Texas Instruments Incorporated's TXN CEO Rich Templeton Presents at Citi's 2020 Global Technology Vi

I am doing terrific Chris, thanks. So I'll get right into it. The topic on everybody's mind is COVID. By the way, for those of you out there that don't see me or Rich, this is an audio only presentation so it's kind of a shame that this is the first time I've worn a suit in months and you don't get to see me in it. But anyway Rich, why don't you talk about the impacts from COVID to Texas Instruments, maybe go through the increased costs that you're incurring and do you feel that this is having a long-term change in your business and your end markets and we'll jump right in.

Yeah, you know Chris, I would describe it in general and I joined the earnings call back in I guess April and Dave and Rafael gave some updates in July during it. But you know, I just remain pleased with the way our team is handling things around the world. The good news is that the team was exceptionally well prepared in terms of we operate in a very virtual way even before with a lot of Webex meetings and we've got strong relationships built with the people. So the productivity of what we're able to get done on a global basis is very high. We continue to be doing business as usual because we had processes in place with how we were selling virtually and I continue to have customer meetings, we just do them over Webex or Zoom or whatever the tool of choice is. So navigating that all well. Our global footprint of diversified manufacturing locations and having a great business continuity or BCP plans have really rewarded us as I think you saw even through the second quarter results as we were able to keep things running even with a lot of the different restrictions that took place around the world. So pleased with how the team is navigating it, we've really kept our eye on the ball. And you know, we all of us and I'm sure you've got the same feeling, we look forward to getting back to seeing people and working more closely together. But you know, we also think there's things you can learn in terms of can you travel more efficiently, meaning less, and in areas like that. But we look forward to getting back to the more usual business environment probably sometime in 2021. So far so good.

Yeah, you know Chris, I think in general and you know, I think you've monitored and watched this. I think as you went through the July earnings calls, I think things were reasonably logical. Meaning things that had work from home or remote learning drivers, you know, be it personal electronics were stronger, server/cloud stronger to handle capacity. Automotive because you had North American and European plants taken down in late March and really just starting to come back up in June. And then within the industrial market, you know, you could see the logical areas where obviously a medical end market's going to do well, where anything in the energy field or factory automation where you can't get people into plants to install stuff is going to be slower. So I think that all made reasonable sense. My general guess over a four or five year period is that you're actually going to see secular trends accelerate. And so I think of things like electrification of vehicles, it's going to continue to move very strong and pull forward on that. I think you'll find companies actually going on an increasing basis to more semiconductors and electronics because they've got to make their equipment better and more differentiated and more unique and those newer products get higher priority in terms of their products and their launches. So in general, I think it's going to look pretty much like we expected three, four years from now when you think about COVID impacts from COVID.

Yeah, I think it's, and I think time will have to sort a little bit of this out and you watch this as much as anybody and has good instinct. You know, some of it is you have to remember that we were coming off of a pretty modest 2019 because 2017 and 18 were pretty strong and then things pulled back a little bit in 19. So the industry was due to do better in 2020 even though you had the pandemic hit early in the year. Second is I think you're just seeing, as I commented before on implications of COVID, the things that our industry does and what we put electronics into to make people more productive has if anything accelerated through the pandemic. And that'll vary depending on end market as I commented. So if you're looking for some of those reasons that's there. You know, I know you've written, David sent me some of your comments even before of do you have customers being careful about not wanting to be exposed to supply chain limitations due to either the pandemic or even on a broader basis some of the trade implications. You'd be naive to say there's not some of that but being able to quantify that is always difficult. The great news and it's how I look at things is in the near term we know how we're going to play this which is make sure that we're operating the factories pretty strong. It's really served us well and I think it'll continue to serve us well. And then in the longer term, and longer term think two, three, four years out, you can really count on trend line growth and make sure you've got the right capacity invested to be able to support that as well. And so that's what we keep our eyes focused on and we don't have to make the same decisions that you're trying to navigate or help investors through.

Yeah, I think as long as you're careful about getting down and looking at the smaller sized end markets, I think they can make seasonal sense. But automotive is not seasonal as you can well relate to in terms of what it did, slowing down and coming back up. So I think you've just got to be very careful putting high level seasonal trends on numbers and you've got to look at them at a more granular level. And then yeah, I think they're making sense. You know, I laugh at the visibility comment because everybody talks in good markets about high visibility and in bad markets they have none. But it's the same damn market. And so I think we've got a reasonable sense of what our customers are trying to do. It doesn't mean we'll ever be able to predict it. It's why you heard us and saw us take the strategy that we described in April of keeping our optionality very high. And we've got the luxury because of our product mix and our product diversity that we can do that. And we can do that at actually a very low cost. And therefore it puts us in a position to be most flexible. So we don't have to get it called precisely right and that's a very nice thing. And as you know, 10, 15 years ago we didn't have that luxury as we were much more dependent on high volume single concentrated customers where you better get those mixes called pretty accurately. We're fortunately by design in a very different situation.

Yeah, I think in general, and the best comparison, and again you follow us for a long time, look at where we were 10, 15 years ago when you're doing essentially custom high volume parts, you better not be operating at those rates, you're going to be in trouble. And today we have the luxury of being able to do that. And it really puts us in a position where our customers gain great confidence because we tell them don't worry about giving us a great forecast, just when you need something we'll have it. And that ends up being a much better way to do business with customers and they respond well to that. Now in terms of what's the exact amount of inventory that we're going to need, Rafael and I have talked, I think we do owe investors an update. We've got this inventory range, we're above it right now. And I think what you see us doing is making good decisions, thinking like owners, not just being static and trying to adhere to some arbitrary metric. But we will probably get an update or updated thoughts on that maybe at the capital management call in February of '21, we'll get some insight into how we're thinking over time on that front. The good news is because of the confidence in what we're building, you've just got extraordinarily low cost and the carrying cost on it is small. The other thing that gets lost in that a little bit, and you suggested it even with the question, is we continue to bring much, much more of the inventory that used to be downstream in the channel on our balance sheet. So the days on TI's balance sheet are a lot higher, but we look through the whole channel and try to make sense of that as well. So I think we've done a pretty thoughtful job and we'll provide some better help about how to think about the appropriate inventory range as I said early next year.

Yeah, to me it really comes down to the same things that we've talked about over time. And much of it in some ways centers around the four competitive advantages that you hear from Dave and you hear from Rafael. You know, the foundation, manufacturing and technology, most visible or most recognized is our 300 millimeter wafer size analog manufacturing. Then the breadth of our products, then the reach of our channel, then the benefits of diversity and longevity. And inside of that you see this growing mix of automotive and industrial and products that just live a long time, which as you know correlates quite well to increasing returns. So what are the things that continue to drive either gross margins or free cash flow margins? It's more 300 millimeter, it's better execution, it's more efficiency, higher quality of product mix, higher quality end markets. A number of the things that we've been doing over the past 10 years. Obviously the amount of improvement that we can still get because we're just starting from a higher point is less, but I still think there's some things that we can do.

Yeah, the simplest way to describe it is, and I think probably every company is going to do this, at least I expect or hope, and that is we're going to comply with all the laws and all the rulings that come out and we'll deal with them as they occur. And we will not try to predict what that's going to look like. Dave may have the Huawei numbers, but they've been a declining and reducing customer for us in general. But we'll deal with it and navigate it accordingly.

Well, you know, if I recall, and I think I recall the discussion, and I had it both at the conference because I had spent time talking about it internally, was to get everybody expecting that this is a way of life going forward, not will the next trade negotiation resolve things, because I never expected it would. I just think it's going to be a growing reality. And now the companies that adapt and adjust and deal with it best are going to be the ones that cope with it accordingly. And so I think we've had good efforts by our team to understand the customers are still the customers in China. Even with tensions and even with any inclination of nationalism and preferences of where to buy, our job is still to come to them with the most appealing offers and most competitive offers and help their business. And that's where we keep our teams focused right now. So I think that's the right way to approach it. And is it going to be an issue that continues to grow? It probably will. But we just have to handle it better than anybody else. It's not just happening to TI, it's happening across the industry.

Yeah, I'm careful because I think there's a lot of different stories that you hear and obviously there's some proposed legislation and activities that are taking place. I go back to the things that we support, the things that when I spend time with the folks in DC, is really to make the US headquartered semiconductor companies and semiconductor industry strong for the next 10, 20, and 30 years. And I think the things that can be best done on that are making sure you're investing in the long-term research and making sure that we have access to great people. And then finally make sure you've got competitive tax structure so you can run manufacturing in the US. And we've made progress on some of that over the past four years, we've gone backwards on some of it. And I think there's a growing awareness in Washington that having a significant percent of the global semiconductor market is a good thing. And so I think people are trying to figure out just what that means and what are the right ways to be able to do that. You know, we've seen, go back to the '80s, we've seen the SEMATECHs invested in to make sure that we were doing well against the growth of the Japanese competition. And so I think we'll just have to find what the right balance of things are for this current phase.

Yeah, I think it's just really simple math. And that is that when you've got your manufacturing internal and you run your manufacturing at world-class competitive levels, you end up with a cost advantage and you end up with better control of your supply chains. And so to me that is the only way when you operate a 10 billion plus semiconductor company, we're doing, pick a number, 40 billion units a year when you look at how you manufacture. And to me COVID-19 was a perfect example of what TI can do because of the way we're structured with it internally. And not only do you get cost advantage, but we perform better than the majority of our competitors that were highly outsourced around the world or they had very concentrated test facilities. So I just think we're just going to get growing advantages of that internal manufacturing and technology. 300 millimeters is just kind of the most visible example of the advantage we have and we're going to keep building that advantage, leveraging it, and I think it's going to serve us quite well. Put aside, do you have supply chain risks of stuff built in Taiwan over a five or ten year period, that's even beyond that question.

Yeah, Chris, somewhat the question is a good way to frame it because it's actually how people thought about it internally even when that news came out just a couple of months back. We compete against those companies while they were standalone and when they're put together you're competing with them together, they just have one name above them. And so nothing magical occurred, nothing different happened. And the biggest thing, and you and I have talked about this in the past, when companies are busy integrating and merging they're not working on getting fundamentally or organically stronger. And what I love about what we've been doing over the past five years, and even beyond just the acquisition you're mentioning, the other acquisitions that took place particularly in '16 and '17, we've been busy building the company stronger organically. So more capabilities with TI.com, better product execution, more discipline internally of how we're executing. And just look at the steady and continuous gains particularly on the analog side that you see us continue to achieve. And I do believe that in the end that organic strength, or building the company stronger, is what really determines success in the long term, not have you combined things together to make a larger company. So we feel pretty good about where we are and we feel pretty good about where we're going.

You know, there's really two answers to that. At the high level, if you think about the kind of major product categories, go down a level or two inside of analog or a level or two inside of embedded, and you put eight or ten boxes across the page representing the next level of granularity, we've got check marks in all of them. And so we're in solid position and there's just nothing we have to go get. As we've already discussed on scale and size, we can afford to do things that our other competitors can't do. Running manufacturing, wafer fabs internally, the size of our sales force, what we're doing to transition and bring customers direct, those are all great benefits of our size and scale. But to the last part, if you go down far enough in the granularity of products, are there products that we don't have that if there was ever the right match we could possibly do something? Sure, we don't have something covering every space, we're not arrogant enough to think that. But the areas that we've got well covered, we're going to keep building them stronger.

Yeah, I'm careful on that characterization because I actually think the more accurate one that somebody had pointed out, go back and look at the Burr-Browns and the Unitrodes, those were really pre-2000. So it really wasn't the decade of the 2000s, it was the end of the '90s where we thought there was really some good capabilities that we wanted to bring in to help accelerate the growth of our analog business. If you look at what we did and think of it as really 2009, '10, and '11, and you remember it well, I remember meeting with you the morning that we announced the National deal in April of '11. Everybody on this call remember how depressed everybody was about the economy in 2009, '10, and '11. They thought the sun was never going to come up again. And so we just used that as a great time to be more aggressive, be it picking up used wafer fab equipment, used wafer fabs, or eventually National. So valuations really made great sense. And now we've got, and I think you said it, we've got scale and we've got the capabilities and oh by the way, valuations are exceptionally high. It's just not a great time to be doing those things. You've heard me for a number of years, when you're buying things where the purchase price or the free cash flow yield on purchase price is three percent, I know as an operator how to get four or five percentage points on top of that, but you're just not doing your owners over the long term any good when you're buying stuff at that level. So I just think discipline on allocating or where you spend your money really matters in the long term and we're going to continue to stay disciplined on that front.

Yeah, I think it continues and I think Rafael and Dave do a really nice job each February talking through during the capital management presentation just how we're thinking about that. We continue to get a lot of positive feedback from investors that that presentation is really helpful for them, it's a good reminder and any updates that we provide. But basically the two things you'll see under stock repurchase and dividends. On stock repurchase is to just really think like owners and make sure that when you're buying back stock you're doing it in very accretive ways for the owners for the long term. And go back and look at what we've even done over the past six or eight quarters and now the grade on that you don't get for ten years, but just tactically look at what we've done. And you see large purchases and I guess it was fourth quarter of '18 and then you saw us again pretty aggressive in first quarter of '20 and second quarter of '20. And I just think that thoughtfulness of being very disciplined about what levels you buy back at really add to the owners for the long term. And on dividends, I think dividends play a key role. I think they allow us to attract a broader set of investors and we think it's important to provide that dividend but also the ability for that dividend to grow. And I forget the exact data but I think our past five years and probably 10 years growth rate on the average on the dividend is probably sitting in the 20% growth rate, maybe a little north of that. And in the end though, what this all comes back to is the comment you made which is we've got to be great growers of free cash flow and disciplined of being focused on free cash flow per share. Because then you have the ability to then make decisions like stock repurchases or dividend increases.

Yeah, it gets a lot of attention on the new turn in the near term and I think you're close enough we should have the transition mostly completed by the end of this year. But as you know we've been on this journey for five and really 10 years and we believe the reach of our channel is a real asset. We think we do that work better, we think we get better results. I think you can see what we've been able to do with market share over time on that front. And I just think this is the final piece to get that chapter completed to build closer direct relationships. And the goal is not to be direct, the goal is to grow your revenue faster by being direct. And I think we're going to be able to do that, but obviously the proof on that will lie with how we perform in 2021 and 2022. But I think we're lining up to be able to do that well. And as we touched on before, I think that's a very difficult thing for our competitors to do because they haven't built out the sales and applications team, they haven't built the systems and the processes in place. So that heavy lifting and that thoughtful work over the long term is really going to be a great asset to us.

Not true. I think the top goal of this of building closer direct relationships with customers is to grow faster. And so I think we're going to end up with greater market share and greater growth in terms of where revenue comes out. And we heard that same nonsense when we took distributors off of these design win registration programs, oh it was probably five, six years ago now, and you've just watched us continue to power through that and gain. And this final act will be the same thing. Are there potential margin lift? Obviously when you've got fewer people stacking things up there's less margin left. It's not the reason we're going after it, but obviously if we gain a margin through the process of doing that we will certainly accept it. But revenue growth is what we'll really benefit from in the long term.

Yeah, we will always, and the question is a great way to frame it. If we thought that the better thing for long-term free cash flow per share for the owners was to do something different, I think you've seen in our past we wouldn't be afraid to do that. But the fact is I think embedded is going to be a great contributor to free cash flow per share growth over the next 10 years. We clearly had outperformed for a four or five year stretch, we gave back some of that performance in 2018 and '19, but we've got work and effort underway so I've got a lot of confidence. I'm going to guess we're not getting that question three or four years from now and I think we're going to be very pleased with what it can do.

Yeah, I refer to it as a brief sabbatical where Michael got to play baseball for a few years. But you play golf, okay. The, it's really very simple and that is that we are going to make sure that we've got a great answer for a 10 or 15 year shift and I'll be here until we've got a good answer for that. I love the candidates and people that we've got leading the company inside. I think you've got a chance over the years to see the people that we have and they just, I believe, just keep getting better in terms of who we have growing up. You watched recently that we promoted Haviv on to the chief operating officer role. He's just going to simply help us build the company stronger. When you get a chance to meet him I think you'll see that intensity and that...