Q1 2020 Earnings Call
[music].
Please standby.
Good day, ladies and gentlemen, and welcome to the Texas instruments first quarter 2020 earnings release Conference call. Today's call is being recorded at this time I would like to hand things over to Mr., Dave Paul. Please go ahead Sir.
Good afternoon, and thank you for joining our first quarter 2020 earnings conference call for any of you missed the release you can find it on our website at <unk> Dot Com Slash IR.
This call is being broadcast live over the web and can be accessed through our website.
A replay will be available through the web. This call will include forward looking statements that involve risks and uncertainties that could cause T.I.s results to differ materially for managements current expectations. We encourage you to review the notice regarding forward looking statements contained in the earnings release published today.
As well as T.I.s, most recent SEC filings for a more complete description.
Given the likelihood of a significant economic recession due to covert 19, we're changing the format for this quarter's earnings call.
In addition to Rafaellas already our CFO, we will be joined by rich Templeton, our chairman and CEO.
Rich will be covering up a broader frame of how we're approaching the current environment.
I will then provide a summary of first quarter in Raphael will wrap up with the financial details of first quarter and our outlook for second quarter.
Our prepared remarks will be longer than usual as we hope to cover a range of anticipated questions. Let me turn it over to rich.
Thanks, Dave.
The highest level I understand how we will approach to the likely significantly session, resulting from gold with 19.
I'll remind you of the three ambitions that for decades, driven all decisions inside a T.
These ambitions are first we will act like owners will all the company for decades.
Second we will adapt and succeed in the world that is ever changing.
Third we will be a company that you were proud to be part of it would be proud to have as a neighbor.
When we pursue these ambitions our employees customers communities and owners will all benefit.
These guiding ambitions of served as well for decades, but they are enormously valuable in these times because they help simplified many decisions.
An uncertain environment.
Like many companies in the cold that 19 crisis, we have acted aggressively keeping our people safe and able to support their families.
We have kept our operations running to support our customers the special emphasis on our medical customers.
And then the communities, where we operate around the world. We have provided direct financial support and medical supplies to provide some relief.
The list of action is lengthy.
So starting with economic framework no to economic recessions are identical what the 2008 financial crisis provides us the most recent significant recession and therefore as the Best example, the study in informed decisions on operating plans revenue forecasts that investment and spending plans.
As a reminder, if you look back to 2008, and specifically to September 2008, our new orders turned off overnight.
This led to a 26% sequential drop of revenue in the fourth quarter of 2008, an additional 16% sequential decline in the first quarter of 2009.
And then a rapid snap back for the next six quarters by the second quarter of 2010 or within two years of the start of the sharp decline revenue moved back above the level of the third quarter 2008.
For the benefit of hindsight, our customers overcorrected to the downside and we didn't spend a year and a half chasing backup to support demand.
With this in mind, we are not trying to predict this economic recession that recovery, but instead, we want to ensure that we had the highest degree of optionality. So that we can deal successfully with any outcome.
Therefore, [laughter] regarding our operating plan looking at the pattern from pre and post 2008 in the second quarter of 2020 and quite likely to third quarter 2020, we will be running our factories at about the level. They ran in the first quarter 2020.
This will likely result in increasing inventory during the second quarter, but this will be important to support our customers. During a time, where they have limited ability to forecast our product portfolio, primarily long live products makes this an easy decision and maximizes our optionality.
Regarding second quarter revenue guidance Raphael will elaborate in a minute, but with reduced visibility of customer demand. We have used to historical transitions that I mentioned from 2008 and adjusted for seasonality.
We're not implying precision, but explaining the assumptions we are using expanded range to account for the current uncertainty.
Regarding spending and investments.
First research and development spending will be essentially unchanged as either five to 10 year.
Time horizon decisions, we will continue to make ongoing portfolio adjustments, but these are unlikely to make meaningful changes to investment levels.
Our next DNA, we will maintain critical investments in new capabilities, such a strengthening T.I. dot com because these are important times to gain ground.
Well, we can minimize expense we are and we are we will certainly continue to do so.
On capital spending our plans are generally unchanged because the bulk of capital spending is driven by road map capacity needs in the 2022 to 2025 time frame.
We will continue with previously announced construction plans that are underway for the next generation 300 millimeter analog wafer fab in Richardson, Texas.
Lastly.
Regarding how we are operating in the current environment.
We were fortunately prepared for the unforeseen disruptions to cope with 19 as presented.
We updated our customers in late March that our lead times remain short and unchanged and that we could respond to short term demand.
This is because we invested in inventory had a robust business continuity plan and invested in a geographically diverse internal manufacturing footprint.
Our manufacturing teams are operating throughout the world, including countries like Malaysia, the Philippines, where local restrictions have resulted in partial operations. We've adopted protocols quickly to keep our people safe and minimize any disruptions.
Our team was prepared and as comfortable getting our work done remote.
We continue to actively work new design wins with customers via virtual selling processes that we instituted several years ago.
On most days across the Iwear, averaging a peak of 10000, BPM connections and 2 million meeting minutes per day about four times higher than normal.
Well look forward the things getting back to normal but in the meantime, you're focused on execution.
Let me hand things back to Dave.
Thanks Rich.
I'll provide a standard comments first quarter revenue by end market and then I'll add some additional insight about the quarter in light of code at 19.
First for highlights on first quarter revenue by end market versus a year ago.
Industrial increased mid single digits from a year ago quarter and improved compared to fourth quarter.
Automotive declined mid single digits and decelerated in the quarter as our customers factories downs impacted demand.
Personal electronics declined mid single digits, but by sector was a mixed bag.
Mobile phones declined low double digits, while by contrast, Pcs increased low double digits.
Communications equipment declined about 50% as expected.
Due to a comparison against a very strong first quarter 2019.
Indications was up sequentially.
And lastly, enterprise systems increased double digits on strong datacenter demand.
For additional insight the first quarter ran as expected into Chinese new year, but was slow coming out of the holiday is Chinese factories struggled to come back due to covert 19.
In early March we saw a pickup in orders from most markets as supply chain disruptions led to increased customer concerns about being able to secure supply.
This increase in demand that we experienced in March had continued into early April with the exception of automotive.
As manufacturers plant closures reduced consumption.
This increase in orders has steadily abated in April but returned to levels. We saw in early March.
The midpoint of our range assumes that this decline continues through the quarter as customers have reduced visibility to end demand.
Raphael will now review profitability capital management and our outlook.
Thanks, Dave and good afternoon, everyone revenue was $3.3 billion down 7% from a year ago.
Gross profit in the corner with $2.1 billion or 63% of revenue.
From a year ago gross profit decreased due to lower revenue.
Gross profit margin decreased 20 basis points.
Operating expenses in the quarter were $794 million about even from a year ago and about as expected.
On a trailing 12 month basis operating expenses were 23% of revenue.
Over the last 12 months, we have invested $1.5 billion in R&D.
Operating profit was $1.2 billion or 37% of running.
Operating profit was down 10% from the year ago quarter.
Net income into first quarter was $1.2 billion or for $1.24 per share, which included a 10 cents benefit for items that were not in our prior outlook as we have discussed.
I mean, I'll comment on our capital management results, starting with our cash generation.
Cash flow from operations were $851 million in the quarter.
As a reminder, first quarter typically that seasonally low point for cash flow from operations due to pay out a profit sharing and bonuses.
Capital expenditures were $161 million in the quarter.
Free cash flow not trailing 12 month basis was $5.6 million.
In the quarter, we paid $841 million in dividends and repurchased $1.6 billion of our stock for a total return to owners up $2.5 billion.
In total we have returned $6.6 billion into basketball month, consistent with our strategy to return all free cash flow over.
Over the same period, our dividends represented 55% of free cash flow underscoring their sustainability.
Our balance sheet remains strong with $4.7 billion of cash and short term investments at the end of the first quarter.
In the quarter, we should $750 million up that we're about coupon up 1.3751st then do in five years.
This resulted in total debt of $6.6 billion with a weighted average coupon of 2.81%.
Since then we have repaid $500 million of debt doing second quarter, and we have not Bernard debt. Due this year, we have $550 million of debt due in 2021.
[noise] regarding inventory the inventory dollars were flat for fourth quarter and dates were 145.
Distribution owned inventory decline again in first quarter by about $50 million, the six consecutive quarter of planned reductions.
As we continue the transition of our channel to have fewer distributors and bring more customers direct.
We had about four weeks of distribution inventory the lowest since third quarter of clean 17.
Tactically and strategically we're very pleased.
We have steadily decrease total inventory dollars, while increasing the percent of inventory concentrated in fact, the pie and therefore in fewer places.
This enables us to maintain short lead times on high availability, which is critically important in an environment, where end demand visibility for our customers will be limited.
We have a recession likely upon us as rich mentioned earlier, we're using that 2008 financial crisis to inform our second quarter outlook to reflect increased uncertainty. We have also expanded the range.
For the second quarter, we expect the AD revenue in the range up $2.61 billion to $3.19 billion and earnings per share to be in the range of 64 cents to a dollar all four.
Regarding our operating plan for running our factories, we expect that customer and this recession similar to past recessions.
We'll go over correcting the short term as their visibility of their end demand drops.
We believe it will be an important advantage to maintain consistent lead times and to offer customers high levels of product availability.
Our product portfolio that portfolio of mostly long lived part affords us to have a steady hand.
Therefore, we will be running our factories in second quarter at approximately the same level would ran them in first quarter of 2020.
The inventory will likely grow during the second quarter, while distributor owned inventory will likely dream.
In closing, we continue to invest in our competitive advantages and make it our our business stronger.
History has shown us that this is that in times like this.
At least when we can make the most strategic progress with that let me turn it back today.
Thanks, Raphael operator, you can now open the lines up for questions in order to reside as many of you possibility to ask a question. Please limit yourself to a single question and after response will provide you an opportunity for follow up.
Operator.
Thank you, Sir ladies and gentlemen, if you have a question. Please press star one on your telephone keypad.
Please make sure your mute button is turned off Tiger signal three chocolate.
Okay and everyone that is star one if you have a question.
We'll take your first question today from Zack ARIA Bank of America.
Hi, Thanks for taking my question. So my first one I understand visibility is low and I understand the way you are predicting Q2, but just a few weeks into Q2 have your orders or bookings played out the same way as it did during the financial crisis.
It does your consignment program now provide you a better visibility.
Then last time I'm, just curious what do you have actually seen so far and on the quarter.
So that he can I get a better handle on the outlook that you are giving.
Yeah. So let me I'll start and Dave you want to chime in on that but as we said in his prepared remarks.
April has in fact behave very differently than than 2008.
In the comparison March was a not only April March March was a was strong coming out of a Chinese new year. During the prepared remarks is we came out a little slowly, but then things friends then and into April all the things have abated.
The second half of April, but we think that is due to their or their concern that many customers have on supply disruption. So.
We are a range and particularly the midpoint of our range.
Implies an expectation that demand will drop.
As customers.
Internalized better there they end demand and frankly, they're gonna have very low visibility, we expect them to have very low visibility of them and that's why.
The important point here is that we're keeping high optionality.
Throughout this process, though that if things a snap back we can support that we can support on the other side of this they anklets, while said you have follow onto that.
Yes. Thank you.
You mentioned that you are continuing to run your factory loadings in Q2 as as the same levels as a Q1 I'm curious if you look if you can give us some color around what do you are modeling days of inventory to be exiting Q2, you know it is it a second maximum limit to the amount of inventory or.
In terms of days or dollars that you're willing to.
So before do you have to start taking actions.
Yeah. Thanks for that that question something that gets you framed I'm glad you frame it that way it if the capital allocation decisions. So we are.
Allocating capital.
In the form of inventory capitalizing on a going to inventory instead of going to other places.
And the inventory will increase we expect very likely to increase.
Into second quarter, but that is a that that's what gives us the optionality that I mentioned are having that inventory on hand.
The keeping thing to remember I knew you know very well.
We did the vast majority our products are long live they're highly diverse there's some too many many customers.
They leave a long time on the shelf and the customers product Lifecycles are very long so that even though I will now go back. So it's is a is an option.
We are fairly low caused the upfront.
To have that option.
Thats great. Thank you have extra will go to the next caller. Please.
Next up we'll hear from Stacy Rasgon Bernstein research.
Hi, guys. Thanks for taking my question.
For the first one again, if I go back to 2008 weeks well. This will decline was a lot quicker, but if I look through Q3 awake piece to Q1 on Twog.
Revenues fell about 40%.
This cycles been longer, but if I take maybe that the peak was Q3 18 to you're guiding Q2 20 down about 30% does that suggest that maybe there's still a little more to goal for following the same kind of trajectory and I guess also if the decline from peak to trough is longer does that suggest that where you might be thinking about the increase off the peak I'm also being longer.
Like how do we use how do we compare the two situations.
Yeah. So I'll now they are.
Yep.
Yeah Stacy this is rich given.
The recollection of 2008.
I'd be careful and too much precision in where you're trying to draw that too I do think that valid comparison that and I think you know this very well from the history.
Is that 2008 was a reasonably 2007 in first half a 2000 at eight were reasonably hot semiconductor markets not overheated.
Pretty hot.
And clearly 2019 in the first quarter of 2020.
Cooler compared to the heat of 2017 and 18, so when you try to get peak trough. That's a little more complex. We just tried to basically look through whatever we think demand was doing for a couple of years prior and that was what helped inform them help a and help set where we.
I would put the operating claims.
Got it for my follow up I know you generally don't have tons of visibility into what true end demand is doing but do you have any way to gauge just given the amount that anyway to get to the amount of pull forward that we might be seeing right now whether its gauging the pace of rush orders.
Anything like that its or anything that we can you can give us.
Try to gauge how much of the strong near term demand.
I might be you pull forward versus anything else.
Yeah, I speak as you'd imagine I don't think we have any precision on that I think that.
As we saw a after Chinese new year's is that we saw strength.
You know we believed was that was due to the customer concerns you know it's hard to have any precision around what what percentage of that was.
Due to that concerned with any degree of accuracy.
But the.
Yes.
You want to add to the yeah. There the as I agree the only thing I would add is that we know is the channel is clean delisting now because as we said were four weeks, we drain above $50 million on that channel and we plan to continue draining a foot and add to the next three quarters or so.
Bought out another $200 million us up blamed drain as we convert more and more customers to going direct so so the channel. We know is a is clean and we'll continue to be clean, but as Dave alluded to we really don't know them customers when they pool, how much of that is joined demand versus a where's the stocking up for potential disrupt yeah and I'm I'm.
Might add to that as you know Stacy 65, 70% of our revenues on consignment. So.
We're not seeing backlog, but we see.
Plans.
And our customer factories, but.
As they have reduced visibility all those plans are not updated so they are being updated slowly as they are deciding what to build in those factories. So.
Those are updated plans are rolling through and that's what's creating the uncertainty as you'd imagine okay. Thank you Stacy will go to the next caller. Please.
Step from Morgan Stanley is Craig Hettenbach.
Yes. Thank you I appreciate the color on on the Opex side of things any additional thoughts around just kind of variable compensation as revenue comes down you know some mitigation in terms of EPS impact that next couple of quarters.
Sure. So as we said in the prepared remarks.
In general or Opex will be relatively unchanged. So R&D a those are long term investment.
SDN and we also have a some.
Investments area area of them with data Com in other places are we frankly run the company pretty tight to begin where but whatever we can tighten up more we do a on your specific question on variable compensation that tends to be a profit sharing them bono's profit sharing moves.
According to a formula asked was very formulaic, so depending on what happens that a that adjust and bonuses.
Is that fair me by the board depending.
On relative performance on one to three years on several metrics.
The follow on correct.
Okay, I get it thanks and understand the different cadence by geography in terms of China was weaker than came back and you know Europe and North American maybe weaker now, but just love to get your thoughts just the Q2, how you're expecting kind of things within your guidance.
From a geographic perspective.
Yes, you know I always give caution on when asked about the geographical.
Revenue in sometimes we can see distinct patterns.
But.
You know we were we ship our product is very rarely where it's actually consumed as as you know so.
We ship phone that ER product ends up in a phone.
Built in China. It may end up in Europe. So.
If there was something distinct in our guidance that was impacted by geography, we'd sure that.
And we don't have anything specific to to share with that right.
Right now.
Thank you Craig and we'll go to the next caller. Please.
Our next question is Ross Seymore Deutsche Bank.
Hi, guys. Thanks for all this additional details, especially with rich on the line maybe one for rich in your comments earlier, you said you wanted to use 2008 as a template and that's just about is fair template is I could imagine as well you also laid out about how the pattern was a steep fall then a steep rise back.
Given that you are behaving your actions are very different this time, where you're keeping utilization flattish et cetera is that because you view. This cycle is being any different short duration matching the same one is a decade ago.
Or is it simply just the optionality side of the equation at the end of the day that you're trying to maintain.
Let me, let me have Rafi.
No Ross just the just to help on that I think.
Raphael covered this in some ways. If you think back to 2008, and you know and a bunch folks, though we were we were very much different we had a large wireless business. We had portfolio Reprofiling. We had to do you got a high percentage of a product that.
Wasn't exactly custom, but it behaves a lot like custom. So you know building inventory was a with a much.
A much more difficult games and the beauty about where we are today is as Raphael pointed out is that 5% or do the portfolio is is a long lived product.
We've got our R&D and our resources well deployed in the areas that we want to be long term.
That's what really puts us into a wonderful position where.
The cost to have maximum optionality is actually pretty low and our particular casing in 2020 versus where it was back in October.
2008.
Great. Thank you for that and then I guess as my follow up just switch switching over to the cap. The cash return side of the equation looks like you guys had the pretty much the second biggest buyback in a single quarter you've had in a decade can you just remind us on how you guys are thinking about the ability to return cash I know your long term policy for.
Turning 100% of your free cash flow and it's not just dictated by any single quarter I appreciate that as well, but this was significantly above what you guys generated in a single quarter and maybe even in a couple of quarters a free cash flow. So just talk about how much leverage you're willing to put on the balance sheet to take advantage opportunistically of a pullback in your stock when.
It's below what I guess, you viewed to be or the intrinsic value.
Sure so.
Let me first though you alluded to it but let me just remind everybody on the.
On the calls that our objective when it comes due to cash return is to return all free cash flow to the owners of the company and we do that through buybacks.
And dividends. So for example on a trailing 12 month basis, we generated 5.6 billion of free cash when we returned 6.6 or so so obviously all all free cash flow there being been return.
You know and then you know you mentioned that and we we have dead on their balance sheet. As we said on the call. A 6.6 billion. We finish on a net basis is 1.8 billion because we have 4.7 billion.
Billion of of cash on the on the balance sheet, but yeah. We are we use that to increase that the rates of return we some leverage when it makes sense. So.
So that's how we view the how we view.
The returns on the data for many many years have we've talked to US we have talked about it on capital management.
Okay. Thank you Ross and we'll go to the next caller. Please.
Next up is John Pitzer Credit Suisse.
Well, Jeff you got some so let me ask question gave I just wanted go back to your comments in your prepared remarks about booking slowing as we become engine is April was there any market discontinue can talk about particularly interesting.
Out of understanding how auto and industrial he behaved being at the beginning of this pandemic forces maybe things like PC data center on comps.
Yeah, John I, you know I'd say that when we looked a at a.
Last quarter is very distinct that yes, we saw strength is strength in in Pcs, we saw strength in data center.
We saw a distinct flowing.
In in auto as we as we talked about.
I'd say that the.
The relative strength in orders.
Ah that that we saw in the quarter that a that happened as margins in continued into April.
Was broad based generally.
And and and.
It was across the board.
With the exception of of auto and then the slowing I'd say that it is also also broadbased.
Following.
You can just as my follow on returning to Ross.
Quick question about capital allocation return.
Rich.
Since you're on the call you guys have always been good sorted sagging when everybody else is thinking and you've got a longer duration out there I'm kind of curious about how you're viewing the current environment relative to M&A and that's something sort of an arrow in our strategic quiver as we go through the next couple of quarters is much greater than 10 years section.
Yeah.
John If you think about it and you can even needs you've watched this for long time, you can go back to 2008, and then look at what we did through 2910 11 in such.
ER and cool.
Okay.
Through keeping on the worried to R&D investments keeping on the right eat a capital expenditures, making the right capability investments on.
Things like T I dot com.
You know, that's where you get just very excited about we will be getting stronger during this period and those strengths will help us.
You know even as the secular trends of more semiconductors in your life for a growing.
To the degree that we'd have an opportunity to buy a used equipment or used factories or potentially M&A.
As with anything on capital allocation I think that one just goes down to the it depends.
Type comment meeting it would have to be probably a more prolonged downturn.
If you think about what you know the mood was in 2010 and 11, well 2910 11, you know that that mood had to be there for a while before opportunities or became available but we're certainly.
Try to just be wise over the long term.
Okay. Thank you John will go to the next caller please.
[laughter] Christiana lease citigroup.
[laughter].
Hey, Thanks, guys and rich thanks for making the the cameo my first question Rich do you think or do you anticipate a any longer term structural changes in the business either in terms of end markets or anything you're looking at as a result of this pandemic.
Yes, Chris My I think it's early I think Oh, I know you're a world of tries to get ahead on trying to guess what will happen.
I in general thing that you know the the secular trends we've seen good semiconductors more semiconductors trying to get into People's lives.
They're going to continue okay, and I think.
Somewhat is as John alluded to it is question it's obvious in the near term, but you know silver sales and Pcs are going to do well is working from home continues but I just think longer term you look at.
Industrial products industrial equipment, and even automotive even though in the near term people will see solid numbers come down.
The secular trend on semiconductor growth inside of automotive is going to make it.
A great market to be in for the long term so.
No I don't I don't think from that point there'll be a big structural change I do think we've got great advantage of having structural channel advantage. So the changes that we've been working towards for a number of years building closer direct relationship with customers.
Things you now see playing out with a higher and higher percentage of inventory being in our hands to where.
We can be more efficient.
It's that's going to be a fantastic trend T.I. as well well prepared to take advantage of that with our breadth of channel we chose to the industry.
Thanks to I can follow up.
Is there go before Chris Great. Thanks, and then rich to the extent you can you know if you could give us any insight into what the the customer conversations or like what are what are they asking what are their big concerns and I guess at at the root of it you guys talked about and I've I've thought about this why are we seeing this sort of.
Fall off in orders, yet as everybody just kind of frozen in place out there what wasn't happening.
You know, Chris I think if you.
Dave I thought you know was was very direct with what he described as we saw you know orders rise starting the.
Pick it first second week embark she saw them rise up you've seen and start to trend down there still at that level. We saw approximately ending February in early March.
I think that's starting to filter through for us, especially they will have the number or were.
60, 70% consignment.
It takes a while for those consignment feeds to really get updated because companies we've got to.
Start getting better numbers on that front. So I think customers are just still processing through with their customers are telling and Oh, we will see that play through its why we've made the assumptions that the may would be down from a April and June Dallas.
Versus April as well for the for the range.
Okay. Thank you Chris will go to the next caller please.
Stepping frightened onboard Stifel.
Yes, Thank you and I appreciate the wide range on the guidance in this environment.
But can you maybe elaborate a little bit on on what the assumptions are sort of at the low end and at the high end of the range.
Yeah. So I'll give you might take frankly, there's a there's no no signs on that a as we as we talked about earlier, we're using 2008.
As the model afford adding any doesn't imply procession not even similarity.
It's just the is the most recent exogenous event.
That we can use so we're using that in a and the midpoint is the closest thing to do that a kind of adjusted for seasonality.
What do you normally would soon a first second quarter not transition now you're seeing a negative 13% that midpoint, but the entire range then the other recently, we widened the there or the reason we widened the range is due a.
Reflect did they grade level on uncertainty.
We have going on.
As rich mentioned many customers right now there there's still processing, what's what's happening and we've actually heard so how I'm. A you know haven't been able to update their feeds a to us right. So so they got to go through all that process then.
So that's embedded in that in a wide range.
The big is a point I want to make it and we maybe a couple of times already is the the optionality that we're going to get base on how we're running the factories ride. So these things can go multiple ways.
For second quarter and third quarter.
NB on but we have just great optionality that we were running to the business both strategically the type of parts, we build and then brought us and so forth.
Tactically than we were running the I'm the factories and inventory is already in a in second quarter.
Follow on Turner.
Yes. Thank you Dave the other question goes it goes back to what you just mentioned they're held so you know.
Sure your customers until they're thinking about this too and maybe a day or perhaps building some inventory to be able to respond to the eventual demand.
Absolutely the case, how long would you be willing to you know have disturbed optionality or perhaps a rundown inventories a little bit longer than normal.
Yeah, he's going to depend on a number of factors that that today, we don't know right and I think Oh, we and the world than the industry will learn.
Over the coming weeks or months, the and then we will adjust isn't as necessary there.
I think advantage, we have with did they were set up a a strategically.
The type of bars, we build and the type of customers. We haven't been type of in markets is that we can afford to have this optionality. There I just bars are not going to go bad.
It was very different custom centrica custom far centric world in personal electronics type of centric world.
Not the case with the way we structure to the company. So so we have great optionality to both of the there is a.
Beyond second quarter.
Okay. Thank you tour eight will go to the next caller. Please.
And next from BMO is Ambrish srivastava.
Hi, Thank you rich could you give your voice Im sure nobody really wanted to hear you and just kind of Florida.
I had a question back on capital allocation.
And going back to the 2008 2009 template Oh playbook you raised the dividend in the fourth quarter back then it was a small portion but it does take on a percentage basis was pretty meaningful I'm. So as me compare what wherever you're heading now versus and I'm sure. Nobody has any idea what next quarter it was going to be.
What's the right way to think about capital allocation based on the comments, you and Dave and all fail and make it sounds like no no change in how we present free cash flow back.
Debbie plus buyback no change to that's just kind of just help us understand the thinking or scenarios that you're playing out that youre thinking through which might lead to a two a near term modification and metrics and that I had a follow up.
Yes, it allows set up and all that.
Well I feel cover at the answer is no change numbers, because we really have tried out very thoughtful long term plan, but I think it's helpful for Brookfield summarize some of those points.
Yeah, So just to comment on and I'm breezes, as you said and and enrich just confirm that yeah. There's no change in our the way we think about capital management in our long term objective. So as I said earlier cash return return all free cash flow on dividends, specifically as you a as you alluded to.
The objective is to provide a sustainable and growing dividends to appeal to a broader set of owners.
And as a reminder, or on a trailing 12 month bases, our dividend was 55% of our from our free cash, but now of course that the backwards looking metric I understand that but it's a great place to start.
Frankly few companies are that at that level.
Industry, adding the S&P 500, who is a great places start, but but that objective of providing sustainable and growing dividend. It has been in continues to be very important for us.
I want to brief.
Oh, Yeah, you did and this is more to do live there Chris asked a good question on structural changes.
Given that we're all working from home at least a surplus who can afford to work from home how is that impacting the design activity that T. I engages in multiple chills multiple customers. So many end markets. What's the right for you to think about the changes that you're seeing that and doesn't portend poorly for.
Or you know when we ultimately get to a more quote unquote normal world.
You know ever shift or it's why we included in my remarks comments about how we're operating good.
It's one of these.
Deals I.
Produce them or you don't update for in total.
Basically I'd had a bunch of people tell me gosh, we got lucky on some things and I explained there's this great quote that.
Good luck is what happens when preparation meta opportunity.
And you know we put in place this mass market selling really virtual selling techniques, starting three years ago. It's an instituted standard process. Our sales teams work it applications people work get comfortable with customers.
And so it's almost been like nothing has changed in terms of where we spend their time working between ourselves and the customers. They all want to do it all the phone anyhow, our products group connecting it all that.
So the readiness that we had to operate in this world is actually enormously high having T.I. dot com.
You know more capable to support customers decisions to be able to support a online commerce as we're bringing more customers do what.
The comp for the bar product groups design engineers.
And people to work collaboratively because we've always had to do that.
It is really very very unchanged I do think people were working more hours.
Just because of the days than ours tend to blend into one another as I'm sure everybody on this call is experiencing a but it's still very impressive to watch the a watch the team performing in watching what it's getting done worried that at the point or all the set of customer visits even next week, where those customer visits will be virtual.
As well so we're just well into the way of operating this way.
Hey, I just want to comment on.
Finally, there from a different topic what related in the in the spirit of preparation meeting opportunity.
Just wanted to highlight and we talked about a during the during their prepared remarks, but we weren't prepared for a they unforeseen disruptions.
A combination of our inventory strategy, our business continuity program and our geographically diverse manufacturing footprint and which of course is part of all are one of our competitive advantages of our manufacturing and technology. So we haven't.
Hi, evil and continued to be able to the provider customers. We've always short lead times and inventory availability in this time, where they needed most.
Now one in the coming quarters when their visibility will be a will be better yeah, and I would say that we've had customers actually contact us and the rather surprise that our lead times.
Our stable and they can get the product that a that they that they need so ER.
The they're very.
Very very happy with that so thank you operation will go to go next caller. Please.
And then [laughter] Harlan sur JP Morgan.
Good afternoon. Thanks for taking my question and I appreciate the additional commentary on which being on the call. Today. I know you guys don't like to talk about sort of specific geographies, but talk to the matter is China is coming out of this pandemic and studying to open up the economy and throwing quite a bit of stimulus that it are you see.
And just being reflected in your order rates are consignment forecast for your domestic China customers and roughly what percentage of your business today comes from domestic China consumption.
Yeah.
Yes, I I'll I'll start and are pleased to chime in Raphael seems like so it we've.
Again, I'll give the numbers of products of where we actually ship the product, but always not offer the the caution.
That it's a you know where the box shifts from.
So we've got 50% of our product ships from into China, a big it met again like are you know.
So our phones as an example may be built there.
Maybe designed and in California.
And end up in Europe as it as an example, so.
And yeah, we are seeing those factories coming back on line as we talked about in our in our prepared remarks.
But I think the uncertainty is how much demand will actually be there as those factories come back online and I think that's what's creating that that uncertainty. So you have fallen.
Yep. Thank you for that until I chestnuts, most fishing for cats is calling for global light vehicle production to drop almost 20% is here. This is placed a year over year drop as experience in the ALLETE online financial crisis outside maybe just a near term inventory correction to kind of normalize to the lower production trends.
How does the T I keep thinking about your content growth and although to potentially partially offset significant decline in production this year.
Yeah, I, you know I think Harlan that.
Opportunity in automotive remains unchanged and.
You know we continue to invest in.
Uh huh.
Five different sectors inside of the automotive.
There will be more content per vehicle as you know Harlan as you're you're pointing to.
You know, we will respond tactically to those changes in demand on and we know how to do that and take care of that operationally, that's not something that we'll be able to control.
We will keep our investments steady and be prepared to to support that growing opportunity.
As it arrives so rich you have anything to add to that.
Yeah, I would just you know hurdle and amplify the as I suggested earlier that.
You know the secular growth themes that are embedded in things like automotive are better than industrial or alive and well, okay. They're gonna be where those are they they're not going to offset a 20%. So drop in any one year and you know that I think everybody does.
But when it comes to you know, making investments as Dave said very well you got to be look five and six.
Two years out we think all the will continue to be a growth a great average up or have a full of our long term growth in our performance.
Okay.
Thank you Harlan we'll go to the next caller please.
And up next is Toshiya Hari Goldman Sachs.
Hi, good afternoon, thanks, very much for taking the question I just had one.
Probably four for rich I was hoping you could.
Talk little bit about the competitive landscape that you're seeing today. Both in embedded processing is walls analog you guys have been pretty consistent share gainer over the past 510 15 years.
And I wanted to get your thoughts on on share growth potential going forward. Obviously, you guys are going through.
This recession, which all else equal I would I would think would be positive for industry leaders like yourself, you're also going through the go to market strategy a change you've also got the trade type.
During the U.S. in China. So when you think you think about those three if you.
Can you talk to your confidence level around share growth over the next call it three or four.
Oh.
Yeah totally I I think you've almost be answered. The question. I think you described a couple of secular tailwinds, if we do our job well, where the you know a secular headwind depending on trade tensions, but even there if we do our job well I think we could mitigate some of that.
I think you also.
I'm sure Dave is smiling you got to the right context, which is you've got to look at this older two three and four years I think he reminded everybody all the time.
And so you know you look at the share we gained going kind of into and then the position we were coming out of the old nine downturn and we gained momentum in that and that's certainly what our plans are right now and that's about both analog and embedded and it's about.
You know the markets that we focus on it for customers to products the technology, the Cape stability like T. I Dotcom, where we put in place that's where it's where all our energy is going on a weekly and daily basis, just to get better.
Okay. Thank you to Shia we'll go to the next caller. Please.
Next step is Timothy arcuri you'd be yes.
Thanks, a lot I had two I guess first for.
Which is another [laughter], how to think about how to school.
Definitely around.
Uh Huh [laughter].
Oh, Hey, Staples.
Hello, Tim them, Yeah, we have trouble hearing you could because you could you start over please.
Oh sure. Okay. So the first question really is around how the cycle evolves and how to think about it.
And I guess I understand that that magnitude the peak to trough magnitude, it's hard to look back at all eight and and to sort of look at that but but it seems like the near term some ply chain boost that or you know that you know the concerns that customers have about that that's you know boosting near term demand. It seems like for you that effect is sort of bigger.
Turning to wane, maybe a little earlier than others because it you can find that model. So what you're seeing it first and I wonder if you'd agree with that with that that it relates to the you know to the consigned to model and I guess the question is does that agreed it or does that argue that you would maybe see it out the other side first as well.
Yes, Tim I you know.
So I I don't know you know so first of all we haven't seen where others have have reported yet or what they've seen so it's probably too early to do that.
And Ah you know we've had a series of US seen it early and seen late just rather not weigh in on that debate and just report facts or that have we have.
And let others debate right.
We do believe that bite by pulling and controlling that inventory will get much cleaner signals, but as you know we talked about before you know our customers right now.
You know, they're not sure what their demand is going to look like and and so what they're telling us hasn't been updated yet. So you know, even what they're telling us isn't isn't completely clear.
So you know, it's going to take a little bit of time before all that stuff is a is updated so you have a follow on.
I do I do yes for Rafi off so I guess on inventory or.
So if I assume it's sort of flat to up in dollar terms, obviously days are going to go way up in June and maybe there how to 780 days like that and possibly that out but you know can in September I guess I was just wondering like can you give us some sense of what the pain point is where you might cut you know utilization is it an inventory now we're seeing is it.
Interesting or is it a sort of just said you know duration of recovery thing to thanks.
Yeah No. Good question first let me step back on reminds you that.
For us the objective inventories to maintain high levels of customer service or minimize obsolescence, while we improve our manufacturing a after utilization the target one a 15 to 145 frankly is it's kind of incidental write a it's just that calculation at the end of that aided is a capital allocation that.
We're going to you we have to a $2.7 billion of a of inventory. That's a that's real money does on their balance sheet that if it wasn't there the back in the owners pockets. So we're very thoughtfully in how we're going on how we make those decisions to boot a potentially more more inventory on on their balance sheet right. So that's.
Less cash that we have but we just things going to give us great a great optionality.
Throughout this thing right and you know.
Like you make any decision when it comes to capital management is going to depend I felt that decision, we're making now I'll have to see how things develop in the in the coming month and based on that we'll adjust the important thing the inventory last a long time. This is inventory that the scrap levels on that inventory very very low.
So the others that well there was a working capital and.
And then opportunity cost or the wet but a very low given that is a highly unlikely that that is going to be scrapped and it gives us tremendous optionality a from the other side.
Okay, Hey, Mike just to follow up Raphael and and Ken Warfield said this before so it's just be repeating goes combat.
The other thing to keep in mind I mean is called this out is while our inventory would be growing in second quarter, we will be brain, yet again distribution inventory.
So we just got to keep these multiple variables in mind, it just keeps putting us in a better and better position. When we're doing that so with our balance sheet may or may show higher inventory, but we'd love. The fact that that channel inventory will be getting leader at leader.
Inventory will be a one place where we can get the most effective use out of it.
And algo had an ad.
When when new and old investors listen on the call when you compare us to do most or maybe all of our competitors. Our balance sheet is very different in that regard because we have many consignment arrangements or about 65% two thirds of our revenue both of them Simon whether it's the distribution or directly with the.
With the end customers, so that bodes upward pressure on that inventory level that we have we also have our own a manufacturing do.
Including Assembly pass operation, whereas a to do a very high degree of about 80% of our or output goes.
Through our to our Fabs and maybe six or seven through our assembly test operations. So that's also very different than than our competitors. So that's why it's not apples to apples when you compare or inventory levels due to those of our competitors, but but let me let me make the point, though that we think.
Owning and controlling that inventory is a strategic asset.
So we're very pleased with we haven't does consignment arrangement clearly very pleased weve owning our own manufacturing and what that has enabled us to do.
Any time, but particularly in times of disruption my we do us a just experience I continue to experience, where you just really puts us in a in a much better positions to support customers.
Right. Okay I have we have time for one last one last caller.
And we will go to Mark limits Jefferies.
Great. Thanks for taking my question.
So I had one.
Our own field work in the supply chain downstream from you guys.
Indicate that inventories are indeed, like normal us not lean levels and as the virus spreads are around the world to places like Malaysian Philippines that their shortages of of components understanding that your inventories are all our are higher than.
At the high end the range and.
I'm not hearing anything about <unk> shortages, but but basically supplies being disruptive and there's a reticence to give up any excess inventories downstream for you I'm wondering if you could describe what you're seeing on your own supplier base. It you you want to run your factories that are consistent levels here are you seeing.
Any of these supply chain disruptions that that you know you're kind of your customers are seeing it. Other components are you seeing that and how are you managing that in their service that you you're not going to be able to run your capacity Saab consistently because of your own supply disruptions. That's all I had yeah sure.
Yeah no problem. The short answer to that is we're not seeing anything worth mentioning on this call a little things here and there, but nothing that we're going to manage remembered you know I referred to our business continuity program.
And we've been Oh in this call we've been talking Mona Mona mainly about inventory of finished goods inventory that we carry but that also applies on on multiple oh. There angles. So for example, we also carry raw material inventory buffer, we have many a dual and triple and quadruple sourcing of Ah.
He oh raw materials Ana.
We also have a as we as I talked about earlier geographically the drivers a manufacturing footprint in a in Malaysia in the Philippines in Taiwan in Mexico in China.
So that just really puts us in a in a very good position also gives us leverage due to work with us suppliers, which by the way we pay them in 30 days or we make a that's part of our of our thinking to be fair to those suppliers and we don't we don't play games on that so that you know that's also from a from a long term relationship standpoint, I think we.
We are very good shape with the of all those suppliers.
He's like that wraps up yeah. So let me just wrap up by reiterating what we have said I previously history has shown that it is times like this when we can make the most strategic progress.
We will continue to invest in and strengthen our for competitive advantages, which our manufacturing technology portfolio breath, Mark and reach and diverse among the products. We will also continue to pursue the three embraced ambitions a rich mentioned.
We will act like owners, who will own the company for decades, well, we will adapt in a world the ever changing and we will be a company that were personally proud to be part of and wouldn't be proud to have as enabler.
When we are successful our employees customers communities and owners will all benefits.
It is this a missions that will guide our discussions in the weeks and months ahead as we navigate these uncertain times our best for you on your families.
And ladies and gentlemen that does conclude today's conference. Thank you all for your participation.
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