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ON Semiconductor Corporation (ON) Q1 2021 Earnings Call Transcript

ON Earnings Call - Final Transcript

ON Semiconductor Corporation (NASDAQ: ON) Q1 2021 earnings call dated May. 03, 2021

Corporate Participants:

Parag Agarwal — Vice President – Investor Relations & Corporate Development

Hassane El-Khoury — President, Chief Executive Officer and Director

Thad Trent — Executive Vice President and Chief Financial Officer

Analysts:

Ross Seymore — Deutsche Bank Research — Analyst

Christopher Danely — Citi — Analyst

Vivek Arya — Bank of America Merrill Lynch — Analyst

Rajvindra S. Gill — Needham — Analyst

Toshiya Hari — Goldman Sachs — Analyst

Vijay Rakesh — Mizuho Securities USA — Analyst

Craig A. Ellis — B. Riley Securities — Analyst

Christopher Rolland — Susquehanna Financial Group — Analyst

Chris Caso — Raymond James — Analyst

Matthew D. Ramsay — Cowen & Company — Analyst

Kevin E. Cassidy — Rosenblatt Securities — Analyst

John Pitzer — Credit Suisse — Analyst

Harsh V. Kumar — Piper Sandler Companies — Analyst

Harlan Sur — J.P. Morgan — Analyst

Mark Lipacis — Jefferies — Analyst

William Stein — Truist Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the ON Semiconductor First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Parag Agarwal, Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead.

Parag Agarwal — Vice President – Investor Relations & Corporate Development

Thank you, Denise. Good morning, and thank you for joining ON Semiconductor Corporation’s first quarter 2021 quarterly results conference call. I’m joined today by Hassane El-Khoury, our President and CEO; and Thad Trent, our CFO.

This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast, along with our 2021 first quarter earnings release, will be available on our website approximately one hour following this conference call, and a recorded webcast will be available for approximately 30 days following this conference call. Additional information related to our end markets, business segments, geographies, channels, share count and 2021 fiscal calendar are also posted on our website.

Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are also included in our earnings release, which is posted separately on our website 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 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-K, Form 10-Qs and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for the first quarter of 2021. Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law.

Our Analyst Day is scheduled for August 5. We plan to host the event in New York City, and we look forward to seeing you all in person in the summer. We will send out further details regarding the event in a few weeks.

Now, let me turn it over to Hassane. Hassane?

Hassane El-Khoury — President, Chief Executive Officer and Director

Thank you, Parag, and taking everyone for joining us today. For the first quarter of 2021, we posted strong results driven by solid execution and broad-based strength across our strategic end markets. We reported revenue of $1.48 billion, up 16% year-over-year. More importantly, our focus on gross margin expansion is beginning to show results with first quarter gross margin increasing by 370 basis points year-over-year and by 80 basis points quarter-over-quarter.

We have taken steps to optimize our product portfolio and channel strategy to ensure that we capture the right value for our products, and these steps will continue to drive favorable and sustainable results. At the same time, we continue to drive cost improvements throughout our supply chain, improving efficiency of our operations and shifting our product mix towards higher margins. We are seeing increased demand across most end markets. And while the strength in the automotive market is well publicized, we also see strength in the industrial market as global industrial activity is gaining momentum.

The steep acceleration in demand has impacted our ability to supply certain products, especially those manufactured by our foundry partners, and in certain pockets, products manufactured internally. We are working diligently with our manufacturing partners to ensure timely supply of our products to our customers, and have taken steps to ensure continued supply to our strategic customers by building inventory on our balance sheet and reducing inventory in distribution channel.

By having better control over inventory, we are able to quickly respond to the needs of our strategic customers. The steep acceleration in demand that we have seen in the last few quarters will likely begin to subside in the second half of the year, but will remain at a very healthy level. We expect supply and demand to get back in balance as demand stabilizes later this year.

On our transformation initiatives, I had indicated in the previous call, our goals to realign our investment and resources to accelerate our growth in high margin businesses. At the same time, we are looking at our pricing practices to identify and address price-to-value discrepancies and are realigning our cost structure across the whole supply chain given the recent increases in material costs. We are productively engaging with our customers to ensure we’ll recover these costs, but more importantly, working with our strategic customers to secure long-term agreements to provide better supply and price visibility over the next few years.

Over the last few months, we have made several changes to streamline the organization and improve efficiency. We have brought in leaders with strong execution track records, promoted new leaders from within, all with the focus on accelerating our strategic transformation and capitalizing on the current market strength to set our path for growth and margin expansion over the next five years. My goal is to have an organization that is able to react quickly to changing business condition and is able to make decisions efficiently and objectively in the best interest of shareholders.

I remain bullish on the potential of our company and believe we are uniquely positioned to benefit from the key megatrends in the automotive and industrial markets. These are the fastest growing semiconductor end markets with solid margin potential. We have outstanding assets and a highly talented and motivated workforce. With a disciplined investment strategy and consistent and strong execution, we can maximize the value for our shareholders, customers and employees. We will provide you with greater insights into our strategy and targets at our Analyst Day on August 5.

Let me now discuss a few highlights of our key strategic end markets starting with automotive. We set a new record for automotive revenue in Q1 with revenue of $515 million. This revenue represents 35% of our Q1 revenue and an increase of 17% from Q1 2020. This increase was broad-based, and we continued to maintain strong momentum in our vehicle electrification, automotive MOSFETs, CMOS image sensors, lighting and ultrasonic products.

We continued to see strong momentum in our silicon carbide and IGBT products for electric vehicles, and during the first quarter, we secured significant design wins with leading Tier 1 and global electric vehicle OEMs, few of whom have recently launched marquee platforms. These wins are expected to ramp starting in late ’21 and will contribute to the growth we will see over the next few years.

It takes more than technology to win these platforms. Among the most important source of differentiation is our expertise in packaging, which is critical for improving heat dissipation and reducing the footprint of the module. In addition, we have been serving automotive and industrial customers for a few decades and during this time. We have built a vast distribution network, strong customer relationships, solid domain knowledge and a reputation for quality.

Customer feedback on our silicon carbide traction modules has been very strong. The efficiency of our modules is meaningfully higher than that of our competitors, which enables our customers to make favorable trade-offs between the cost of battery and the range of the vehicle. From the sensing solutions in automotive, during the first quarter, we secured a platform win for up to 11 image sensors on a single vehicle, which is expected to ramp in 2022.

The industrial end market, which includes military, aerospace and medical, contributed revenue of $371 million in the first quarter of 2021 at 25% of our revenue. Excluding the impact from geopolitical factors related to a specific customer, our first quarter industrial revenue increased by 22% driven by broad-based demand. In the industrial end market, we continue to see strong momentum for our power modules and various applications with alternative energy being a key area of growth. We are expanding our customer engagement into the EV infrastructure. And we secured our first design win for our silicon carbide power modules for a charging application with an emerging electric vehicle OEM.

Now I will turn the call over to Thad to provide additional details on our financials and guidance. Thad?

Thad Trent — Executive Vice President and Chief Financial Officer

Thanks, Hassane. Let me start by saying that I’m energized to join ON Semiconductor at a very exciting time for our company. We have tremendous opportunities to create value for our shareholders, customers and employees as we execute our strategic transformation. We have the building blocks of a robust product portfolio, excellent teams and operational scale to drive sustainable financial results during this transition.

Now let me comment on the current business environment. During the first quarter of 2021 we saw continuing recovery in business conditions driven by further acceleration in global economic activity. We are seeing broad-based strength across most end markets as semiconductor content continues to increase in the products we encounter in our daily lives. As Hassane mentioned, we continue to benefit from the secular megatrends in automotive and industrial end markets, which now account for 60% of our total revenue. Although the industry and space with severe supply constraints globally, we have supported our customers through a proactive inventory management by taking channel inventory down while holding more on our balance sheet. We believe supply and demand will start to balance later in the year.

Now let me turn to results for the quarter. Revenue for the first quarter of 2021 was $1.48 billion, an increase of 16% over first quarter of 2020 and 2.4% quarter-over-quarter versus normal seasonality of a sequential decline of 2% to 3%. The year-over-year increase in revenue was driven by broad-based strength with automotive and industrial growing by 16% and 17% respectively.

Gross margin for the first quarter of 2021 was 35.2%, a 370 basis point improvement year-over-year and an 80 basis point improvement sequentially. The gross margin improvements are being driven by improved mix to higher margin products, improved utilization and our laser focus on cost structures across the company. Our position was 80% as we ramp production to align with the strong in demand. As we move forward, our fab lighter strategy will allow us to continue to reduce our manufacturing footprint and optimize the mix of products within our fabs to reduce our overall cost structure.

GAAP earnings per share for the first quarter was $0.20 per diluted share as compared to a net loss of $0.03 per share in the first quarter of 2020. Non-GAAP net income for the first quarter of 2021 was $0.35 per diluted share as compared to $0.10 per share in the first quarter of 2020.

Next, let me provide additional color on the performance of our business units starting with the Power Solutions Group or PSG. Revenue for PSG for the first quarter was $747 million. PSG revenue increased by 20% year-over-year due to strength in automotive, industrial and computing end markets. Revenue for the Advanced Solutions Group or ASG for the first quarter was $531.5 million, an increase of 14% year-over-year. In addition to strength in industrial and automotive, ASG benefited from strengthened computing, especially in high end graphic cards. Revenue for the Intelligent Sensing Group or ISG was $203 million, an increase of 9% year-over-year. Strength in ISG was primarily driven by automotive and by computing with the work from home trend remaining strong.

Now let me give you some additional numbers for your models. GAAP operating expenses for the first quarter of 2021 was $395.3 million as compared to $384.1 million in the first quarter of 2020. Non-GAAP operating expenses for the first quarter of 2021 was $324.7 million, an increase of $6 million year-over-year and $32.3 million quarter-over-quarter as expected. This increase is primarily due an increase in variable and stock-based compensation and the normal reset of fringe rates going into the year.

Our GAAP operating margin for the first quarter of 2021 was 8.5% as compared to 1.5% in the first quarter of 2020. Our non-GAAP operating margin was 13.3% as compared to 6.6% in the first quarter of 2020, driven largely by higher revenue and gross margin performance. Our GAAP diluted share count was 445.4 million shares and included 12.8 million shares for the in-the-money portion of our convertible notes. Our non-GAAP diluted share count was 432.6 million. Please note, we have an updated reference table on our Investor Relations website to assist you with calculating our diluted share count at various share prices.

So turning to the balance sheet. Cash and cash equivalents was $1.04 billion and we had $1.42 billion undrawn on our revolver. Cash from operations was $218.5 million or 15% of revenue. Capital expenditures during the first quarter of 2021 were $77 million, which equates to capital intensity of 5.2%. As we indicated previously, we are directing a significant portion of our capital expenditures towards enabling our 300 millimeter capabilities at the East Fishkill fab.

Accounts receivable was $684 million resulting in DSO of 42 days. Inventory increased $44 million sequentially to $1.3 billion and days of inventory increased three days to 123 days. Distribution weeks of inventory decreased $113 million to 8.4 weeks from 11 weeks in Q4 and currently is significantly below our target of 11 to 13 weeks. As I mentioned earlier, we proactively reduced the distribution inventory to hold more inventory on our balance sheet to support our customer needs rather than building inventory in the supply chain. Total debt was $3.34 billion and we paid down $154 million in the quarter.

So turning to guidance for the second quarter. A table detailing our GAAP and non-GAAP guidance is provided in our press release related to our first quarter results. Let me now provide you key elements of our non-GAAP guidance for the second quarter. As mentioned, demand remains strong driven by improving global macroeconomic environment and the steep recovery in our markets following the COVID-19 downturn.

Based on current booking trends and backlog levels, we anticipate that revenue will be in the range of $1.57 billion to $1.67 billion. We expect gross margins between 35.8% and 37.8%. This includes share-based compensation of $3.5 million. We expect total non-GAAP operating expenses of $323 million to $337 million in the second quarter. This includes share-based compensation of approximately $20 million.

Capital expenditure is expected to be $110 million to $120 million for the quarter. We anticipate our non-GAAP OIE including interest expense to be $28 million to $30 million. Our non-GAAP diluted share count for the second quarter of 2021 is expected to be 435 million shares. So this results in non-GAAP earnings per share in the range of $0.44 to $0.54.

So to wrap up, I’m optimistic about the opportunities ahead of us, and I’m happy with the execution of our teams across the globe as we embark on our transformation journey. I look forward to seeing you all in August for our Analyst Day in New York.

With that, I’ll now turn the call back over to Denise to open up for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Ross Seymore — Deutsche Bank Research — Analyst

Hi, guys. Thanks for letting me ask question. Congrats on the strong results and guide. I guess, the first question I had is on the supply side. Obviously, demand is strong across the board, but on the supply side, Hassane, I wondered if there is any impact limiting your revenues from supply limitations either internally or elsewhere in the supply chain? And probably more importantly, any impact of your product rationalization efforts on your total revenues? And then just how that process is going currently?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yes. Thanks, Ross. So look, the obvious answer is yes. It’s impacting our ability to ship to the demand that we have. So revenue could have been higher if we did not have any constraint in a perfect world. However, we are where we are as an industry, but that’s not really impacting what we are doing moving forward on the portfolio rationalization task, to your second question, because it’s actually helping us. We kind of know already based on the strategic reviews that we’ve done where we’re going to be landing, and we’re putting priority on these products especially when it comes to internal utilization. Like Thad mentioned, we have good utilization this quarter, now it’s really maintaining to optimization and running the growth and high the margin products within our fabs, and that fits very well with the rationalization, creating more capacity for the products that we want to maintain.

Ross Seymore — Deutsche Bank Research — Analyst

That’s a perfect segue to my follow-up question, Hassane or Thad, either one of you guys. The utilization, I think, Thad, you said is that 85% already. It’s good to see that back to normal levels. Can you talk about some of the drivers of gross margin going forward? The product optimization you just mentioned, Hassane, is an obvious one, but I assume that’s going to take a little bit of time to bear fruit. So is second quarter gross margin showing a nice pop? Is that simply the utilization rising again? And kind of what are the steps to get that gross margin from the 36.5% to 37% up to your target range with the four handle?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. Look, we have launched a gross margin initiative corporate-wide. So there is not a single path that caused the margin in Q2 that we guided to. It’s really across the board. Of course, some of it is utilization, but we have a laser focus on cost optimization within the supply chain. We have been talking strategically with our customers about some of the cost increases that we have seen, how we passed some of those on. There is operational efficiencies that we have been doing. We’ve seen some of that start in the first quarter. And that’s why I called it the favorable and sustainable moving forward. That’s kind of where you’re going to see us clicking up.

Utilization will get better over time. But more importantly, where the lift for gross margin is going to be is what I mentioned in the prior answer, as we start shifting more of our internal capacity to higher gross margin products and offload, call it, the legacy or to harvest product lines, that’s going to create a mix shift to the higher gross margin. That will come of course with better utilization.

Ross Seymore — Deutsche Bank Research — Analyst

Great. Thanks guys.

Operator

Your next question comes from Chris Danely with Citi. Your line is open.

Christopher Danely — Citi — Analyst

Hey, thanks, guys. And I’ll add my congrats on the strong quarter and outlook. So would you say that the shortages are getting better in Q2 or getting a little worse? And then how do you expect this easing of demand you talked about in the second half of the year? Could we have like a sub-seasonal quarter? Do you expect to go from above seasonal back to normal seasonal?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. So look, the expectation is really what we are talking with our customers and how, I would call it, the velocity of how fast the demand is coming. I talked last call that the problem has not been really on the capacity per se, it has been on how quickly that demand came and layered on a very strong quarter. So that’s the velocity. So when I talk about demand and supply and demand subsiding in the second half of the year or towards the end of the year, I’m not talking about really demand going, call it, weaker or backwards. I’m talking about the momentum, but it will remain at a very healthy and not — and better than seasonal outlook. So that’s where we see the demand. But the balancing of us being able to catch up to the demand is going to happen, I would say, towards the second half of the year.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah, Chris, this is Thad. I would just add. If you take the midpoint of our guidance for Q2, that’s a record for the company. It’s up 9% sequentially. As you look into Q3, I think coming off that high mark, we will be sub-seasonal in Q3 and then probably return to seasonal in Q4.

Christopher Danely — Citi — Analyst

Okay. Thanks guys. That’s helpful. And then for my follow-up, I guess, between your own input costs and raw material going up, and then any chance for I guess firmer pricing on your products? How do you expect the total impact of that to be towards margins? Do you think it kind of negates everything out or do you think that that could be a little bit of lift to the margins as far as like your own pricing goes versus the input costs?

Hassane El-Khoury — President, Chief Executive Officer and Director

Pricing is a small portion of our gross margin trajectory, because obviously, right now we are in a favorable environment. But what we are looking for is those sustainable pricing structures and sustainable cost structures that will remain favorable in the up or down. And that’s — you always hear me talk about structural gross margin improvement, that’s how we’re going to get there.

So to answer your question more directly, there is not a one size fits all. It’s not a one-to-one. It’s really talking to our strategic customers in order to reset; one is the cost basis, but more importantly, in some cases, there is a value-to-price discrepancy, and we are even covering that with some strategic customers and commitment to a longer term supply kits today. That’s really the most important thing is how do we prevent this where we are today from happening to our customers over the next three to five years. That’s really where the focus is, getting those agreements, getting those long-term views for us and the customers, both on supply and on pricing.

Christopher Danely — Citi — Analyst

Okay, great. Thanks guys.

Operator

Your next question comes from Vivek Arya with Bank of America. Your line is open.

Vivek Arya — Bank of America Merrill Lynch — Analyst

Thanks for taking my question. Hassane, you mentioned or Thad mentioned, Q2 up 9% sequentially, I was hoping if you could give us some color on which end markets could be above or below that number? But then also importantly, you are guiding to record sales in Q2, but gross margins will still be 200 basis points below prior peaks. And I’m curious, what’s causing that delta?

Hassane El-Khoury — President, Chief Executive Officer and Director

So the demand is pretty broad. So there is not a single end market. Obviously, all our focus and/or strategic end markets are going to see strength, and that really is mirrored across the industry when you talk about auto and industrial and so on. So I wouldn’t say there is a one specific end market that’s going to drive the majority of it.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah. And on the gross margin compared to the historical, if you go back to 2018, which was the peak, I believe it was Q3 of ’18, the midpoint of our guidance for Q2 would be about 5% higher than that peak. But you’re right, the margins are lower, and that’s primarily because of the investments the company has been making in the capital. So our depreciation has been going up as we’ve been ramping up the fabs in East Fishkill. Obviously, as we go forward and we rationalize that footprint, that will give us some opportunity to improve those margins as we’ve talked about as well. But that’s the primary driver and the difference between the two.

Vivek Arya — Bank of America Merrill Lynch — Analyst

Got it. Thank you, Thad. And for my follow-up, I’m curious, Hassane, how does — what we have seen in the last few months is companies that had better internal capacity are able to withstand this chip shortage issue better than their competitors. So as you think about ON for the next few years, how does kind of reducing lead time and being responsive to customers align with the goal of having a lighter fab footprint over time? Do you think you can achieve both, be very responsive to customers, but still have a lighter fab footprint? Thank you.

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. Yeah, absolutely. I’m highly confident that we are able to do both. And from — obviously, we’ve been working on the rationalization of our portfolio and the manufacturing footprints since I joined the company. And I see a path for achieving both, and that’s going to be really with the rationalization. When you have a pretty broad footprint, it could be as easy as streamlining technologies within a fab, you will get better utilization, you’ll get better costs while still running a very different set of products. It doesn’t change really the overall products you run. It will change the volumes at which you can run per fab by just streamlining on a technology basis or even in the back-end on a package basis. By removing all these inefficiencies, we are able to even get more out of our existing fab footprint or back-end footprint. And then as we restructure and consolidate, you’re going to get that volume upside to maintain our growth. We’re going to be able to get both confidently.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah. And Vivek, just to clarify, as we talked about being fab lighter, it’s not necessarily going outside. We’ll still run the same volume in our fab. It will be just, as Hassane said, higher throughput in those fabs, and then also looking at sub-scale fabs and doing something with those to reduce that footprint. But it isn’t necessarily shifting from inside to the outside.

Vivek Arya — Bank of America Merrill Lynch — Analyst

Got it. Thank you.

Operator

Your next question comes from Raji Gill with Needham and Company. Your line is open.

Rajvindra S. Gill — Needham — Analyst

Yeah. Thank you, and congrats on the good momentum. Thad, just a question on the decision to kind of build inventory on the balance sheet while simultaneously reducing inventory in the distribution channel. Maybe you could walk us through kind of the rationale of that decision. And when you’re talking about kind of demand-supply balancing later this year, can you give us some thoughts in terms of kind of where we are right now and what are the steps that you’re taking order to kind of get the supply imbalance relative to demand? Is it more demand is just decelerating? And then — or is the combination where demand is decelerating and supply is starting to increase to meet that level of demand? Thank you.

Thad Trent — Executive Vice President and Chief Financial Officer

Sure. I think I lost track of the first question.

Rajvindra S. Gill — Needham — Analyst

First question is on the — putting inventory on the balance sheet.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah, yeah. Okay. So let me address that. Sorry. So we made the decision. Obviously, we were running at about 11 weeks of inventory last quarter. Our target range is 11 to 13 weeks of inventory in the channel. We dropped it to 8.4. The logic there is, it doesn’t make sense to have inventory sitting on the shelves of the distributors versus supporting customers. So by holding in our balance sheet, we can support the customers either through the channel or directly. But it allows us to ensure that we’re allocating the products to the right customers at the right time versus just having it sit in the channel for extended weeks. So it was a proactive decision basically for customer support.

Rajvindra S. Gill — Needham — Analyst

Okay, great.

Hassane El-Khoury — President, Chief Executive Officer and Director

No, I mean, I was going to tackle your second question about the demand.

Rajvindra S. Gill — Needham — Analyst

Yes.

Hassane El-Khoury — President, Chief Executive Officer and Director

So from the demand perspective, it’s really — there are few things going on. One is, a lot of the work that we have done that I mentioned earlier about changing the mix and streamlining our footprint, we have more supply coming online, not through capital expenditure, but literally through streamlining our operations, part of the initiatives that we have for our strategy. So that’s going to help increase our supply, but also the velocity that the demand came in or start to subside, which means that we are able to get more visibility on what the steady state demand is in order for us to build for that.

What’s been happening is, we get the demand signal, we started the wafers. Then the demand gets stronger, we start wafers, but those wafers have a latency before they get out, and that’s why we’re in the supply constraint. But as we are getting more stable outlook of demand, which remains by the way at a very healthy level, I’m not talking about demand going backwards, I’m talking to about the velocity, the demand kind of stabilizing, we are able to start material for that demand and that will get us towards the end of the year on a balanced supply and demand picture.

Rajvindra S. Gill — Needham — Analyst

And for my follow-up, in terms of the automotive market, you had record automotive revenue, you stated. Can you talk about kind of what you’re seeing in that industry as we progress throughout the year in terms of SAAR production? Are we done with the kind of the component shortages impacting production? Do we still have more way to go? And just, how do we think about the overall industry? And then how do we think about kind of your momentum in silicon carbide and electric vehicles? Thanks.

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. I think as an industry, automotive is going to remain strong. There is low inventory across the board. I don’t know when anybody try to buy a car lately, but there is no inventory anywhere whether it’s rental cars or new cars or used cars. So that’s going to fuel the strength that we are seeing. Now obviously, we do have pockets where some of the OEMs have reduced production because of the supply, and we do have some ad-hoc issues in the industry like unfortunately the Renesas fire that happen in the fab, that also has an impact on where the demand is going to be. But that doesn’t change the overall picture for automotive being one of the strongest years I’ve seen.

Our momentum remains very strong. Obviously, we keep talking about our content story. So as those vehicles are back online, we’re going to see our content grow with that, and that’s part of our growth trajectory, not just for this year, but moving forward, and that includes our silicon carbide. I’m very close to our silicon carbide initiatives here in the company. And more importantly, I’m watching very closely and I’m personally engaged with customers on platform design wins that are going to fuel our growth from the revenue and the margin. But what I like about our silicon carbide story is, we’re not just on the electrification of the vehicle itself, although that’s a great area, we are also engaged on the infrastructure whether it’s onboard charging or infrastructure charging. That’s going to also fuel because as we get more and more EVs on the road, we need to have an infrastructure to charge them and we’re engaged with that and that’s also going to be part of the industrial strategy for us.

Rajvindra S. Gill — Needham — Analyst

I appreciate it. Thank you.

Operator

Your next question comes from Toshiya Hari with Goldman Sachs. Your line is open.

Toshiya Hari — Goldman Sachs — Analyst

Good morning. Thanks for taking the question. Hassane, I wanted to come back to your comment about Q3 revenue potentially being sub-seasonal. You talked about very strong demand across your key markets, inventory up and down the supply chain seems pretty low, including your disti channel and you’ve got idiosyncratic drivers of growth in power and image sensors and so on and so forth. So I’m just trying to better understand why Q3 would be sub-seasonal given the backdrop? And then I’ve got a quick follow-up.

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. I mean, if you talk about sub-seasonal, Q3 is usually up 3% to 4%, but you have to remember, we’re coming off of a 9% up quarter in Q2, which is typically 3% to 4% down. So when we talk about seasonality, for this year, we can throw that a little bit out the window. What we are looking is just maximizing our supply in order to meet the maximum demand we can. So demand remains strong. So even if we talk about sub-seasonal Q3, that’s still a very healthy Q3 coming off of a second quarter with a 9% sequential growth.

Toshiya Hari — Goldman Sachs — Analyst

Okay. So from your standpoint, is supply a bigger issue in Q3 than it is in Q2? Is that a fair statement or no?

Hassane El-Khoury — President, Chief Executive Officer and Director

No, no. I wouldn’t say it’s bigger. I think we’re still going to be navigating the same supply constraint that we’ve seen.

Toshiya Hari — Goldman Sachs — Analyst

Okay. Got it. And then as a quick follow-up, I was hoping you could give us an update on Belgium and Niigata? I know you’re in conversations with potential counter-parties, but any update there? And I think on prior calls, you’ve mentioned each fab potential sale would give you 10s, 20s of millions of dollars in cost savings. Does that continue to be the case? Thank you.

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah, yeah. I mean, we have nothing new to report. Obviously, as soon as we conclude anything, we’ll make sure that becomes public. But where — the status you stated is exactly where we are.

Toshiya Hari — Goldman Sachs — Analyst

Thank you.

Operator

Your next question comes from Vijay Rakesh with Mizuho. Your line is open.

Vijay Rakesh — Mizuho Securities USA — Analyst

Yeah, hi guys. Great quarter and guide here out of the box. Just a question on the automotive side. You mentioned silicon carbide obviously on the EV side that continues to grow. Any thoughts on how you see that percentage and how you see that growing in ’21, ’22? And what was — what is it as a percent of your auto revenues there? Thanks.

Hassane El-Khoury — President, Chief Executive Officer and Director

I think it’s going to stay. We don’t break it up specifically. We look at our electrification, both silicon carbide and IGBT. That’s been growing. It’s going to continue to grow. And as more silicon carbide see its way on the penetration as far as technology from the IGBT as customers crossover over the next, call it, two to three years, we’re just going to be growing our content with that. But right now, our focus is layering in all the design wins in order for us to be able to do that, and we are on track.

Vijay Rakesh — Mizuho Securities USA — Analyst

Got it. And on the 300 millimeter side, can you give us some idea of how you’re ramping that? Where do you expect utilizations as you look out this year, next year as you move some product into 300 millimeter as well? Thanks.

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. I mean, we’re on track moving this, but just to remind everybody, we don’t take ownership of the fab until 2023. So until then it remains an outside fab, but our focus is to make sure all of our product that we want to be running there is in there, not just qualified internally, but qualified with our customers. So when we take ownership of that fab, we are able to ramp it as planned.

Vijay Rakesh — Mizuho Securities USA — Analyst

Got it. Thanks.

Operator

Your next question comes from Craig Ellis with B. Riley Securities. Your line is open.

Craig A. Ellis — B. Riley Securities — Analyst

Yeah. Thanks for taking the question. And guys, congratulations on the strategic progress so far. I wanted to start with a longer term question. Hassane, you mentioned that you’re working on some long-term agreements with some of your customers. The question is, what percent of sales could those be in 2021? And as we look out over the next three to four years, how much larger could those long-term agreements be as you have a couple years to work on it? And to use auto is one example, would that mean, for example, that in auto you could actually accelerate the premium industry growth that I think the company has talked about 10 percentage points or would those long-term agreements really leave relative growth unchanged versus what the company has been looking for?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. I wouldn’t say it will change our growth target because our growth targets are pretty aggressive when you compare them to the SAAR numbers over the next few years. So I’m very comfortable with those. Now of course, from the prior question, if silicon carbide accelerates faster than what we think, then that’s going to be higher growth for us than we expected. So there is puts and takes on the growth trajectory. And that’s why the growth we have provided is a pretty well balanced, the growth.

As far as the long-term agreements, I look at them as more outlook confidence. If you look out over the next few years, we want to be able to spare capacity. We want to be able to potentially build or shift capacity into the strategic products we want. And we are engaged with customers to make sure that their demands over the next few years are met, and that comes with a two way where we make sure the investments are made in the areas where we see the growth. And from the customer side, the investment is made in order to give us the visibility and the long-term agreement for us to make sure that we are building for the right demand. So it’s a win-win for our strategic customers. We’ve been working with a lot of them in order to make sure that what we experienced in 2021 does not occur again. And that only comes with a steady outward looking demand signal that they will commit to.

Craig A. Ellis — B. Riley Securities — Analyst

That makes a lot of sense. And then the follow-up is for you Thad. So a number of times in the commentary, prepared and Q&A, the company mentioned strategic mix out. The question is, are we starting to see that in the business? For example, I noted communications was down 10% year-on-year in the first quarter. When will we see that impact peak in the business? Is that later in 2021 or would that be some time more distant in 2022? Thank you.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah. As we go through our strategic review process, it’s too early to really to see those results coming through our financials at this point. I think you’ll see that shifting much further out in 2022, probably hitting the revenue numbers. So I wouldn’t look at this quarter as being indicative of the strategic markets that we’re focused on. Obviously, auto and industrial will be strategic to us, but I wouldn’t read more into that on a short-term basis.

Craig A. Ellis — B. Riley Securities — Analyst

Thank you. Good luck.

Operator

Your next question comes from Christopher Rolland with Susquehanna. Your line is open.

Christopher Rolland — Susquehanna Financial Group — Analyst

Hi guys. Thanks for the question. There have been some rumors about some CMOS image sensor tightness out there, can you guys talk about that market specifically? And are there any supply constraints there that you guys are seeing whether you specifically or anywhere in the supply chain for those modules? Thanks.

Hassane El-Khoury — President, Chief Executive Officer and Director

The short answer is yes. We see it. Most of it is — well, all of it is foundry for us and we all know the foundry situation. Part of our allocation strategy that I’ve been discussing or hinting at during the call applies to the image sensing. But for sure, there is tightness in the market.

Christopher Rolland — Susquehanna Financial Group — Analyst

Great. And then perhaps tying into that as well, just a discussion about East Fishkill. So 2023, that’s when you guys get the fabs, but are you able to ramp meaningfully, there is some additional capacity that you can kind of touch there? And then this supply chain tightness that we’ve seen out there, has that exceeded qualifications or re-qualifications from other fabs to this fab? You’ve talked about $2 billion plus of revenue. So I guess my — putting all the pieces together, where are you guys going to be in 2023 when you’ve got this fab in terms of utilizations, in terms of ramping to that $2 billion plus revenue? Has this put you guys in a better position? And where do you see that position? Thanks.

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. Look, we still have a few years on. We have looked at the products that we are moving. We have re-prioritized in order to make sure the products we are moving with higher priority are the strategic products, the growth products that I’ve been talking about, part of the portfolio rationalization. So those of course we’re going to try to accelerate. But as you know, with a lot of product calls, it is not how hard or how fast you work, it takes time to qualify. There are X number of hours you have to test and those hours have to pass. We can do parallel quals. We can do customer quals. And we’re doing all of the above to make sure that when we take ownership of the fab in 2023, it has the maximum utilization we can get to at that time given all of the demand that we have. As far as the short-term, of course, we maintain a close relationship with GlobalFoundries that operates the fab. And we navigate the supply constraint just like we do with any outside foundry.

Christopher Rolland — Susquehanna Financial Group — Analyst

Thanks for the time.

Operator

Your next question comes from Chris Caso with Raymond James. Your line is open.

Chris Caso — Raymond James — Analyst

Yes. Thank you. Good morning. The first question is about the production plan as we go through the year, and it sounds like you’d be ramping production pretty significantly now to catch up on supply, and that’s obviously having margin benefit now. What does that look like as we go into the second half with revenue potentially flattening out as you go to Q3? Does that mean utilization comes down a bit or — and I guess, what does that imply for gross margins as we go into the second half of the year?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. As I mentioned, utilization is currently at 84%. It was mid-70s last quarter. As we look through the remainder of the year, we think it’s going to stay right in that level based on the projections we are seeing in the backlog. So when we talk about the second half coming back into balance, it’s balance really at this level. So we don’t expect the utilizations to drop much through the remainder of the year.

Chris Caso — Raymond James — Analyst

All right. So just as a follow on to that given what some of your peers have said about expecting tight supply through the year. Do you expect you’ll still have the opportunity to improve the mix as you go through the year to prioritize some of the higher margin products, and therefore, still get a mix benefit as you go through the second half?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah, absolutely. I mean, that’s — we’ve already started doing that. And we hope to get more favorable mix and optimize those fabs as we go through the rest of the year, and that will give us some tailwind on the gross margin, additional tailwind. So that’s what we talked about, right? The next phase of the gross margin isn’t all about utilization, it’s really about optimizing the footprint and optimizing what’s going through those fab to increase the throughput.

Chris Caso — Raymond James — Analyst

Got it. Very helpful. Thank you.

Operator

Your next question comes from Matt Ramsay with Cowen. Your line is open.

Matthew D. Ramsay — Cowen & Company — Analyst

Good morning. Thank you. Hassane, as you think back to when you were thinking about joining the company and when you came into the company, it seems to me like the — as you think about modernizing or rationalizing the footprint or manufacturing, I don’t know if you guys would have thought about the extreme 6 and 8-inch tightness across the industry when you started putting the plan together. So I wonder if you might reflect on that a little bit? Are there anything new variables or has the aperture sort of broadened for strategic options as you think about it given tightness and the likelihood of 6 and 8-inch tightness persisting across the industry for a longer period of time? Thanks.

Hassane El-Khoury — President, Chief Executive Officer and Director

No. From where we look at it, obviously, we had to re-look and re-visit our baseline assumptions. And I’ll tell you, it hasn’t changed because the fact of the matter is not the 6 or 8-inch tightness that is driving it, it is how effective can we run those fabs at the scale that they are in versus consolidating or moving front, for example, 6 to 8 as an example. So it doesn’t change what we need to do, which is we need to streamline our manufacturing footprint, we need to consolidate and we need to have all our fabs to be at a scale that we can drive lower costs. And as we keep those fast fully utilized, that cost will basically spread across all products that we run in. So it doesn’t change the valuation of these fabs as far as the market is concerned. But when we decide to potentially divest any of those assets, they’ll just bring in more than they did when I first started.

Matthew D. Ramsay — Cowen & Company — Analyst

Fair enough. That makes sense. As my follow-up, you guys mentioned in the prepared script strength from computing and also strength from GPUs. Maybe you could talk about how big are those markets for you guys specifically that you called out driving some upside? And are those particular products at the richer end of the mix? And are you, I guess, planning on those sustaining through the balance of the year? It seems like those would be fairly high margin products into those markets. Thanks.

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. Our product focus in these segments — first of all, those segments are not a big percent of our revenue. However, they are very, I’d call them, adjacent to our power product offering that we have in the auto and industrial where we bring a lot of value in these GPU cars and so on, which have seen some growth. So we’re able to support that growth. But I will just reiterate, we’re able to support that growth once we have fully supported our automotive and industrial customers, which are part of our strategic markets.

Operator

Okay. And your next question comes from Kevin Cassidy with Rosenblatt Securities. Your line is open.

Kevin E. Cassidy — Rosenblatt Securities — Analyst

Thank you, and congratulations on the great results. Your capex spending at $77 million came in lower than I guess the guidance, guidance was $90 million to $100 million. Was that just due to timing of the equipment delivery or is there some other change that’s happening?

Hassane El-Khoury — President, Chief Executive Officer and Director

No, that’s just the timing of the cash payments. So you can think about it still being in that 7% range long-term. This quarter just happened to be lower on a cash basis, but no change in strategy at this point.

Kevin E. Cassidy — Rosenblatt Securities — Analyst

Okay. And can you say what percentage of that goes towards the 300 millimeter and how much maybe for 8-inch?

Hassane El-Khoury — President, Chief Executive Officer and Director

I don’t have the breakout, but I would say the majority of that is going towards the 300 millimeter today.

Kevin E. Cassidy — Rosenblatt Securities — Analyst

Okay. So is there — I guess, what is the lead times for 8-inch equipment or can you still find used equipment?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. Well, yes, because our investment, our capex in the 8-inch is really maintenance or upgrade investment back to what I mentioned, streamlining, removing some bottlenecks in the fab. So we’re not looking at purchasing heavy equipment. And as you streamline and consolidate some of the lines within a physical location, we have the flexibility to move some equipment from our own from one spot to the next in order to remove any bottlenecks that are specific to a fab. So we haven’t hit any roadblocks in what we aim to achieve in the 6 or 8-inch fab trajectory we have.

Kevin E. Cassidy — Rosenblatt Securities — Analyst

Okay, great. Thanks for clarifying.

Operator

Your next question comes from John Pitzer with Credit Suisse. Your line is open.

John Pitzer — Credit Suisse — Analyst

Yeah. Hey, guys. Thanks for letting me ask the questions. Congratulation on the strong results. Hassane, I’m little curious on this inventory strategy. To what extent is taking on more inventory tactical to try to kind of make sure your customers aren’t building much inventory? And if you can comment on what you think end customer inventory that would be great? And to what extent might this be a little bit more structural? And as we think about use of cash, how should we think about your use of cash relative to your inventory strategy?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. I would say, John, it’s tactical. When we have strong demand and strong signals from our customers coming to us directly regardless of how we fulfill, either direct or through distribution, the customer engagement is direct with us. And being able to have those conversations and move inventory where we need to move it in order to support our strategic direction, back to our portfolio rationalization, it is better for us to hold that inventory than put it at the distributor and have them shipped at their discretion, I would say, based on their backlog or their order. So from that perspective, it is purely a tactical approach to how we believe we are able to support it, and that worked very well for us. We had a great quarter that we just talked about. We have a great outlook. That’s all part of it. That is a tactic.

Now as far as longer term, obviously, we’re going to be talking about rationalizing our inventory management both in the channel and internally because that has to match the velocity at which we are able to get our products from start to finish goods. How do you stage products in dye bank and how do you stage products and finished goods is going to depend on the rationalization and really the efficiency of our manufacturing footprint, and that’s going to drive a change in our capital allocation for inventory management. And again, it’s either internal or external. For me, it’s the same. It is inventory that needs to be monetized by getting on a customer aboard.

Thad Trent — Executive Vice President and Chief Financial Officer

And John, on the cash, I wouldn’t expect the inventory to increase, the balance sheet inventory to increase. I think over the longer term, it will come back into balance, but we’re not looking to increase it further. We think this is about the right level for this tactical, as you call it, tactical move in managing the inventory in the short-term basis.

John Pitzer — Credit Suisse — Analyst

That’s helpful. And then for my follow-up, Hassane, I was a little bit surprised about two things. One, that pricing is not a big part of what’s going on right now. And two, neither is portfolio rationalization. And the reason why is, if I go back and think about what you historically did in the NOR [Phonetic] market, if memory serves me correct, you used periods of strength to kind of price customers out of the market and move that portfolio more aggressively. I guess, why aren’t you doing that now? Are these just different markets in the sense that they’re more sole socket and it’s hard to do that without kind of not supporting your customers or why isn’t the portfolio rationalization happening more quickly?

Hassane El-Khoury — President, Chief Executive Officer and Director

Well, let me put it this way. We are doing that. It is happening quickly, but there is a lot of pieces to it. If you think about it, it’s not going to have an impact in Q1, it’s starting to have an impact in Q2 and have more impact — talk about Q3 and Q4 because there is backlog that we have accepted before that we’re going to support. There is pricing actions that we are doing, like you said, to price some opportunities out of the market because we’re not going to be supporting them. But that all is going to help towards the end of the year as we get through the portfolio rationalization. But as far as happening quickly, we are. Because one thing you have to also remember, the difference with it is when you have the tightness in supply, if I’m not shipping and the customer because of strategic reasons on the portfolio and the customer can’t get that product from somewhere else, they’re not going to build that board that I’m also on with products that I do want. So we have to make sure there are some production that’s still going and that’s the trade-off we’re able to make.

John Pitzer — Credit Suisse — Analyst

That’s helpful. Thank you.

Operator

Your next question comes from Harsh Kumar with Piper Sandler. Your line is open.

Harsh V. Kumar — Piper Sandler Companies — Analyst

Yeah. Hey, guys. First of all, congratulations on a very strong guide. I had two questions. Hassane, first one for you. I know silicon carbide and power for cars and automotive is a focus area. If I had to ask you what is your view of ON’s position in that market today with your products. I know if I ask you like you want to be huge and number one, but I’m curious where you are today and I’m curious what you think needs to be done to get to that top tier slot?

Hassane El-Khoury — President, Chief Executive Officer and Director

Sure. We are in a very good place and it’s only getting better. Today it’s better than it was when I first started. So that’s kind of the focus that we have. How is it going to get better, to use your term, for us to become number one, which of course, we play to win and we don’t dabble. That’s going to be with a focus and investment strategy, and that’s the work that we have been looking at. But that’s the work we’re looking at for silicon carbide and a lot of our other segments in the technology in order to make. We pick a vector, be it silicon carbide or anything else that we’re able to sustain it over the next four or five years in investments and products in order to get to that leadership position.

Harsh V. Kumar — Piper Sandler Companies — Analyst

Great. Hassane, for the next one, just wanted to ask you and Thad about the cost side. So as you look at some of the cost initiatives that you guys have started on, would you say that the easy things that you could have done are sort of underway and close to getting done and the hard work has started or where would you sort of characterize where you are in the process of cutting costs?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. It’s not the hard and easy way. It’s how long it takes to implement and get the benefit of. We can implement — if I use the two categories, we can implement two things; one is easy one is hard. The easy one is implemented, but it’s not going to see results for another quarter or so. We’re doing all of these in parallel. Obviously, anything that is, what I’d call, low-hanging fruit, has already been launched and initiated. The question is, have we seen all of the benefit of it? The answer is no.

So it’s not really — I look at it as the timing to get or reap the benefits of hard or easy implementation. What we have done is we’ve launched a lot of them in Q1. You’re starting to see that benefit in Q2. And back to my prepared remarks, those benefits are obviously favorable. But more importantly, to me, they are sustainable. So it’s a cumulative effect. As these things kind of start showing the benefit, they’re cumulative on what we’ve already established as a baseline, and that’s the gross margin trajectory that we are — we set ourselves up for.

Harsh V. Kumar — Piper Sandler Companies — Analyst

Thank you.

Operator

Your next question comes from the line of Harlan Sur with J.P. Morgan. Your line is open.

Harlan Sur — J.P. Morgan — Analyst

Good morning. Great job on the quarterly execution. The ISG business was down about 2% sequentially. It was up 9% year-over-year. I believe auto and industrial make up a majority of ISG revenues. And these two end markets combined were up 5% sequentially and 17% year-over-year. So the large delta does appear to reflect the capacity constraints on foundry that you guys talked about. Similar to your overall business, do you guys expect that ISG foundry capacity to be more in line with your demand by the fourth quarter of this year?

Hassane El-Khoury — President, Chief Executive Officer and Director

So ISG specifically, obviously, the revenue is 100% constrained by supply. So that is a one-to-one supply constraint and that will remain through probably the first half of 2022. That’s the one business that will remain a little bit out of balance between the supply and demand given the growth in that market with ADAS and everything. We’re working very closely with our foundry partners to get more capacity, obviously, because we have a lot of common customers with the micro controllers or the advanced nodes that they ship. And that’s how we’re going to be able to get a little bit more capacity. We do have a path to more capacity for the second half of the year. That’s capacity that we’ve negotiated in the first quarter. So of course that’s going to alleviate some of that gap. But it’s not going to resolve it, but it will get us closer to it.

Harlan Sur — J.P. Morgan — Analyst

No, I appreciate the insights there. And then despite the potential for Q3 revenues to be maybe a bit sub-seasonal, I would assume that the team would expect gross margins to continue to move higher. I mean, all you seem to be executing to a focus on a higher mix of gross margin products. So while Q3 revenues might be seasonal, should we expect gross margins to continue to move higher as we move through the second half of the year?

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah. Harlan, this is Thad. We expect gross margins to continue to expand through the remainder of the year. This is from a lot of the things we’ve talked about, whether it’s the cost initiatives, also the mix, the benefit of the utilization and the cost structure in the fabs. But yes, we do expect even as revenue is coming back into balance, we expect gross margins to continue to accelerate.

Harlan Sur — J.P. Morgan — Analyst

Yeah. Great job. Thank you.

Operator

Your next question comes from Mark Lipacis with Jefferies. Your line is open.

Mark Lipacis — Jefferies — Analyst

Hi. Thanks for taking my question. Hassane, a lot of time what happens at this part of the cycle is you get OEMs and contract manufacturers order more components than they need. Some people call that double ordering and some call it building inventory safety stock. And then what happens the industry adds capacity, lead times shrink and then the requirement for that safety stock declines and semiconductor companies see the order cancellations. So the questions here are, is this cycle — can this cycle be different than all the other ones? And as I listen to how you’re planning to re-tool ON’s manufacturing operations, I’m trying to figure out if you’re insulated from this dynamic in some way for your future portfolio? And then I had a follow-up. Thanks.

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah. So if you think about a lot of the commentary that we’ve talked about, all of that is to in order to set us up to be more distance from any one cycle that as you say is expected, it’s the same thing that happened in ’18 or coming out of ’18 into ’19. So what does that look like for us? We talked about holding the inventory on our balance sheet versus putting it in the channel because that gives us a more clearer and quick response to the true demand signals. It’s much harder to put double orders on our direct and through the disti. So that gives us much better visibility, the engagement not just with the Tier 1, but with the OEMs directly. When you have OEM that is going lines down in a few days because they’re not getting parts, I guarantee you there is no double ordering in that. Nobody has got those product on the shelf and causing an OEM lines down. So that’s another signal that we look at. Again, more responsive when we hold the inventory than what it is — when it is in the channel.

As far as the portfolio rationale there or the manufacturing footprint specifically. That’s why I said, we’re very cautious about investing to add more capacity versus removing some bottlenecks as we changed the product mix in our manufacturing, just changing that bottleneck. So we’re not adding capex that will end up loading us with depreciation, it is adding very light investment whether it’s a tester or one machine in order to get that throughput out in order to support the high demand, but not really impact our long-term utilization outlook that we want to maintain in that 85 plus. So all of these, whether they shield us, I can’t comment on that because you know who knows what the cycle would look like. But what I will tell you is it will make us much more immune than just letting it ride. Very helpful. Thanks. And the follow-up. The OEMs that seem to be doing better right now are those that abandoned these just in time inventory processes and built inventories on their own volition last year, and I’m wondering if you’re hearing from your customers the desire to take that approach even as you and other semiconductor companies plan to increase your own days of inventory in your own balance sheets? Yeah. It’s not — I wouldn’t say it’s common across the board. There are still some customers on portion there are in denial, and we’re working with them. But everybody has a decision to make. We can make the decision for us and they have to make their own decision about how they want to manage inventory. But I will tell you, the just in time era is not going to be sustainable. And customers who are going to keep pushing for it after this is done will just find themselves in it in the next demand turn or the demand strength or even slight upside. For me, the focus is a productive engagement with the customer where they are confident in their demand signal and I’m confident in my investment in order to meet that. The short-term cancellation, all of that I think is going to be a thing of the past. And that’s going to be the difference between a strategic customer and a non-strategic customer. It’s the ones that we are able to run a healthy and profitable, but more importantly, a predictable business with. That’s where our focus has been and part of it is — part of those long-term agreements. Now when I look at the inventory for customers who have done it, I’ve done it in my past life where some customers will work with us on what we call a BCP, business continuity plan, which includes some inventory with us, but more inventory with them that we have visibility to where they will hold it, they will order it, they have two months or so of it and we just have to make sure it’s replenished. We’ve done that, a lot of it with our Japanese strategic customers. And I’m hoping that we’ll start expanding for European and North American customers as well.

Mark Lipacis — Jefferies — Analyst

That makes a lot sense. Thanks, Hassane. Very helpful.

Operator

Your next question comes from William Stein with Truist Securities. Your line is open.

William Stein — Truist Securities — Analyst

Thanks for taking my questions, and congratulations on a very strong outlook. Hassane, in the past we’ve talked about this idea of a split between your relatively more, let’s say, specialized or unique products versus ones that are somewhat more commoditized in nature. And I think your prior responses around this had been that it’s not so straightforward, it’s not just looking at margins, you have to look at parts, and in particular, parts by end market. And I’m wondering if you’ve had the opportunity to complete that analysis and maybe help us understand a little bit better about what the split might look like today and going forward in terms of the balance between those two categories?

Hassane El-Khoury — President, Chief Executive Officer and Director

So to answer your questions, yes, I have had lot of opportunities to look at it. We’re in almost the, call it, the last stages of review where I have a two week long kind of wrapping up the strategic plans and the strategic reviews, but what you said is true. For us, not just on the margin, because you have to look margin and our ability to manufacture it at a very aggressive cost. You can have a product today at a low margin that we are targeting in automotive. It is valued product and the margin impact is because it is not running efficiently as far as cost structures through our manufacturing footprint.

So by consolidating and rationalizing the manufacturing, that’s going to give an uplift to those specific products. So before I rush and say low margin, kill it or move away from it, I have to be able to make sure that we have a benchmark cost in order to make those assessments. And then the decision for us here is do we act on the product right away or do we fix the costs and keep the product, and that’s part of a strategic review. I can’t tell you at this point how much of the products fall in which bucket. That’s going to be part of the work we are going to be finalizing as we get ready for Analyst Day. But I just wanted to give you a preview of the mindset that I have going into that work.

William Stein — Truist Securities — Analyst

I appreciate that, Hassane. And maybe a follow-up along the same lines. In terms of not getting a quantified size or split today, do you think the size might be big enough to take a significant action that doesn’t look like just sort of letting it — pricing yourself out of the market or letting it fall off the income statement over time and something that could be more of a strategic action like monetizing the asset through a JV or something like that?

Hassane El-Khoury — President, Chief Executive Officer and Director

Yeah, absolutely. I mean, if you think about, once you disposition your assets and categories, you have a harvest, core and growth categories, we have to look at what do we — how do we disposition the assets. Pricing yourself out of the market or exiting or EOLing [Phonetic] and shutting down our manufacturing site that supports those products is one side of it. But monetizing the assets is of course something that is on the table that we’re going to be looking at. All options are out, and we’re going to do the best thing for the company as far as balancing cash flow and balancing manufacturing footprint.

William Stein — Truist Securities — Analyst

Great. Thanks, guys.

Operator

This concludes the Q&A session for today’s call. I’d now like to turn the call back over to Hassane El-Khoury, President and CEO.

Hassane El-Khoury — President, Chief Executive Officer and Director

Thank you all for joining us today. I’d like to thank our worldwide teams for stepping up to help drive our transformation which has already started delivering favorable results. We remain focused on our execution as we navigate the current market conditions, and I look forward to seeing you all at our Analyst Day on August 5. Thank you.

Operator

[Operator Closing Remarks]

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