ON Semiconductor Corporation (ON) Earnings Call Transcript & Summary

Thanks for coming, everyone. Thanks for being here on this afternoon of the annual Citi TMT Conference. I'm Chris Danely, your friendly neighborhood Semiconductor Analyst. It's our pleasure next to have ON Semi, the dream team. We have Hassane El-Khoury, the CEO and resident [indiscernible] at ON Semi and then Thad Trent, CFO and resident Math wizard at ON Semi. So it really is my pleasure to have both of you guys up here. Thanks again for coming. You've supported the conference every year. So we had a couple of your competitors this morning talking about what's going on, both reiterated guidance. But I'd ask you guys, it seems like we've had, I think, 5 or 6 of your peers here today in the analog space and asked them about the various end markets. So let's start with auto. I would say it's, I guess, slightly mixed. Some companies are saying that auto is a little better. Some companies are saying, we don't know. Talking about the quarter will depend on September. Visibility is a little bit murky. Any of your expertise on what are -- I guess, start with the underlying demand trends in the automotive market, and then we'll move on from there because it seems like that's like the most controversial area of semis right now.

Yes. Look, I think we'll -- I'll start at high level what we talked about last earnings call. We saw stabilization overall. I don't think you can call recovery yet or anything beyond what I talked about L-shape, which means first positive is a stabilization. However, we did acknowledge some green shoots in some of our end markets. We talked about automotive being, call it, flat-to-slightly up, but that's not up because of a recovery, but the lumpiness of some customers decided to take inventory down lower than they typically would.

And that's for [ Q3 ] sequentially, just...

I'm talking for Q3. Because, look, beyond Q3, then you need to talk about an industry -- recovery in our industry market. I know some of my peers you mentioned talk about it depends on September look, at this point, you are in September. You either have the order or you don't. At this point, you're almost packaging and shipping. So I don't think that the visibility is as grim as we don't know what's going to happen in September. We don't -- we, as a company, don't have that -- I would like to see to say we have better visibility. And look, we have better visibility on the way down, better than most of our peers where we call both the industrial market when the softness or the inventory correction started, call it, probably 6 to 9 months ahead of everybody, and so we did in automotive. So I'd like to say, we have better visibility because of how we run the business. But I would say at this point, I'm comfortable to mention we have stabilization. As far as calling a recovery, I think that needs more time, and it has to be a change in the market. Because to me, a recovery, I'm not going to peg it on, oh, we got more backlog. Therefore, here's the recovery. I have to see a recovery over at least a 2-quarter basis because you may get the backlog, you may ship it, you may get a good quarter. But if the end demand doesn't catch up, then it's going to be inventory and the hamster wheel starts again. So you have to see a sell-through of our end customers before you start talking about the backlog being sustainable and i.e., a recovery.

So one thing you talked about that I did want to ask you about is, you guys lowered utilization rates. You were at least in the first 2 or 3 companies, if not first. So you seem like you're a little more aware of what was coming and infinitely better prepared for the correction. What did you see? Like what caused you to be so proactive.

Yes. So we look at both Thad and I, look at many of the KPIs and the data, actually, on a weekly basis with the working team. It's not like we sit somewhere and we got a report that synthesize with the conclusion. We look at all and we use our combined experience with my -- the executive team's experience of what does this tell us? And how do we react? But I would say at a high level, you've heard us talk about the LTSAs. I know there are mixed views when we started talking about the LTSAs during the -- all the shortages, even when kind of the market started to loosen up a little bit, mixed feelings about the LTSAs. But one thing I've consistently said is, if nothing else, the LTSAs are legally binding. Therefore, we're going to get a phone call. That's the phone call that I want because in every other cycle or every other market this location, you don't get it the call -- you don't get a courtesy call of, "Oh, we're going to wipe out your backlog." It is the backlog just goes away and you start wondering what the heck happens. Therefore, you react to rate. By the time the backlog is gone, you're already over shipped. But because the LTSAs are multiyear, the customers can't ignore them. You can ignore it for 3 months, 4, 5 months, maybe a year. Some of our peers actually did it for a year and it didn't work out too well. When you have 3- to 5-year LTSA, you're going to get the call. And the call goes like, we know we signed up, we know we're on the hook. The demand is not there, what can we do? That's the start of conversation that we want to have, which is it's not to our benefit to push inventory to the customer. Because congratulations, we made the quarter they got it on the shelf. You just pushed the problem down in time. So when you get that phone call, we do engage with the customer and say, okay, we see the demand also softening. That is a true problem. What can we do? What share can we gain? How can we offset it with new designs, et cetera, et cetera. But fundamentally, you get a very clear signal of what the real demand is from the customer. So when we start getting those calls in industrial, in Q4 of '22, we started taking utilization because the first thing you do is you stop building. You don't want to compound the problem. I have an inventory now on your balance sheet that you can't ship. So if you know you're going to have a win-win discussion with the customers, we'll stop making the problem worse for ourselves and them and then you start discussing. So we did that. Then when we start getting calls on the automotive ahead of everybody, if you recall, Q3 of '23 and everybody was in denial until the negative preannouncement started around CES. Started a quarter late by the end of 2 quarters, end of -- in the March quarter, everybody is talking about automotive. So we're getting the cost -- so that's, I would say, a big portion of why we were able to see it. And we expect, on an upturn, we're going to get the calls to make sure we're ready. And I would like to see we'll get it -- I'd like to say we will get the calls ahead of probably everybody because for everybody, let's say in automotive, OEMs increases their numbers, puts it on the Tier 1. Tier 1 may or may not believe it, then they ordered -- we're going to get a call from the OEMs. So again, this is coming, get ready. That would be a signal that I would actually feel good about.

So we're definitely keeping the LTSAs. I got that loud and clear. Would you say that most of your top 10, top 20 customers have them? Have you seen a decrease in the overall number of LTSAs? Or have you kept them but at a lower level? How has that sort of evolved as the year goes on?

Yes. So what is -- what could a win-win. So the number -- dollar number and really number of LTSAs have kind of relatively stayed flat, which means that customers actually do also still see value. But what is a win-win? A win-win could be, okay, do we have a excuse me, this part, we don't have it on LTSA, while we can add it and make up the volume. So a different mix within the LTSA share shift is another one. New design is another one. When you have a new design, you put the volume kind of in the outer years because you got to design it in and qualify it. But hey, that's a win-win for us because that's a long-term share. So in the win-win, it's not about optimizing for the quarter. It's optimizing for a structural benefit for the company, where the customer wins in the short term, if that's the problem they try to solve and we win, whether short or long term, is what we will optimize for it.

Got it. What would you say your typical LTSA backlog coverages for the quarters in these days?

So if you look out over the next 12 months, and you look at -- the Street numbers, we've got about 60% covered for that, right? So if you think about it -- and that's pretty evenly spread throughout the 4 quarters. So roughly about 60%. And as Hassane said, if you look over the lifetime of the LTSAs, it's roughly flat.

Okay. So a year ago it was still 60...

Roughly. Yes. Yes.

And do you anticipate that remain at that level going forward, yes, I think so.

Obviously, volumes have changed a little bit here. But the top line has come down, too, just with the market softness.

Okay. So just going back to the auto supply chain because I got a little off track. Whenever you say LTSAs, I get excited. How would you characterize inventory in the automotive supply chain? I think you're a car guy. So I kind of rely on you more than almost every other exec as to what is really going on there, anything from the automotive industry. So what you take...

So the difference is this time around, it's not an industry specific inventory conversation. It is a customer-specific inventory.

You mentioned that the in a conference call.

Yes. So there's not a trend. So if you look at -- in a few [ pull on ], let's say, 10 Tier 1s. Let's just do the Tier 1. If you pull on 10 Tier 1s, you're going to get 10 different answers. Some of them are holding, in my view, way too little inventory, which is, I think, a bigger problem, and the OEMs are taking notice of it. What I mean by that, think about it, you have 2 weeks of inventory. That's all great when demand doesn't move as soon as you have an inflection.

A suicide, yes.

As soon as you have an inflection, the 2 weeks overnight become 2 days, then you go [indiscernible] now. So the OEMs are worried about that level. Some Tier 1s have learned a very expensive lesson by taking the big OEMs down, costing them billions of dollars. They'll go, we are going to use this time to show we're able to have supply resilience and supply assurance. So we're going to take a more comfortable revenue. And those are the Tier 1s that are actually going to gain share. The other ones may not know, but over time, they're not getting new RFQs. We get the benefit of we see a much different view of it because we work directly with the OEMs. So the conversation with the OEM is, here's the volume that's coming, we will tell you later we'll ship it to, right? So that's going to be the discussion. And look, the level of inventory of the hypothetical 10 Tier 1s depends on how strong their balance sheet is. It's Tier 1 balance sheets, you can -- I mean, it's all public information. You can take a look at it. Some balance sheet cannot support more than that in inventory. So it's not malicious or anything. It's just survival. But that's not good in the long run.

If you took an amalgam of that constellation of auto OEMs, would you say that there is a general propensity to take inventory a little lower at this point or higher? Or do they feel like they have what they -- if you just took like an average because I know different folks are doing different things.

OEMs?

Yes.

Higher.

And what else is there like the supply chain or distributors?

The distributors we manage, right? So you got OEMs, Tier 1s distributor and us. We've done a very good job on the distribution side of it. We've kept the weeks of inventory very tight even on a lower revenue base, dollars actually drained out of the channel. We manage that to our comfort. If we're able to [ save ] some, we'll [ save ] some, you've seen us take that up for the mass market. So we manage our distribution inventory very, very well. Tier 1, they managed inventory, OEMs, they want more than what's being managed to. And today, we have LTSAs directly with the OEMs to a first order, where we may not ship to them directly, but they're holding a portion of our capacity for their needs. Part of their -- we ship it through the Tier 1. But if they want a share shift, the OEMs, if they want a share shift, then they own the allocation, and they will share shifted.

A couple more questions for the automotive Yoda. So EV versus ICE cars, what would you say your relative exposure is, if you had to split out your automotive business between EV and ICE.

I'd say, obviously, I will -- let me talk about the content from a drivetrain perspective because it's hard to differentiate. Interior, doesn't matter what the drivetrain is. A content in the cabin is both the same for EV, hybrid or internal combustion. The drivetrain is really what the difference is. So for ON Semi, the content in internal combustion drivetrain is $50 worth of content. but that content goes to about $350 for hybrid and $750 for EV. We have EVs, obviously, that are more than that, and EVs that are less than that, but that you can think about it as an average. And look, I'll use the opportunity given that I mentioned the word hybrid, a lot of people go, "Oh my god, hybrid is in the future, what are you doing on hybrid?" Well, it's $350 worth of content. So it's still 7x from the internal combustion. But let me make a point on EV. There are 2 types of EVs. There's -- or 2 types of hybrids. One is what we -- you hear about range extender, hybrid, okay? From a content perspective for us and China, by the way, primarily is going to range extender hybrid. From a drivetrain perspective, that's a pure battery electric vehicle with a small internal combustion engine that just charges the car. It doesn't drive the drivetrain. It's a generator to drive the -- to charge the batteries. So for us, that's a fuel full EV content, that's the 750. Then you have the hybrid, plug-in hybrid that's the 350. That's more on the silicon rather than the silicon carbide. We do both silicon IGBT and silicon carbide. So regardless of where the market or what the customer mix is, we can support both of them.

And so it seems like the EV growth prospects have slowed, but perhaps that's being taken up by hybrid getting a little stronger. Do you agree with that? And then do you think that there's like an ICE come back out there given the potential slowdown in EVs? Or how do you sort of assess the overall market?

So I would say I have a longer-term view of the market. Longer-term view is EV is going to be the drivetrain. That's a fundamental belief I have based on 1 investments at the OEM levels and consumer demand. Now affordability is all of that, that you hear about in the short term, that's all going to work its way through the system. We're going to have more affordable EVs, you're going to have charging, you're going to have fast charging. All of those are road maps that we've introduced, and I know customers are working on. So long term, EV as a percent of total vehicle is going to increase. That's -- again, where hybrid, is it going to be 100% by X year? The answer is no. It's not realistic to expect that. So first, you have to expect the growth through penetration which is, I think, is a safe assumption based on all the RFQs, based on the introduction other than 1 handful of OEM, maybe 1, 1.5, nobody canceled or pushed out EV plants. What they've done is they reduced their -- the volume that they would be. But most introductions for EVs coming out of Europe have been introduced. Most introductions of EVs happening in China have been introduced. The sell-through is not what we expected 2 years ago. But the penetration is happening as platform. So that's why you have to see that long-term view, which is the view that we're investing in. Short term, there is a problem when it's multifaceted. We have high interest rates, not a lot of cheaper alternatives. And those 2 together are not inducive to growth in EV to the level we did, there's growth, but not to the level that we thought a few years ago. $30,000 car is very different than an $80,000 car when you have 9% interest rate.

A couple of questions on that. Do you think that EV like price/content needs to come down to drive more penetration?

Not yet. It's what I call optionality. You're not going to get an $80,000 car, and you say, I'm going to buy this car, when it gets to $40,000. You needed a different car at $40,000, which is the same thing in internal combustion engine, right? So I think affordability to get to mainstream is a necessary need, which is the same in ICE. Otherwise, everybody will buy premium or everybody would make lower-end vehicles. So ranges and affordability is, of course, a requirement. People talk about range is another one. Range is adoption. It's not a requirement. Today, anybody can buy a 300-mile range car. How many of us drive 300 miles in a week without having access to one evening that you can charge it overnight. You see, I mean, so it's not that. Charging speed is prohibitive. But if I have to wait 3 hours to charge a car, I guess what, that's more than my lunch break, right? So 15 minutes, 1-5, that's a much different EV profile. So those adoption curves are going to accelerate as you solve the structural problems, while you provide affordability for the vehicles and affordability, people ask me, is IGBT or silicon carbide. That is not the affordability. The affordability is how much battery you got. Silicon carbide, we provide silicon carbide. And the reason we win is efficiency. 10% efficiency on silicon carbide versus IGBT is hundreds of dollars on battery volume that you can reduce to keep the same range. There's no way you get a hundred of dollars benefit by going from SiC to IGBT. Do you see what I'm saying? Yes. So it's not about the technology of the drivetrain or the traction, it's what that technology, although more expensive at a piece price, it provides a more affordable vehicle if you can reduce the battery between IGBT and SiC. That's the math that the OEMs are doing. Not I need $0.10 cheaper than -- $0.10 is not going to make a difference when you're talking about $100 per liter of EV -- battery.

On that point, it seems like most of the more affordable EVs are coming out of China. It seems like every other week, I see some new Chinese EV company, who is launching a car for $20,000 or something like that. I mean do you think that most of the growth in EVs is going to come out of China? And then obviously, what's the impact on? Is that good? Is it bad? Is it indifferent?

Today, adoption in China is the highest from the rest of the world. That's a fact. Now every -- like you said, every week, every month, every quarter, there's not just a new EV coming out for $20,000. It's a new brand of EVs coming out there. So there's going to be -- at some point, there's going to be a consolidation, just like any industry, including in China, you get the broad innovation and push and then you got consolidation for financial performance. So that -- keep that aside, that's a timing thing. From our side, the commentary I gave at our last earnings call, I just attended in April, the Beijing Auto Show, which is where all the new China vehicles come and they present, those are vehicles that are to be launched, not concept and so on. And I would say, most of them were silicon carbide most of them were 800-volt batteries and over 50%, 60% were On Semi silicon carbide inside.

6-0?

6-0. So that's kind of the -- you can talk about the market share from our perspective in China. Now the volume remains the same topic we talked about as far as penetration. But whatever you believe the market is this year or next year, you have to be in the socket to grow when the market recovers. So our focus has been, even in the lumpiness, short-term lumpiness of EVs is, we need to make sure we're designed into these sockets. So when actually volume does recover through optionality of price points or interest rates or you're going to grow with that volume.

One more is the big Volkswagen deal you guys signed up. When can we expect this to be a material impact to ON?

So you've got to think through your typical automotive design cycle. So it's not a 2025 revenue. I'm not given the time line. I think VW has done a good job under SSP, talking about time line, but you can think about it from an automotive design cycle as far as when you're going to start seeing the ramp and then material within 1 year or so after that start just to get to that maturity of peak. Important thing is a lot of people ask. SO what is it? What's the power box? We talked about in the press release. So everybody talks about silicon carbide as the die or the device. I've been talking about silicon carbide as a technology play, which is device and packaging. You're not going to win with the device, if you don't have competitive packaging to get the heat out and the efficiency and so on. If you think about the power box, it is every module, think about it this big, has 8 to 16 multiple dies in it, 8 to 16 of them to get the performance. The module -- you need 3 of them to run the traction inverter. And then all 3 of them are sitting on a cooling jacket that you pump coolant in to water cool it. We provide that box that power box. And we provided, in this case, directly to the OEM. So we're able to vertically integrate not just down to the substrate as we've historically done, but vertically integrate also upwards towards OEM by creating more value to system-level integration and system-level performance because at the end of the day, if they can get the efficiency we can provide through that, they save on the battery and they save on the system. And that's a benefit for the OEM. It's something we've been working on. In our last Analyst Day, Simon, the President of the Power Group held one of them in his hand [ 4 ] to win would be, I think, I said this is the future. This is a new platform. And the VW Group win, not just the VW brand, but all the VW brands landed on it as a scalable platform.

Great. Shifting gears, I guess, but to stay in automotive, let's touch on the silicon carbide market. So one of your dastardly competitors talked about 30%, 40% growth in silicon carbide in 2025. Does that make any sense. So we're in the right solar system. I won't even ask ballpark, but are we in the right solar system? And what do you think are going to be the key drivers up or down of the silicon carbon market in 2025.

At the end of the day, it doesn't matter when. Let me ask you this. What's the assumption of the demand? I can give you any number, and I'll have the disclaimer at the bottom. And here's what I think the demand is going to be. What's the number of EVs that are going to happen? What's your market recovery? Are they expecting a boomer year like we had 2 years ago? Or my point is, it adds -- it has no credibility as far as I'm concerned that far in advance to be talking about 2025. When I will -- let me ask you this. Is it the same one that said they don't know about September.

Perhaps [indiscernible] I can tell...

Do you understand what I'm saying? If you don't know what's happening in September, and you can't even guide for the Q4...

Mutually on sell side.

Then it doesn't really matter what you tell me about 2025 at this point in time, I'm sorry, but there's a credibility that I don't want to engage in at that level.

Let me give you a point that might help as well. So there's the trajectory of the EV ramp. And then there's penetration that sits on top of that of silicon carbide. So today, it's 22% penetrated silicon carbide what's in production today. If you exclude the market leader, the #1 guy in North America, it's 6% penetrated. If you look at our design wins, and we sell silicon and silicon carbide products, you look at, what we've stacked up over the years, it's like 85% silicon carbide. We sell it away, and we're happy to sell it [indiscernible] to those customers. So the fact is the penetration rate is going up. It's just a matter of time until those get into production. The question is what's the sell-through going to be. So that feels totally unpredictable. What we can tell you is from a design perspective, penetration is going up, for sure.

Yes. And by the way, on the -- let's just take the EV market. Can we pretty much roughly map the silicon carbide content to the ASPs of these EVs? Like if there's a $80,000 EV would it have 3x the content of a $25,000 EV. That makes any sense?

Yes. No. Yes, I understand. It's actually more tied to the battery. So 800-volt battery primarily over 90%, if not more, is silicon carbide. So as the batteries get to the 800-volt, which most of them are, regardless of high end and low end, and then you're getting more into the 1,200-volt silicon carbide, which is much more efficient than 1,200-volt IGBT. So it's more on the battery. And the reason I say it's more on the battery as battery prices also normalize in the market and you're able to get an 800-volt at a different price point than you did 2 years ago, you're going to see those getting into more entry-level vehicles than just the 400. So that's -- it goes back to really the battery pricing. That's the biggest driver for price points of EVs. Because the content, you still need 4 seats right, okay, leather seats or class -- all that is optionality that you have from internal combustion. So it doesn't change the ASP. What that's changed it is the drivetrain.

Okay. One more, since we'll stop the forecasting there. How about your gross margin assumptions of silicon carbide, what's it going to take to get to accretion? I mean, granted you're whatever nonsilicon carbide margins move around. But give us some sort of milestones or timing on when we can expect silicon carbide to be accretive, let's just say, parity and then accretive to the overall model.

Yes. Look, it goes back to -- today, I look at the margin performance of silicon carbide in product margin and gross margin. And the reason for that is you got the underutilization, meaning, are we pricing on a value? And are we providing a value that is at or above. That's a product margin. The answer is yes. Now you have the underutilization because we've added capacity in order for it to be ahead of the ramps, that's what is bringing the margin down. So that's a timing thing. So at scale, we already know and we expect our gross -- the gross margin for silicon carbide to be at or ahead.

Can you define scale, give us some sort of revenue number?

I'm not going to say a revenue number because a year before we ramp, we add more -- so you're going to see kind of up, then flat, then open, then flat because as you ramp, you're going to add more capacity as well until you get to capacity maturity. So we're not giving a revenue number. And look, a few quarters ago, we did say it was already at the corporate. That was a few quarters ago. So I'll just leave it at that. And I leave it at that purely for competitive reasons. Because when I disclosed it, didn't work out too well. So I'll just tell you, we got there. There's no reason we can't stay and grow from there. It's just we've proven it. So I'm not -- I don't need to keep proving it. I'll just keep that for competitive reasons.

Have your forward assumptions for silicon carbide in terms of pricing changed at all over the last 3 to 6 months? I'm not asking them what they were, but have they changed though at all?

No, the value didn't change.

Yes. This seems like ASPs. And then maybe talk a little bit about customer concentration. It seems like more and more applications, say, on the industrial side are starting to use silicon carbide. Can you give us any sense of your customer concentration and then maybe auto versus industrial and how you expect that to change over the next 3 to 5 years?

Yes. I mean, overall, the split between auto and industrial, really has not changed for us. If we looked at the LTSAs, even from a few years ago, we talked about 80-20, you can talk about 15, 85 in that range. So call it, 85, 15, give or take. That's auto and industrial. And it really matches if you look at the market data, the market data is split about the 80, 20 ballpark. So we're no different than the market, which means we're pretty equally distributed between where the actual market demand is. On the industrial side, look, that's been a trend for a few years. It's not new where silicon carbide is making its way. Our energy infrastructure specifically energy storage systems, where we provide fully integrated silicon carbide, IGBT and hybrid, where in the same module, you got silicon carbide and IGBT we provide both so we can make those innovative products available. That business has grown 70% year-on-year, '21 to '22, '22 to '23. Now that took a pause part of the inventory digestion. But last quarter, we talked about green shoots and alternative energy. That's one of them. Another data point we have given is we're -- we have LTSAs with 8 of the top 10 energy infrastructure companies that command 80% market share. So we already have that market share. We're already designed in, and we've been growing that revenue very aggressively, like I said, '21 through '23 and starting again. That puts us in a very good position to also capture silicon carbide value into industrial applications.

Great. Before I switch gears and start to pester that over here, anybody in the audience have a question, I'm going once, going twice, I'm fine [indiscernible] Do you want to use the mic?

Hassane, when you talked in the Volkswagen press release about like the customization of the efficiency, like what do you kind of mean by that in terms of like achieving some of these unlocks, an efficiency unlocks for your customers?

Sure. So it's always, so let me put it this way. The solution is not an off-the-shelf solution, which means it's -- what, if you want to put it an umbrella, it's a proprietary solution umbrella. That is, however, based on a scalable platform. for us and the customer. But what are these customization, look, there's -- have been very consistent of saying our technology and our differentiation is both the die and the package. We co-design and co-develop the die and the module, the package and the module together because if you make trade-offs only at the die, I'll give you a perfect example of semiconductor. Everybody goes for smaller and smaller semiconductors, right, die area, smaller is cheaper, you win margin. If you take a square inch, it's a big die, I know, but just for the math. If you take a square inch of power, it's very easy to get the heat off of it. If you cut it in half and you have a 25 square millimeter, more than half, 25 square millimeter die. If you don't have the right package, you're going to have a very expensive package to get the heat of a much smaller surface. So the [indiscernible] per surface is way different and way more expensive to get cooler than it is when it's bigger, counterintuitive. So if you just make a die that's smaller, you may be high-fiving that you have an innovative device, but you just move the cost to a very expensive package. So when we say you have to codevelop the 2 in order to achieve the best performance of efficiency and cost. That's what I mean by that. Otherwise, you just squeeze the balloon somewhere else.

Great. Is there another one. Over here.

So I just wanted to ask a bit about the silicon carbide growth of 2x of the market comment you had earlier. Could you comment a bit about where as you see that coming from. So I think I've heard from previous calls that I think largely is about the confidence about the performance that you have versus your peers in this product. Would you say you are more thinking about that penetrating into, let's say, the biggest North American player in EV? Or is that in China? Or is that maybe in the upcoming European players that are doing more EV? Or is it maybe more broad-based? I wonder if you have any comment there you can share?

Yes. The answer is all of the above. So at this point, when you talk about 2024, those designs are already won. So at this point, it's ramp. Earlier in the year or end of last year, we said the second half of this year is going to see a European OEM ramp in addition to the wins that we've had in China already that will ramp in the second half. And Obviously, the proof point for that is the market share that I talked about from the Beijing auto show. So designs, everything is in play today as far as where we need to be. As far as North America, specifically, we are the market share gainer over there. We've been very consistent since last year, and that is consistent. Now you're a market share gainer, but the volume has to catch up, the units have to catch up, and that is more public than I can comment on. So at this point in time, it's purely what the end demand is going to be. That's why we peg it to market rather than a certain number because that's going to be what the denominator is going to be, but we know where we're designed in and the sockets. Over a longer period of time, Europe is going to ramp for us. We just talked about VW. North America will continue to ramp for us. China will continue to ramp for us. Those are the primary regions, really where EV penetration is high -- right now, we're focusing on design-in and market share. What happens to the denominator, which is units will just lift us along with everybody, but we expect it to lift us faster because of the share of design-ins we have.

Great. So Thad, you look little lonely over here. Maybe just run through the gross margin drivers going forward top 2 or 3, then we'll dig into it a little bit...

Yes. So look, I think we're in a really good spot given where the market is, just to calibrate. We're at 65% utilized. We're holding a mid-40% gross margin floor. The last time -- or historically, when we're at 65%, margins are in the low-30%. So structurally, we're a different company, right? We're positioned really well for a recovery when it does recover, we've got lean inventory in the channel. We've got lean inventory on our balance sheet. We can crank up utilization, and that starts to flow through to gross margin, operating margin, free cash flow. So let's walk through the pieces. So in the short term, the biggest driver is utilization. So for every point of utilization, it's 15 to 20 basis points of gross margin improvement. So we maxed out around 84% utilized. That's -- you can think about it is because we run so many technologies that's pretty much at full capacity for us. So you can do the math there, going from 65% to 80% plus and calculate there. So that's what I'm saying the shortest term, that's the benefit of the gross margin. The second piece is, today, we have a 100 basis point headwind from the GlobalFoundries business that we run in EFK. That's just a matter of time. That's going to roll off in '25. So that 100 basis points starts stepping down early in '25 and by the time we exit '25 will be completely gone, just a matter of time for that business to roll off, nothing else other than that. The third element is we divested 4 subscale fabs in 2022. That's $160 million of fixed costs. And when we move that production into our footprint, we start to see the benefit of that. So today, if we own those 4 fabs, our gross margins will be lower. We'd have more under utilization charges. So great move that we did when the market was [indiscernible] and growing at the time as well. But $160 million, we'll start to see some of that in '25, probably most of it in '26 if the market comes back faster, we'll see it faster. It just a matter of moving that production in-house. And then the last element is accretive new products that are accretive to gross margins. So analog mixed sickle, everything that Hassane is talking about silicon carbide coming up to the corporate average. All of that is a tailwind that gets us there. So if you start doing that math, you can get to our to our 53% gross margin target pretty quickly . It's going to be the #1 driver is demand. It's -- when this market recovers. And there's not a long latency for us given the way we position the company.

Would you say your overall visibility now versus, say, 3 months ago? Is it the same? Is it better? Is it worse? How would you characterize it?

I would say visibility is about the same. I think as Hassane said, we've seen some stabilization. So we monitor push outs, reschedules, LTSA changes and that's starting to slow, which is a good sign. So that's where we see this. But I would say visibility is about the same.

And in terms of that gross margin utilization rate calculation, what sort of pricing does that assume to assume normal pricing, flat pricing, up pricing, down pricing?

That's consistent pricing. I mean we are not seeing pricing pressure, right? So the pricing pressure is holding on everything that we do in LTSAs as well as non-LTSA business.

Yes. I'll give you, for example, a lot of the designs that we're winning now whether they ramp next year or 3 years from now, pricing is a -- we know the pricing, right? Whatever that pricing land, there's no uncertainty in the price even if it's 3 years out.

Great. All right. I think we're out of time. Thanks, guys. Thanks, everyone. Thank you.