I know what the market -- the market has spoken. The market put a value on that product. The fact that I have 1 or 2 customers that somewhere, somehow, we're able to negotiate a much better deal, that doesn't mean the product doesn't have any value. So those are the price-to-value discrepancies that we've been doing outside of the market strength, and those are sustainable. There is some mix shift that's happening where we've always had intent. You hear me talk about rationalizing our portfolio. Now that we have the focused technologies and the focused markets that we talk about. If I have a wafer, half of it goes to auto and half of it goes to consumer on the same technology, guess what? I'm going to shift it all to automotive because that commands a higher margin, and it's a longer-term growth driver. So that's also a sustainable expansion model. And so we've done a lot of that, and that's what you see in our results so far, right? In the gross margin trajectory that Thad outlined, you see kind of those pillars that are going to get us to the 45% margin in the model. And a -- there is a lot more that we are doing on the portfolio on the shifting on the mix shift. But also, half of that is going to come from manufacturing, and that's a multiyear process. It doesn't happen overnight when you talk about manufacturing. But the execution on that started, and the benefit will come layering on top of all the deliverables that I talked about on the portfolio.

Okay. So I've already had 3 questions come in on pricing. Maybe these guys are rep firms or distributors or something like that. But just talk about how much has pricing helped so far. How much has that helped sort of the gross margins? Is pricing a factor whatsoever in your gross margin targets? And how do you think about longer term? And I know maybe expand on the sort of pricing you're doing within the portfolio as far as getting rid of some of the lower-priced products, and then also taking a look at certain pricing action of products that we found out about at your Analyst Day from some of the GMs there.

Yes. Look, our biggest self-help is the value that we provide. Of course, pricing is a contributor, but that's not the main driver. The big -- one of the biggest drivers is, like I said, the mix. The efficiency of that mix as we streamline more of our footprint and our manufacturing that we've been working on since the beginning of the year, that's going to get us more wafers. And when you get more wafers out of your footprint, everything gets better, right? Your whole cost structure because now you're absorbing more of that cost across a much bigger volume. So all of that are the contributors to the gross margin expansion. When we talk about the -- I talk about passing on the cost increases to our customers. I wouldn't look at that as a favorable to gross margin because we're passing the cost down to customers. There is a portion in that 10% to 15% of the noncore that we talk about where we have raised prices because you don't want a way to exit these businesses as you price yourself out. But what I want to make sure people understand, that's not margin that is now above the corporate margin, right? You increase prices, but it's still noncore. And we don't provide specifically the value that we want to get to that 45%. So actually, that -- losing that business still has favorability to gross margin. So people worry we hit the ceiling. What else can we do? There's a lot of self-help that we can do. And disconnecting the margin expansion from revenue puts that gross margin expansion all in the self-help bucket where we have to execute, but we know what to do.

Hassane, could we expect in the future a little bit less price volatility from ON? It seems like that's kind of what you're driving at. I think you did some of that at previous place as well. Maybe talk about that a little bit.

That's right. When you put yourself in a value-first versus manufacturing-first or what we refer to sometimes IP-first, then you remove yourself from that volatility based on the market dynamics. Market's is going to do whatever market's going to do. Top line will do whatever top line is going to do. But value -- but you don't lose value based on supply and demand. Where there is supply, all of a sudden, your value -- your component or your products are less valuable. That's not the case. So shifting to a value-driven model versus a manufacturing and fill-the-fab model puts us in this sustainable area where -- if there's a top line that says, oh, we don't see the value in the product, that doesn't mean I'm going to go chase it down to the margin. I'm just going to say, well, go find it somewhere else then who will give it to you for no value. That's not who we are as a company anymore, and that's changing the culture and the approach.

Okay. Great. And then maybe dig into the manufacturing strategy. You seem to have taken a bit of a 90-degree turn from the previous regime at ON as far as how we're going to buy as many fabs as we can. And now you're shrinking and hybriding. Maybe go through your manufacturing strategy, and how long this is going to take?

Look, any time you talk about rationalizing manufacturing footprint, not just front end, but I look at it as overall, front end and back end, that's a multiyear process. It takes time to qualify products somewhere else in a different manufacturing facility, internal or external. It takes time to get the customer qualified to ramp and so on. So we're talking a multiyear process to unwind it. But the benefit comes when you start moving the products. When I start moving product from 1 fab to the next and I start ramping it, it doesn't ramp overnight. It will gradually ramp overnight. But every single wafer I build in that new fab fills that fab more, and everything in that fab gets better cost, right, back to the utilization comment. So you're going to see that gradual improvement as we do those actions. So it's not the when you transact and you hand the keys to somebody is when you're going to get the gross margin expansion. The gross margin expansion happens along the way. The transaction is just a milestone. So that's what we've been working on. But it takes time to do that to qualify and all of that. One thing I do want to make sure, when you said the 90-degree shift, that is true, but we're not sacrificing capacity. People talk about, well, how are you going to grow? Well, the growth is going to come from capacity. So what we're doing is having a more efficient manufacturing footprint where we are reducing our fixed cost overhead that we may need to absorb at some point into a more scale manufacturing footprint that gives us a better cost structure across the board and minimizing our fixed cost. And that's how you get a structural gross margin level that doesn't fluctuate with the top line.

Yes. How do you see the use of foundry coming in or for ON in the future?

Look, foundry is an important partner for us, where we have technologies that the foundry is way more competitive than we could ever be doing it ourselves. So we're going to use the foundry. We don't have any more of this mindset of must-be-built-here to win, right? So if there are things where scale of foundry gets you a much bigger advantage than do it in-site, you're going to see us do that, both front end and back end. We're also going to have, in certain areas, dual sourcing. Meaning we have internal because we already have it. But when we see the demand growing, we will be flexing it externally with the foundry. And there are technologies, of course, like the power, high-voltage power, where you don't have foundries for it. Those are the ones where we add a lot of differentiations by having that manufacturing footprint, and we're going to utilize that ourselves.

Okay. And then maybe talk about how the 300-millimeter fab falls into that.

And that -- so the 300-millimeter is one of that consolidation place where I said consolidating fixed -- physical footprint, right, but not at the expense of capacity. The capacity expansion comes with the 300-millimeter going online in the '23 time frame. So our capacity, although we said we're going to reduce or shrink our manufacturing footprint, from a front-end capacity and overall, we're going to see that going up 1.3x from where it is today. So that's the benefit you're going to get when I say moving technologies to fabs at scale is going to give you not just the benefit of the technology you move, but the benefit of all technologies that exist in that fab. So it is a big component of it, and we're going -- part of our capital intensity targets that we've given is landing on EFK, of course, the longer silicon carbide.

And as that fab comes online, is that going to have any impact up or down on gross margin at first?

Look, there's -- of course, until the fab is full, it will have -- we need to fill the fab. Apples-to-apples, you have to be filled. But our focus, of course, is to have all the other levers of margin triggering by that point to kind of offset it to minimize that impact. So net-net, you're going to see that gradual migration to our model. But of course, there are trajectories that we have to go to. But our focus is not to have a hockey stick and not to have a step function, just stick with that gradual predictable gross margin expansion.

Yes. Do you guys -- this might be too far out, but do you have any idea of how long or what sort of revenue level it would take for the Fishkill fab to go from being dilutive to accretive on a gross margin basis or a margin basis?

No, we haven't -- well, we have an idea, of course, but we haven't really reset the number because we don't look at it as a revenue per fab, right? That's the old manufacturing mindset. What we're looking at, we're going to run the technologies that will benefit from that fab and the scale of the fab, right? So we're not tying ourselves to a revenue target that we have to achieve. We're looking at it as purely a utilization. And then the mix of that utilization, which then translates to a revenue dollar, is going to be the secondary. Our focus is to have the full flexibility in our capacity footprint to be able to have the flexibility to run any technology in the places that is more sufficient for our business.

And then, another sort of current event that I get asked about is the shutdowns in Malaysia. Does that have any impact to ON?

Look, any disruption because of COVID, including in Malaysia, has an impact on ON Semi. However, we've been -- it's not a surprise. We just don't know where the shutdown is going to come from, but disruption is going to happen. We've been able to manage it very, very well. You see that in our results. That's all I can tell you of how well we managed it. And you look at our results in general, it's all built into that. Now people talk about the disruptions in Q3 that you see at the OEM level. Again, people ask, did this stuff get worse? My answer is no. It's expected because of the disruption in Q2. You're just a quarter away from impact. So we have a good team that focuses on continuity, business continuity. I'm involved, our Head of Manufacturing is involved, and we will manage through any disruption as it comes.

Great. On the products, so you mentioned that -- I think you're pruning 10% to 15% of your products. Is there anything out there that you don't have in terms of products that you'd like to have? And you can -- feel free to be as obtuse or as specific as possible or you feel pretty good as it stands right now.

I feel pretty good. One of the first assessments I've done after joining the company is on the technology side, and that's how I started getting very bullish about the silicon carbide or the power and sensing prospects of what our strategy could be even back in Q1 before we voiced what our strategy is. So I feel pretty good. I feel comfortable with where we are. Of course, we have a road map of new products that we have to execute to. But again, that's self-help, that's execution, and we're going to keep focusing on that. But look, we are in a consolidating industry. We can't be blind and have blinders on. But as an organic strategy, I'm pretty comfortable with it.

Sure. On that note, you just made an acquisition of GTAT. Maybe talk about what attracted you to them.

Sure. Let me give you just, in general, how we think about it. We've always said that we would -- we'd be very disciplined in M&A because of my prior answer, we have kind of a lot of the structure that we need to be successful and to deliver on our strategy. And we would be very disciplined with M&A. And one of the uses of M&A is to accelerate an internal development that we have as a company. I've always said, we have an internal development as a company for substrates to make our own substrates for silicon carbide. And when the opportunity came about for GTAT, given that we are a customer of theirs, so we're very familiar with the technology and the capability, it seems a very synergistic and strategic move for us to engage. And that's how it came. So it wasn't a form. It was a good engagement that started from an engineering level before it came into a transaction level. And our focus for it is, again, accelerating in internal development that we have as -- for substrate. But more importantly, the thesis for it is supply assurance for our customers. So I talk about the ramps and the growth that we have in automotive, specifically as it relates to silicon carbide and the EV market. And that acquisition supports that from a supply assurance side.

Maybe give us a little insight into the inner workings of you and ON. Did the GTAT acquisition -- was that simmering before you got there? Did you get there in a month or 2 in? You had a bunch of engineers tell you when you need to get this product. Did you have customers calling you telling you, you need to add this thing on? Maybe just give us a sense of the time line there.

Look, I won't go beyond the time line of what was publicly out there. But what I will tell you is we did a zero-based plan when I came into the company. I don't believe in what I call grandfathering anything in. We reset everything. The road map was reset. The strategy is reset. The strategy was redone bottoms-up. Of course, we -- the only constant was the capability of the team and the capability of the technology. That was kind of the anchor because I was comfortable with that, having talked to customers about why they choose ON Semi. So therefore, the ability to approach and win the market is how the strategy evolved bottoms-up. And our own internal, we have investments in our internal substrate development. And therefore, when you have all of that and you have a stand-alone organic plan that you deliver on to your strategy, then you start looking at opportunities to accelerate. The engagement with GTAT, as you know, is public. The engagement of GTAT as a customer to them is -- dates before my time, so the familiarity with the company and the capability predates me. But the strategy overall for power was developed since the time I joined until now.

Got it. Dig into another product line, the sensor business, one of your fastest-growing products and another product line where you've had some acquisitions enhance that business. Just talk about the drivers on the sensor business and how that sort of feeds into the overall ON perspective as a company.

Yes. So if you look at the fundamental, what is driving the sensing business as the underlying growth in the target markets we have and the automotive is ADAS, obviously, with the vision side of the sensing and the LiDAR side of it. And in the manufacturing or industrial is the factory automation. Both of those are big drivers in the sweet spot of our markets of auto and industrial. For -- from a synergy perspective, we already have the highest -- high market share in image sensing in automotive, but more importantly, in ADAS. So when you talk about the growth in ADAS as a penetration, as more and more cars go to Level 2+. And I'm not talking about going to Level 4 and 5. I'm talking just Level 2-plus, take it as kind of the mainstream over the next 5 to 10 years, and penetration of the number of vehicles that will get to Level 2+. That's the growth that you're going to fuel our market share because we have a big market share. So it's not about gaining more share. It's about leveraging the penetration of vehicles that will get to Level 2+. And the same thing on the manufacturing. Manufacturing efficiencies when you push for sustainability, less power, less usage, is going to come with the throughput that you get through the factories. And throughput, you can only achieve it with what we call global shutter, where the camera is as fast as the mechanical physics of that line can be, as a moving target, the distortion of a moving target. I showed the picture of a barcode on a rotating -- you have to be able to get that picture. Otherwise, you have to slow the line down. And that's what's driving more automation, that's what's driving a lot of the sensing that we make.

Great. Nice transition into more automotive and specifically EVs. We get a lot of questions on EVs. How critical to your automotive growth targets are EVs? And if you could give us any figures on what percentage of the market you think EVs will be in, let's say, 5 or 10 years. Inquiring minds want to know.

Yes. Look, obviously, the biggest -- when you talk about a driver being power and a driver being in automotive power specifically, EV is the biggest driver there. And EV is both on the traction inverter and onboard chargers, but that also pans out -- I know it's not automotive, but it pans out into the industrial domain with the infrastructure or the charging infrastructure that has to be deployed in order to support the growth in automotive. So the big growth driver is obviously the EV penetration. We do see about -- EV becoming about 50% of total vehicles made by 2028. That's kind of the crossover, if you will, that will happen. But look, for us, where I see the opportunity, I'll take it in 2028. But between now and then, the content. I gave examples of customer content in Analyst Day where you go from $130 for an ICE with Level 1 content for ON Semi at a customer in production back in '19. That same customer, same brand in a EV Level 2+ is over $700. So apples-to-apples, yes. And so for me, that's why I went as far in Analyst Day saying even if the SAAR is flat -- because everybody is worried about, oh, the SAAR is too much this year, is it going to be done? Forget about all that. If you have a flat SAAR, that transition of just more EVs is going to create more content opportunity for ON Semi.

By the way, I don't know if you guys have ever looked at this, but are your margins any different in an EV versus an ICE car? Or is it pretty much the same?

No. I mean, obviously, we expect the margin uplift because when you go in EV, the core of the EV, the value of it is in the traction inverter and the efficiency of the product. So again, as long as you get the efficiency that translates for customers into range, that's value that they will pay for. So our responsibility to maintain that value and expand the gross margin along with new products is to maintain that technology advantage from a device, but more importantly, from a packaging side. People think about it, well, ON Semi, you make semiconductor. But traction inverter, I just want to remind everybody, we go all the way to those enhanced metal packages. As you know, I showed it in Analyst Day. If you're able to get the cooling in a much smaller footprint, there's metal that you don't have to put on the system. That's better cost advantage.

Yes. And the $700 you actually threw out there, I mean, we're all doing our own math on that. But it also seems to me that the actual semi content in an electric vehicle is increasing every year. Do you have any estimates as to how fast the content is increasing?

The content is purely going to be on penetration. If I look all in, the voltage rails, 48-volt and traction inverter voltage, and of course, there is a lot of support power in there, power management and so on. That's what I talk about, about the breadth of our offering. So the position we are in, which is a very good position to be in for automotive, it's the breadth of the portfolio. It's not you provide one technology for traction inverter. Yes, we can do that, and we're really good at it from device to packaging, but we also support all of the other demand from customers. Thad showed the chart. On average, our customers buy over 20 parts from us. That breadth of portfolio is also a competitive advantage.

Yes. Yes. So let's talk about the other side of the coin, the shortages. Good for you guys, not so good for the customers. Would you say that it's getting under control? Or is it getting worse? And are we seeing it just in automotive? Or is it still in some of the other end markets?

Look, is it getting good or -- that's a hard question because every time you kind of get your head above water, you end up with a new disruption, unfortunately, due to a surge of COVID in certain areas of the world where not just we have manufacturing, but some of our suppliers depend on in order to support not just our demand for raw material but also our peers. So it's a disruption that causes my -- not the hesitation, but the stability of my answer. Because as we make progress, I can't predict where the disruption is going to come from. We all heard about in Q2, Malaysia was a big disruptor that the supply is getting impacted this quarter because of it. You have Vietnam. So there are regional surges that we have to be aware of and adjust. I can tell you, our focus has been on the safety of our employees. We have been very active and supportive locally on our own site with vaccination. That helps with minimizing the shutdown that may or may not be mandated by the local governments. Because when the shutdown happens, the faster you react with proving the safety and you're not contributing and you're actually helping your community spread and the fact that we are an essential business, that helps get back online quicker. But even a day of -- shutting production for a day is a day air bubble that's going to travel through that system because everything is to hand them out. So I would say -- I wouldn't say better or worse, the disruption is a disruption. It's bad when it happens, and we work our way out of it. But I do see that kind of staying with us through the balance -- supply and demand imbalance through the first half of '22.

[ So you think you got ] handle on it until the second half of next year. Is that [ on call ] right there?

Yes. That's as good as I can -- my crystal ball predicts and based on what I see. But again, like I said, the baseline changes if -- because COVID is an asynchronous event, right?

Yes. And then in terms of the end markets, clearly, the automotive issues have been well documented. Are you seeing these shortages in any other end markets that you're in?

You do. You do. It's kind of the, I would call it, it's a shrapnel that is left over. And because of that, when you have enough capacity and automotive strength is utilizing all of it, you don't have a wafer to give to somebody else, right? So what we are trying to do is get more of that capacity. Now for us, we started the conversation with the mix shift that we're forcing. Some of it, we're actually proactively walking away from it in order to create capacity that otherwise would go to outside of auto and industrial, where we're managing it out and take that wafer and that capacity and move it to auto and industrial because that's going to be with us longer term.

That makes sense. So what do you think is going to fix all this for the next couple of cycles? I mean do you see anything -- are you looking at doing anything differently longer term? Do you think the industry is going to do anything differently longer term? Are we going to have the politicians get involved here and they'll fix it? What's your call on that? Is anything going to change?

Well, politicians getting in to fix it, let me talk about what we're doing first. But our focus is working with our customers, not our typical customer, which, let's say, in automotive, it's the Tier 1, right? For me, the focus is in the longer term where it's Tier 1 but also the OEM, the car manufacturer. The visibility of the demand and where the demand is going to come from is key for us to build capacity where that matters. You're not going to see me do a shotgun approach of let's just -- I have all this demand, let's build capacity across the board, equal opportunity. That's not who we are as a company anymore. Where we are is strategically putting capacity expansion. Thad talked about our CapEx going to East Fishkill for all the reasons we talked about. And silicon carbide because that's where the growth is going to be, and that capacity will be there, and the demand will be there. How do we minimize that risk for us but also ensure capacity for our customers? That's where long-term strategic agreements happen either 3-way or 2-way with us and the Tier 1 or us and the OEM. Those are conversations that didn't happen before. That's a new baseline. Obviously, we're navigating through it in partnership with our customers. But I think we are going to land in a place -- I don't know if it's going to be the solution for all, but at least it's going to be a step function improvement from where we were as an industry where we, as semiconductor, were not going to build and hope it comes. And from an OEM side, they have to commit to the revenue and then let me invest in providing that capacity. And that's kind of, I think, the right balance where we need to land. The government has taken a lot of good steps. The CHIPS Act is a tremendous big step for the industry. It passed Senate. We still work in order to get it through Congress and to get it to the granting process in the state, and that's a welcome development, for sure. And we'll work with our representatives in the states where we have manufacturing. But we are a big manufacturer in North America, and I see there is benefit for us there. But there's a time latency for that, but we're watching it closely.

One theory I've heard is that we've seen this multi -- kind of multiyear and multi-decade trend of inventory going lower. Do you think that we're going to come out of this with a little bit higher, I guess, normalized levels of inventory? Are you being pushed? Do you see distributors, OEMs, anybody in the food chain being pushed to maybe maintain a higher level of inventory going forward than they have in the past?

Look, I think the conversation about any party being pushed is not going to be constructive to anyone. Because if I hold more inventory, that doesn't help the customer that needs the capacity because if I have inventory and the same thing happens today that happened in 2020 -- in Q4 of last year, it will get allocated. And it's not -- there will be winners and losers. People who will get some capacity and people who don't. It just matters who has the inventory, right? So it may be a component of it to kind of buffer areas in the supply chain, but any party getting pushed to hold inventory is not the right solution. That's a band-aid on a process that needs to get fixed. I think long-term visibility with teeth on both sides where the -- on the customer side is their commitment to take that capacity that they need, and our side is to invest in that capacity in time for the ramp.

Got it.

Those are where our core capabilities is there. So let's all focus on what we do best and commit that we will do it. They will pull it. And when they need it, I will have it. That's the balance you need to get to.

Makes sense. Maybe talk a little bit about lead times. This pops up seemingly every conference call with you guys. What would you characterize as your normal lead time? And then where are they now? And do you think that they are going to stretch out further? Are they stabilized? Are they going to come in a little bit? What's your crystal ball?

Look, I'll be very, very frank. Lead times are 40-plus. When you get to the 40-plus weeks lead time, it doesn't really matter. And I'm just going to be honest with you because we're working very closely with customers on multiyear outlook on visibility, how the backlog layers in, it will matter, of course, as things stabilize because that's -- back to my prior comment, that's how you get that visibility. But right now, with the supply and demand imbalance, our focus is on making sure that customers get what they need even on a weekly rate. That's our focus. Of course, a lot of it is in backlog. But we are focusing on the stay-alive quantities to make sure everybody gets what they want. Back to your point, even in industrial, not just in auto. That's our focus. Now of course, we don't want the lead times to stay out there. That's part of the -- as capacity starts to catch up a little bit as we get less disruptions, you're able to catch up, and that's when you see lead times kind of dropping down. Now where it lands, that's work we're taking the opportunity now to revisit because we have a different mix of products. And therefore, you can argue that both the inventory and the channel level and the lead time profile may change. We're doing that on a zero-based plan where we're starting saying, if we are now a brand-new company with the mix we have, what should it be, and that's the work we're doing.

Okay. What would be your sort of ideal lead time? 4 weeks? 8 weeks? 12 weeks? 8 to 12 weeks? 4 to 12 weeks? What would you like to see it as?

For me, longer is better because I get better visibility.

[indiscernible]. We did have one question come in, probably for Thad, just on your usage of cash. And what is the ideal leverage level for ON Semi?

Yes. So on the Analyst Day, I laid that out saying that the net leverage ratio, the target for us is about 1.5 to 2x. We're pretty close to that now. We've been building the balance sheet flexibility, as I've said. We're doing this GTAT acquisition with planning to close early next year. We use cash from the balance sheet on that. Longer term, what we've said is we've returned 50% of our free cash flow to shareholders, and you can think about that as being in the form of buybacks. Really, the next year to 18 months, it will be focused on balance sheet flexibility. And after that, we'll start returning cash.

Great. Gentlemen, I think we've run out of time. Thanks again for coming. Thanks, everybody, for listening, and hope to see you again soon. Thanks, guys.

Thank you, Chris. Thanks, everybody.

Thanks. Thanks.