To begin. Good day, welcome to the Texas Instruments Capital Management conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dave Pahl. Please go ahead, sir. Good morning. Thank you for joining our 2021 Capital Management call. This call is being broadcast live over the web and can be accessed through our website at ti.com/ir. A replay will be available through the web. This call will include forward-looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements contained in our most recent earnings release, as well as our most recent SEC filings for a more complete description. During today's presentation, we'll begin with a recap of our objective, strategy, and business model that is built on our sustainable competitive advantages. Next, we'll review our scorecard for 2020 and updates for 2021. We'll provide a historical summary of our capital allocation and take a deeper look into specific areas of investment, including 300 millimeter analog, R&D allocation priorities, and our progress on building closer direct relationships with our customers. We'll also discuss our free cash flow per share performance. Finally, we'll wrap up with a review of our cash returns. We've recently updated our investor overview, which you can find on ti.com on our investor relations website. We believe it'll be a helpful overview of our business model and competitive advantages. The following guiding principles from that overview will help frame our discussions today. At TI, we run the company with the mindset of being a long-term owner. We believe that free cash flow per share is the primary driver of long-term value. Our ambitions and values are integral to how we build TI stronger. When we're successful in achieving these ambitions, our employees, our customers, communities, and shareholders all win. Our strategy is comprised of a great business model, a disciplined approach to capital allocation, and a focus on efficiency. Our business model is built around four sustainable competitive advantages, manufacturing and technology, broad product portfolio, reach of our market channels, and diverse and long-lived positions. After accretive investments in the business to grow free cash flow for the long term, the remaining cash will be returned over time via dividends and share repurchases. With that as a framework, our objective is to maximize long-term growth of free cash flow per share, which we believe is the best metric to judge our performance and that generates long-term value for the owners of the company. Our strategy to achieve this objective has three elements. First, a great business model that is focused on analog and embedded products and built around four sustainable competitive advantages that we continue to invest in and make even stronger. Second, discipline in allocating capital to the best opportunities. This spans how we select R&D projects, develop new capabilities like ti.com, invest in new manufacturing capacity, or how we think about acquisitions and returning cash to owners. Third, striving to constantly increase our efficiency, which is about achieving more output for every dollar of input. Our strategy is designed around four sustainable competitive advantages that, in combination, provide tangible benefits and are difficult to replicate. First, at the bottom of the slide, we start with a foundation of manufacturing and technology. This provides us with lower costs and greater control of our supply chain. Second is a broad portfolio of analog and embedded products. These products provide us more opportunity per customer and more value for our investments. Third, the reach of our market channels, including our field sales force and ti.com. This provides access to more customers, projects, sockets per project, and insight into their needs. Lastly, we have diverse and long-lived positions, resulting in less single-point dependency and longer returns on our investments. With that, I'll turn it over to Rafael, and he'll review our approach to capital management and the scorecard. Rafael? Good morning. We have shared our capital management scorecard with you since 2013. In 2020, we again met our multiple objectives. We are pleased with the consistency of these results that have been enabled by our business model and strategic decisions, particularly in a year that was impacted by COVID-19. You can see that the scorecard continues to include descriptions of our long-term objectives for each metric, as well as the target range. The long-term objective provides insight into how we make decisions and run the business, as opposed to only a number that reflects a single data point. For 2021, we will be making several changes to our scorecard targets. We're updating the range of our days of inventory to 130-190 days. This change reflects our continued efforts to maintain high levels of product availability with short lead times as we build closer direct relationships with our customers. We are updating the range of our dividend as a percent of free cash flow to 40%-80%. The growth and sustainability of our free cash flow makes us comfortable even with the higher end of the new range. I would like to provide additional insight into how we allocate our capital, and I'll give you updates on several key investment areas. Over the last 10 years, we have allocated about $83 billion of capital. Given that magnitude, you can quickly appreciate why capital allocation is a job we take quite seriously, and one that has a significant impact on our owners' returns. Our largest category of capital allocation is investment in critical areas that drive organic growth, such as R&D, sales and marketing, capital expenditures, and inventory. We're pleased with the results of our investments in R&D that strengthens both our manufacturing process technology as well as our product portfolio. Our isolation products, gallium nitride power products, or innovation in small footprint packaging are just a few recent examples of investments that will provide growth in the years ahead. The second largest category is share repurchases. Here, our objective is the accretive capture of future free cash flow for long-term owners. We focus on consistent repurchases when the present stock price is below the intrinsic value using reasonable growth assumptions. Next is dividends, where our objective is to appeal to a broader set of investors, and we focus on their sustainability and growth for obvious reasons. Finally, potential acquisitions are evaluated through two primary factors that have remained unchanged. It must be a strategic match, meaning catalog analog focus with high exposure to industrial and automotive. Additionally, it must meet certain financial metrics, such as generating a return greater than a weighted average cost of capital within about four years. For simplicity, we have not included changes in net debt, which over this period increased $1.4 billion. With that framework set, let me ask Dave to comment on our investments in several specific areas. Thanks, Rafael. I'd like to update you on our progress in strengthening our competitive advantages. First, I'll be updating you on our manufacturing advantage and investments in 300-millimeter analog capacity, which as I mentioned earlier, help to extend our cost advantage and give us greater control of our supply chain. As a reminder, for those not as familiar with the semiconductor industry, a chip, meaning an unpackaged product made on a 300-millimeter wafer, costs about 40% less than a chip built on a 200-millimeter wafer, the size used by many of our competitors. This translates into a great competitive advantage. The source of this advantage is the area of the wafer. A 300-millimeter wafer has 2.25 times more area, which in turn means we get about 2.3 times more chips, but it doesn't cost us 2.3 times more to process that larger wafer. This translates into a structural cost advantage. To understand how a 40% less expensive chip impacts gross margin, it's easiest to use an example and one we've used for some time now, and it's shown on this slide, of a part built on a 200-millimeter wafer compared to one built on a 300 millimeter wafer. This example shows a theoretical part that sells for $1 with a gross margin of 60%. The chip itself would cost about $0.20 if it was built on a 200-millimeter wafer, and it would be reduced to about $0.12 if built on a 300 millimeter wafer. In this example, the remaining costs of assembly and tests are about the same regardless of the wafer size. The net result is that gross margin improves by eight percentage points. As this simple example illustrates, our 300 millimeter manufacturing capability and the resulting cost structure provides a unique competitive advantage for TI. As we've discussed before, we currently have two 300-millimeter factories, our Richardson fab or RFAB, and DMOS6, both located in the Dallas area. In 2020, we began construction of RFAB2, our third 300-millimeter wafer fab. RFAB2 will be co-located on the site with RFAB1, thus gaining operational efficiencies. Fab construction is well underway. We expect the facility to be ready to support production in the second half of 2022. Next, I'll focus on our R&D investments that we allocate to higher value growth opportunities in order to strengthen our technology and product portfolio while improving diversity and longevity. On this slide, we summarize the current direction of our R&D investments and our revenue breakdown by end market. For the revenue breakdown, we've provided data for the years 2013, 2019, and 2020 so you can get a sense of how the portfolio has changed over the long term as well as compared to last year. Summarizing the direction of our R&D investments shown in the second column. Industrial and automotive investments continue to be up broadly, reflecting our belief that these end markets will be the fastest-growing markets due to their growing semiconductor content. Personal electronics investments are up slightly, but we will continue to be selective. Communications equipment investments are steady and in analog only. Enterprise system investments are up slightly in support of the growing cloud server infrastructure. Other, which is shown for completeness, is primarily the calculator business, where investments is flat but at low levels. On slide 16, you can see the strategic progress we've made in the important markets of industrial and automotive. In 2020, those markets combined for 57% of TI's revenue, compared to just 42% back in 2013. As a reminder, the industrial and automotive markets have high diversity, meaning many customers, many sectors, and many end equipment types. These markets also have high longevity, where they tend to have life cycles ranging from several years to several decades. Success in the industrial and automotive therefore requires a long-term commitment and a willingness to invest broadly across sectors and product categories, both of which we've done and will continue to do. I'd also like to share an update on progress in building closer direct relationships with our customers, which serves to strengthen and extend the reach of our market channels. We believe that customers will increasingly desire the convenience and productivity of online relationships along with the skilled customer and commercial support. This is a broad secular trend, and we see it all around us in our daily lives. Our multi-year investments in our sales and applications teams, ti.com, business processes, logistics, and distribution channel changes uniquely positions TI to lead this transition in the semiconductor industry. In 2020, we took a critical step to accelerate direct relationships with our customers. Our percentage of direct business increased from 35% in 2019 to 47% in 2020. More importantly, as you can see on the accompanying graph, we've left the year with 63% of our business transacting directly. TI's reach our market channel advantage results in higher growth through access to more customers, projects, sockets per customer, and better insight of our customers' needs. With that, I'll turn it back to Rafael to talk about our free cash flow growth and cash returns. Thanks, Dave. As we described at the beginning, our overall objective is to maximize long-term free cash flow per share. We believe this is not only the best metric to judge our performance, but it is also the one that we, as owners, ultimately care about. In 2020, even with the disruptions from COVID-19, free cash flow was $5.96 per share. This was down about 4% from 2019, and free cash flow margin was 38% for the year. Since 2004, free cash flow per share has grown 12% compounded annually. As mentioned before, our long-term objective is to provide a sustainable and growing dividend to appeal to a broader set of owners. For 17 consecutive years, we have steadily increased our dividend, including a 13% increase in the fourth quarter of 2020. These increases represent 22% for both the five-year and the 10-year compounded annual growth rates. In 2020, dividend payments represented 62% of free cash flow, supporting their continued sustainability and growth. As of January 31st, 2021, the dividend yield is 2.5%. Our objective in repurchasing shares is the accretive capture of free cash flow for long-term owners. We focus on consistently repurchasing shares when the intrinsic value of the company exceeds its market value. By using realistic discount factors and reasonable growth assumptions to calculate intrinsic stock value, we're aiming for confidence that investments made in stock repurchases are, in fact, earning rates of return greater than our cost of capital. While the ultimate assessment of return on investment depends on the future cash flow stream, the track record of this approach is encouraging. We have reduced shares outstanding 46% since 2004, including the 1.4% reduction in 2020. We ended 2020 with $10.6 billion in open authorizations, having bought back $2.6 billion worth of stock in the year. In total, as our free cash flow per share has continued to grow, so too has our cash return per share. In 2020, we returned $6.49 per share, which represents a 1.9% growth versus 2019. In total, in 2020, we returned 109% of free cash flow. Since 2004, we have grown returns at a 17% compounded annual growth rate. It may be helpful to frame our performance versus others in the S&P 500. Our free cash flow generation puts TI in the 89th percentile, cash returns in the 97th percentile, and return on invested capital in the 95th percentile when compared to the S&P 500. We believe our strong relative performance versus the S&P 500 is a reflection of our focus on growing free cash flow per share over the long term and the three elements of our strategy. First, a great business model that is built on our four competitive advantages in which we're continuing to invest and make even stronger. Second, discipline in how we allocate our resources, focusing on the best product opportunities as well as areas that strengthen and leverage our competitive advantages. And third, striving to constantly increase our efficiency, which is about achieving more output for every dollar of input. We believe if we can continue to do these three things well, we should be able to grow free cash flow per share for a long time into the future. Let me now wrap up my prepared remarks with a few summary comments. As engineers, it is a privilege to get to pursue our passion of creating a better world by making electronics more affordable through semiconductors. We're fortunate that our founders had the foresight to know that passion alone was not enough. Building a great company requires special culture to thrive for the long term, and we continue to build this culture stronger every day. The desires of ESG and sustainable investors are aligned with our long-term ambitions and have been part of our formula for success for decades. We will remain focused on the belief that long-term growth of free cash flow per share is the ultimate measure to generate value. We will invest to strengthen our competitive advantages, be disciplined in capital allocation, and stay diligent in our pursuit of efficiencies. You can count on us to stay true to our ambitions, to think like owners for long term, adapt and succeed in a world that's ever-changing, and behave in a way that makes us and our stakeholders proud. When we're successful, our employees, customers, communities, and shareholders all win. Thank you. With that, I'll turn it back to Dave. Thanks, Rafael. Operator, you can now open the lines for questions. In order to provide as many of you the opportunity to ask a question, please limit yourself to a single question, and after the response, we'll provide you an opportunity for a follow-up. Operator? Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for questions. Our first question is from Ambrish Srivastava with BMO. Please go ahead. Hi. Thank you very much, guys. Very helpful. For my first one, Rafael and Dave, what's the math or the thinking behind the increase in the DOI? How do we translate that into understanding on the impact on the business? First, let me step back and remind everyone on our long-term objectives for inventory. DOI, days of inventory, that you were asking about. We believe the new range is just more appropriate to maintain those high levels of customer service, minimize obsolescence, and improve manufacturing asset utilization. That's how we think about inventory. Essentially, it's an asset and more than just on the balance sheet, but it's just a way to help us leverage that asset to ultimately gain more share with our customers. A great example of that was what happened in 2020, where we continued building when people were concerned about the demand environment, and we built through that period in March, April, and May. You can see the results over the last several quarters that we were able to leverage. Part of the reason we can do that is because our business model is different than our peers, right? Think of our competitive advantages, our broad portfolio, the diverse and long-lived positions, the products sell to many customers and last a long time. That enables us to have that strength in the first place. Now that we're expanding our engagement customers directly, it makes even more sense to have that inventory on our books versus in the distribution channel. As far as the financial impact that you ask, that depends how things play out. Our focus right now is not on building inventory for the balance sheet, but it's on supporting customers in this period of strong demand. We'll continue to do that to keep lead time short. At some point, as things progress, we should be able to build more inventory and then take those days of inventory higher, ideally somewhere in that range that we just updated. Follow on to that, Ambrish? I'm sorry. I did, Dave. Thank you. Actually, you're right, Rafael. We haven't heard you guys say boo about not being able to meet demand, where many of your peers have talked about tightness. For my follow-up, again, something you touched on just now, Rafael, is the high direct percentage. It's very unusual to see a company such as yours, which has such a diversified customer base. Can you just help us understand, again, how to think about that in terms of large versus small customers, and your reaches, and I forget the number, it's tens and thousands of customers that you have. How have you managed to get to that point? Is it the ti.com has been the biggest driver or a combination of that plus the inventory that you have, your change in your inventory management that has been going on for a while? Thank you. Yeah. It's a great question. Thanks for allowing me to just add some color to it. I'd say that shift to having more customers direct was substantial this year, and wouldn't understate it. We've been working towards that for many years now, as you know. We're just thrilled with our increased direct relationships. That's for both large and small customers, and really just the early results of that showing. Most importantly, as we presented, this transition is about strengthening that competitive advantage or the reach of channels. As we've talked about it, that multi-year investment, it's investments in our sales and applications team, it's in ti.com, it's in business processes, it's in logistics, you hear more recently, it's those distribution changes. It's not just one thing. The tangible benefit that we'll get is higher growth. That's the reason why that we're making it. We'll just get more access to those customers, their projects, the sockets per project, and really just more insight. We're already seeing that, and we really believe that advantage will be difficult for our competitors to replicate. Hey, if I may, let me just touch, Ambrish, back on your first question. Another angle is our manufacturing technology advantage, which I didn't touch on. For many people on the call, I imagine there are some new people. We own our manufacturing and technology. That's a differentiator versus all of our peers, really. On the front end, the fab side, that is about 80% of our internal capacity, or our capacity is internal. Even on the back end, it's significantly higher than what any of our peers have. That allows us to control our own destiny, to keep costs at the lowest possible point. On your question on inventory, that's another reason why it makes sense for us to have higher days of inventory. When you compare us to our peers, it's also a bit apples and oranges when we have our own factories, and the vast majority of them don't or not nearly to the degree that we do. That's great. Okay. Thank you. I will go to the next caller. Thank you, Ambrish. Our next question is John Pitzer with Credit Suisse. Please go ahead. Yeah, good morning, guys. Thanks for letting me ask the question. Dave, just going back to your slide 12 on the cost between 200 and 300. I'm kind of curious, is that a cash cost or is that a fully depreciated? I sort of asked the question because the first time you guys built a 300 millimeter fab, you had the advantage of buying really cheap equipment. That's not available to you today. I'm just kind of curious how that dynamic might change, either capital intensity or kind of the manufacturing benefit. At the highest level, the difference between buying the equipment used at $0.20, $0.30 on the dollar versus buying it new is not that significant over the long term, John. Think of it, depreciation for equipment, we use five years for this equipment, and we've done that for a long time. The reality is that equipment lasts much longer than that, as you know. That's why we're able to buy used equipment. When we buy new equipment, there's some advantages there, too. Many times, it's more automated, more advanced, we get better yields. There's an offset. The way I like to think about it, think of this new factory that we're building. When it's fully built out, it will have cost us probably in the neighborhood of $5 billion, building, equipment, et cetera. That is probably 70%-80% new equipment assumption, somewhere in that neighborhood. It's significantly more than the original RFAB. $5 billion of investment, but we're going to be able to generate revenue of about $5 billion per year. For how long? Who knows? I would say at least 20-30 years, maybe more. We have factories right now that are about 50 years old, right? It could even be 40 or 50 years. From a cash basis, now to address your question. At that point, essentially, the cost is just variable, right? Because you already spent the equipment. The cash fall through is very high on that annual $5 billion of revenue. Do an IRR, you won't be disappointed. Right in that return. Yeah. Just to add to that, let's say it was 100% used, instead of a $5 billion investment, maybe it's $3 billion, $3.5 billion. Of course, generally, we prefer that. I'd rather save the billion and a half or $2 billion. Annual revenue of $5 billion over 50 years, more than makes up for that difference in investment upfront. It's really, at the end of the day, not that significant. A follow on, John? Yeah, that's helpful. As you think about your goal of growing free cash flow, mathematically, you can do that by either accelerating top-line growth, getting more margin, or a combination of both. I'm just kind of curious, relative to the updates you gave today, where would you fall out on that spectrum? Does the customer engagement allow you to grow share at a faster rate? I know, Rafael, you guys don't have margin targets, but you talk about incremental pass-through often. Did anything change on that today with this update? Let me start, and then I'll turn it over to Rafael to add some comments. If you look, one of the things that make both analog and embedded high-quality markets is they're diverse. They've got lots of customers, lots of products. You see share doesn't move quickly. We often talk about that you need to look at share over time. All those things are true. Even looking specifically at fourth quarter, is there share gains in fourth quarter results? Absolutely, there's share gains in fourth quarter results, but always caution, don't look at any one given quarter. If you look in analog three or five or 10 or 15 years, using a thumbnail, we're probably gaining 30, 40 basis points of share per year. If we have competitive advantages, and we continue to strengthen them, we believe that we'll continue to be able to outgrow our competitors over the long time, over the long period, and in fact, we'll be able to grow free cash flow faster than our best peers. The things that we're doing, like strengthening our channel reach, continuing to invest in manufacturing and technology, broadening the product portfolio, just gives us more confidence that we can continue to gain that 30, 40 basis points of share in the future. I don't think we're predicting that we're going to have an inflection point, but certainly have high confidence that that 30 to 40 basis points will be able to continue. Yeah. I would just add, it's mainly a share gain and top-line growth story from here on. The margin, of course, two components, price and cost. The price will be what it will be. We need to be competitive out there. Obviously, we're not afraid of that. If anything, we embrace that, because on the cost side, we have the best position in the industry, right? We have 300-millimeter factories that we own, we control, and we operate them very efficiently. The margin will be what it will be based on those dynamics. Certainly, the cost side, we should be able to continue to improve that going forward. We'll see on the price side, but it's mainly a top-line share gain story. That is certainly the longer term, but we still have structural cost advantages. Right in the model. Okay. Thank you, John. We'll go to the next caller, please. Okay. Our next caller is Timothy Arcuri with UBS. Please go ahead. Morning, Tim. Hi. I guess I had two. First of all, if I look at the share, Dave, you were just talking about the baseline of 30%-40% BIPS per year, but you gained 70 BIPS. If you look at the SIA data, you gained 70 BIPS in 2020, and you gained 60 BIPS the year before, and that's kind of the best two-year stretch you've had since like, 2013. I guess maybe my first question is like, can you deconstruct why that was? If you look at auto and industrial, it was pretty flat last year, but you still gained a lot of share. Was this in some way due to you holding this much inventory now? Maybe if, on that point, can you sort of tell us what portion of sockets are sort of transactional, where you can replace socket for socket because you have the part on the shelf? I had a follow-up. Thanks. Yeah, sure. The vast majority of our products, of course, aren't going to just be dropped in, like if it were a commodity like a DRAM or something like that, where you just drop in one part next to the other, or like a IGBT or a FET, those types of products that are true commodities. As I've talked to investors this last, after our earnings call, and certainly in the press, it's the fact that there are supply constraints in our industry is very apparent. Those supply constraints didn't just start in the fourth quarter. They really started a year ago in first quarter. Customers have had time to redesign systems and just take advantage of the high availability that we've had this year. Again, as I made comments, is there share gains in our numbers? Yes, there is. Again, it doesn't move quickly. I wouldn't overstate that by any means. I'd look at our share over a three, five-year period, and it's much more easy for me to explain 70 basis points than five basis point if we were underneath that 30-40 basis point range. Again, I just caution to look at it over a longer period of time. Yeah, I'd just add, at the highest level is it's all about the competitive advantages, right? Just to touch on a few, the broad portfolio, the broadest portfolio in the industry. That's a big driver of our ability to continue to gain share. The reach of our market channels, right? We've been strengthening that. That's to the point of the closer direct relationships with customers, and that has helped us over the last few years, certainly in 2020, and more importantly, puts us in a strong position going forward. Owning our own manufacturing, having that control that other peers, they don't, right? All of that has enabled us to follow, you asked about, you mentioned inventory, those competitive advantages have enabled us to follow an inventory strategy that augmented that and supplemented that and put us in a really good position in 2020 to take advantage of the situation. Great. Do you have a follow-on, Tim? I did. I did, Dave, thanks. Just on the new expanded high end of the dividend component, it used to be 40% to 60% of free cash flow. Now you raised the high end up to 80%. You've not bought back much stock the past couple quarters. I guess, why was the high end expanded? Did you change your intrinsic value model for the stock? You're just sort of looking at the valuation of the stock and basically pivoting more of the cash flow over to dividend versus repo? Thanks. Yeah. No. Let me explain that. As we described in the summary, the way we think about this is after we make accretive investments to grow free cash flow for the long term. The first thing is investment. The remaining cash, we will return over time through dividends and buybacks. Let me stress, it's over time. It's not any one quarter, even any one year. Over time, we will return it. If you look at our track record, it's impressive, frankly, over the last 16-plus years. You look at how much free cash flow we have generated, and we have returned all of that and then some to the owners of the company. If you look at that time, share repurchases have varied from year to year, but dividends have steadily grown. They have grown to be a more significant part of our cash return, and we're increasing the dividend range today because we are comfortable that our dividend can continue to grow and be sustainable anywhere in that range. Okay. Whether it's 40% of free cash flow, even 80% of free cash flow, we'd be comfortable anywhere in that range. That's the main reason why we're increasing that range today. That's great. Thank you for those questions, Tim. We'll go to the next caller, please. Our next question is Tore Svanberg with Stifel. Please go ahead. Yes, thank you again for setting such a great standard for the semiconductor industry. First question, you talked about investing in inventory to perhaps gain some share. What about CapEx? It seems like the industry is in a pretty precarious situation right now when it comes to capacity. Any thoughts about perhaps ramping CapEx a bit faster over the next few years? Yeah, no, good question. First, let me step back, remind everyone the way we think about CapEx, just as you said, it's an investment. It's an investment on our manufacturing and technology. We own our factories to a very high degree, both front end and back end. CapEx is the fuel that drives it and ultimately drives top-line growth, right? Free cash flow growth. The guidance that we have given you is 6% CapEx being 6% of revenue. That's the model. Last year, we ran lower than that. I would expect the next few years probably running a little higher than 6%, but over the long term, 6% is probably the model you want to look at. Maybe specific to your question, we're not slowing down CapEx for any particular short-term metric, right? We're driving CapEx to the numbers that we think are appropriate to sustain production levels in accordance to what we expect for demand over the next five or six years, because these are all long-term bets, both for the factory we're building now as well as other investments in CapEx, A&T, and so forth that we expect in the future. Follow-up, Tore? Yes. Thank you, Dave. My follow-up is on M&A. I really appreciate and respect your discipline, especially on the weighted average cost of capital in the four-year period. Just given that interest rates are just chronically low now, is there any flexibility on that metric whatsoever? Maybe instead of four years, perhaps five years, or is there no thinking in that direction? Yeah, no. Let me remind everybody, I mentioned it during the prepared remarks, M&A, the way we think about it is first it's got to be a strategic fit. Generally, that means analog companies with really great products to expand our broad portfolio, focus on auto and industrial, ideally. The numbers need to make sense. On your specific questions, the numbers need to make sense. That is a fairly flexible statement, frankly, to your point. Weighted average cost of capital, you ask a banker for an answer, each banker will give you five different answers. You ask 10 bankers, you have 50 answers, it's a big spectrum of possibilities there. Obviously, in all seriousness, interest rates does play a factor on that. The four, five years, three years, that's also flexible, right? At the end of the day, you have to do what makes sense for the business. Sometimes an investment is pretty obvious, so you take that into account where you're assessing that. Other times it's more risky, so you have to think about it a little differently. The framework that I described, that is the big picture of how we think about it. Great. Thank you, Tore. We'll go to the next caller, please. Our next question is William Stein with Truist. Please go ahead. Great. Thanks for letting me ask a question. I'm going to pick up on that discussion of cost of capital. You have highlighted this focus on efficiency. One of the things that sort of stands out on your balance sheet is your gross leverage is about one turn, your net leverage is roughly zero. Interest coverage is something like 45 times. I'm wondering if the company has considered elevating its leverage to achieve efficiency with regard to its cost of capital. Yeah, no. Let me address that. If you look at, I think it was page seven, we talk about how we think about debt from an objective standpoint, and that's essentially what you're alluding to. Our objective there is to increase rates of return with some leverage on the balance sheet when economics makes sense and avoid concentrating maturities and ensure strategic flexibility. You look at what we've done over the years, especially the last three or four years or so. We have added debt to the balance sheet because it made sense given that criteria, right? The rates of return, we're able to optimize those. The cost of debt was low. Maybe not as low as it is now, but it was low. You see how we deployed that capital over the last few years, and we'll continue to think in those terms. Yeah, follow up? Okay. Sure. As a follow-up, I really appreciate the disclosure about the% of business that's direct now so we can get an idea for how that's changed as you've consolidated down to one distributor. It's my recollection that most of your revenue through distribution historically has been on a consignment basis. Now that you're doing that internally, that is you brought in a significant amount that was previously in distribution, now direct. I'm wondering if you can update us on the% of business that sits in consignment at your customers, at your direct customers, for example, and how that's changed in the last year as well. Thank you. Yeah. The amount of consignment revenue that we have in distribution will remain very high with our distributor in the U.S. and that worldwide distributor. As we go direct, many of those customers aren't as large nor have the infrastructure to have consignment. We would love to be able to do that, should they choose to do it. That number actually will come down in time. I'll just say that last year was a year of transition, so actually I don't have that number here in front of me, but it is moving. I'll also just say that we are transacting revenue across ti.com, that is a very small number today. That number is growing very quickly. We just think the customers will increasingly want that convenience of having product that's highly available. They don't need to provide us a forecast with that, and they can go to the website and get that product directly from there. To some degree, those channels probably will shift somewhat. We want to provide that flexibility. The most important thing is having that direct relationship to the customers overall. Yeah, I would only add, Dave's absolutely right in his statements on the shift. Many of those direct customers will not have consignment or do not have consignment, just the nature of their businesses. At the highest level, our intent is to provide them with great support, obviously. In order to do that, we plan to have that inventory on our books to the largest degree. In fact, that's part of the reason why the inventory days range is going up, right? Even if we may move slightly below on the consignment metric, maybe think of it as a virtual consignment, essentially, where we will hold more of that inventory on our books, in our facilities, so that we can very easily, effectively support our customers with the broad portfolio we have of mainly catalog parts that, again, is very low risk of obsolescence. That's why we can hold so much of that in our facilities and then ship it out to where it's needed for the customers. That's great color. Okay. Thank you, Will, and we'll go to the next caller, please. Our next question is from Harlan Sur, J.P. Morgan. Please go ahead. Morning. Thank you for the update. In 2019, about $4.8 billion of your analog revenues were 300 millimeter. You grew that business by about $650 million in 2020. Is it fair to assume that 300 millimeter revenues last year were about $5.5 billion, so you're about 68% utilized on your 300 millimeter footprint? Yeah, that is pretty good. It's about 70%. Yeah, you're getting to that, in that ballpark. For the year 2020, and we don't disclose that in a ton of detail, but to keep it high level, for the year 2020, we ran at about 70% utilized on 300 millimeter. That existing footprint has a potential revenue capacity of about $8 billion between RFAB1 and DMOS6, and we've talked about that before. As I mentioned earlier, RFAB2, once it's fully built out and equipped, will have another $5 billion of potential annual revenue capacity. Harlan. I appreciate that. Yeah, absolutely. With that incremental sort of roughly $2.2 billion-$2.5 billion of 300 millimeter revenue capability in just their two factories alone, and if I assume the analog business grows mid-high single digits over the next few years. That should take you out through the maybe second half 2023, 2024 timeframe, in terms of fully maximizing the two existing 300-millimeter fabs. Why bring on R FAB 2 in 2022? I also know that you are closing two six-inch fabs. Is this six-inch revenue moving into 300-millimeter, and so maybe you're accelerating the 300-millimeter analog revenue capacity to build still faster than just the growth of the business? Is that what's driving the earlier ramp of RFAB 2? I think at the highest level, it's an asymmetric bet, meaning the difference in cost between building it now versus waiting a few years, it's just the carrying cost of that cash, right. That we're putting a little earlier, but the potential offset is huge if demand runs stronger than the functions you listed there. I'd rather have that factory ready, the sooner the better. Right now, we're planning on middle of 2022, middle of next year by the time we start getting some output from that factory. If things work out that we don't need it, then we don't need to run it, right. Right. You also added the couple factories that we talked about shutting down over the next few years. That is also in the play, and some of that will move to 300 millimeter. We don't have to, right? We can always delay that if demand continues to be strong. We wouldn't shoot ourselves in the foot on that front. We have flexibility on what to do there. Yeah. When we started it, that was always the question of, geez, why in the world are you starting this? We started it when the industry was in a cyclical low. Our plan is to ensure that we've got capacity for the long term. We're making those decisions on five and 10-year horizons, not to try to time perfectly, running out of capacity and potentially putting our customers in jeopardy of not being able to get product, but ensuring that we've got long-term capacity for their needs. Yeah To be able to grow. The other angle is, remember, call it $5 billion of investment on the new factory. About $1 billion of that is the building. $4 billion is equipment, you don't have to buy it all at once, obviously. On equipment, we can be more incremental and measure. You can't have half a building, right? You got to have the full building and all the pipes and things needed. That's the other thing that goes into our thinking. Yeah. Okay, great. All right. Thanks. Thanks. Okay, have a good day. We'll go to our next caller, please. Our next question is Stacy Rasgon with Bernstein Research. Please go ahead. Hi, guys. Thanks for taking my questions. I thought it was interesting you left your free cash flow margin targets remaining at 25%-35% of sales. You've been running above the high end of that quite respectively for the last three years. What's stopping you from raising that target? It seems like we've got enough track record now to maybe justify it. Yeah, nothing's stopping us. It's just that at the end of the day, the focus is not on the margin, it's on the dollars of free cash flow per share dollars and the growth. There's little upside in messing with that target and trying to indicate something that's not a priority for us, right? Our priority is the dollars. If those dollars come in at 25% of revenue, the growth of those dollars, then that's great. If they come in at 40% of revenue, that's great too, right? Is there any reason to expect that they should come in at lower rates than we've seen in the past, especially if you think you're going to grow and take share? It sounds like the margin structure is still pretty strong. Why should we expect that free cash flow% to be lower than it has been the last several years? There's nothing structural driving that down. Okay. Thank you. For my follow-up, I just want to ask you about the 300 millimeter, again, in 2022, it's ready for output. I think you said you'll probably have some output coming out in the second half. How much revenue capacity do you think you will actually have installed and outputted by the second half of 2022 in 300 millimeter under the current plan? Well, we'll have the $8 billion from the existing factories, of course. Sure. You're asking incremental on the extra $5 billion for our Fab 2? Yeah. I don't have a number for you, but it'd be very little. Yeah. What's unique about our Fab 2 is that because it's at the same physical address, we can put one tool in that facility. Let's say, litho is the tool that limits the capacity for the whole facility, and we can bring up capacity at that facility on both sides. That's unique with our Fab 2 because it's co-located with R FAB 1. The second thing is the way qualification standards are written in our industry. We don't need ECNs and customer notifications of that change, where if it was greenfield, you'd have to put in a whole pilot line and bring up the whole pilot line on one side. You'd have to have an ECN, and notify a customer of a change. They'd have to go through a qualification cycle. There's some tactical benefits to our Fab 2 that we'll enjoy. We don't have any room at any of our other sites, the next facility we build, we'll have to do that as we've had to do in the past. It's not that big a deal, but we'll have that tactical advantage. That's helpful. Thank you, guys. We'll go to the next caller, please. Our next caller question is from Vivek Arya with Bank of America Securities. Please go ahead. Thanks for taking my question. I wanted to echo what Tore said about TI setting such a strong, impressive quality standard for the rest of the industry. My first question is, if I look at your business over the last decade, analog has grown at a 6% CAGR, but embedded has kind of been flattish. I know you made some changes last year, but at what point does M&A become important in that sector? Can you really grow your overall sales without really growing in the embedded business where, when I look at all your microcontroller or processor or connectivity competitors, they're very fragmented and a lot more competitive industry than analog. Just, thoughts on your embedded business and how it relates to your growth targets. Maybe I'll start, and if Rafael you want to add. I would say that, as you've heard us talk about M&A, our thoughts there haven't changed over time. We talk about a strategic match and the first thing we'll talk about is catalog analog, high exposure to industrial and automotive. You don't hear embedded in that. It's not that we don't like embedded or don't consider it important. It's just really comes down to how those businesses make money. They make money very differently. In analog, diversity of product, uniqueness of product is highly valued. That's the way it makes money. In embedded, the way that you make money is you get as many customer and as much revenue over as few of instruction set architectures as you can. We essentially have, if I simply say it, three instruction set architectures in our embedded business today. Our objective there is to invest and to grow those over time. Those are giving us full exposure to the markets in which we want to participate. Acquiring someone else's instruction set architectures and fragmenting that, you just can't get any leverage off of that. I think that for companies that have done that, I think that's why you see them struggle to some degree. Yeah. No, absolutely right. I would just add, we're pleased with the progress that we're making with embedded. As we have said before, our first goal was to stabilize the business and then to grow it sustainably and leveraging our competitive advantages. The four competitive advantages apply to embedded just like they apply to analog. We think embedded can be and will be a long-term contributor to our sustainable growth, top line and free cash flow. That's right. Yeah. We wouldn't be making those investments if we didn't believe it. I'll just add that we're not looking for shortcuts. It will take time for that business to prove that it can grow sustainably. We're making those investments today, but it will take time before that is demonstrated. Do you have a follow on, Vivek? Yes. Thank you. You gave a very specific range for how you plan to have higher inventory. I think you mentioned the goal ultimately is to grow faster. I imagine that there is some help at some point in gross margins as well. Could you help us quantify what that benefit is? How much faster can you grow with this new strategy, and how much better flow through can you have in gross margin? I understand why you're doing this change. How do I quantify the benefit, whether it is in a faster top-line growth or versus the industry as an example, or through the gross margin fall through, which I know historically your target has been 75% or so. Thank you. Yeah. Vivek, maybe I'll start off and just answer. I think John asked a question earlier on somewhat related to that. I'll just say that going back to the characteristics of the analog market and embedded markets, they just happen to be very high-quality markets, especially the portions that we choose to invest in and participate in. Sure, just doesn't move quickly. Back to the comments that you've got to measure it over time, and we've been delivering kind of 30 or 40 basis points when you put your thumb up in the air and squint and look at the numbers. The investments that we're making, strengthening our competitive advantages gives us confidence that we'll continue to be able to continue to do that. We're not talking about trying to accelerate that or we'd love to. Certainly we'd love to have it grow significantly faster than that and would aspire for that to happen. I think that would be still a good expectation to have. The structural cost benefits that we get from 300 millimeter as we grow revenue, we've talked about, as you know, that 70-75 points fall through. We still think that that's a good number. I think you've done it before. If you plotted change in revenue and change in gross profit. Yeah. You look at that on a year-on-year basis or quarter-on-quarter basis, you can see that over time that that's a reasonable number. To Rafael's point, you're not going to get gross margins passing through 100% of revenue. Long-term growth is probably the most important thing for us to focus on. Yeah, let me just add a few things just to complement what Dave said. The inventory strategy, this is not a big change. We did tweak the range up, in some ways, we've been doing this for years, right? We've talked about building inventory buffers. We've talked about building low volume inventory for a number of years. This is just a little bit more of the same. It's working well. We're going to do a little more on that's why we're moving the range up. Again, it's an enablement ultimately, and it works in complement with our competitive advantages. The other one, you talked about fall-through several times. Let me just stress, the fall-through that you should expect is the same, 70%-75%. That's not changing. Inventory is not going to make that different. Over the short term, any one quarter or two, everything else being equal, yeah, your fall-through is a little higher if you build inventory than if you don't. Of course, that's non-cash. If anything, we're spending cash when that happens. That's an investment. Over the long term, it's not going to change the fall-through once we get to that desired inventory point at some point. Don't think of it that way, right? The fall-through over the long term is still 70%-75%. Great. Thank you, Vivek. I will go to the next caller, please. Okay. Our next caller is Chris Danely with Citi. Please go ahead. Hi, guys. I think that's me. Hey, Chris. Yeah. Thanks for letting me ask a question. Hey, now that we're well past the disti consolidation, can you talk about the impact it's had on your business? Has it enhanced revenue growth, held back revenue growth, done anything for margins, free cash flow, none of the above, no impact? Maybe just a postmortem on it. Yeah, no, I think we're thrilled with the progress. I would just say that shift was substantial. You think of where we started or ended 2019, we basically had two-thirds of our revenue going through distribution. We ended last year with essentially two-thirds of our revenue going direct. Substantial change, really reflective of a number of years of investment to get ourselves into a position to be able to do that. Just the insight of having closer direct relationships is very helpful. As I talked about earlier, the supply constraints didn't show up in fourth quarter. They started earlier in the year. One of the things that customers do when they have shortages is they hand out lists of the parts they're looking for that are short. We get those lists directly now as an example. They provide those to all their suppliers as they're scrambling to find parts. Our sales and apps people are working with their engineering teams, and where we can find those designs that are working through, we'll tell the procurement people and, "Hey, if we switch out these parts and change designs as they're coming through, you can take advantage of our high availability." One simple example of how that works. Again, share doesn't shift quickly over time, but that's one way where you can intersect things earlier on, where you've got information where other people don't have it. You have a follow on, Chris? Yep. I guess a philosophical question. You guys talked about it on the call and prominently featured in the press release that you're trying to maximize free cash flow growth. Even though the results have improved somewhat on the embedded side, and I guess a little bit on the other side, for the last several years they've clearly been hampering free cash flow growth. In the past, you guys got rid of sensor and control business because of that same reason. It was not quite up to snuff. What's the reason for keeping these businesses around if they're clearly dragging your free cash flow growth and your stated goal is to maximize it? Yeah, sure. Ultimately, we evaluate everything based on a free cash flow per share growth over the long term, right? Think of it as a free cash flow per share out into the future. What we think that's going to be, there's a net present value of that. In a simplistic way, you can think about it that way. If there was a different way to maximize that number, we would consider it. We're not close to any ideas, but we are confident that the way we're running the business today, and that is analog and embedded, maximizes that free cash flow per share growth for the long-term owners of the company. Okay, great. I think we've got time for one more caller, please. Okay. Our last question is from Craig Hettenbach with Morgan Stanley. Please go ahead. Yes, thank you. A question on R&D, which you guys highlighted as the main priority in terms of looking at capital. How do you think about it as the industry has consolidated and one of the benefits TI has had is the scale for sure. Just as you see some consolidation and some other companies kind of close that gap, does that change the way you think about R&D at all in terms of either absolute or as a percentage of revenue? I'll take the first crack at it. If I understand your question correctly, at the end of the day, to us, R&D and really OpEx in some way, at least parts of SG&A, it's all about investments to drive the top-line growth, right? R&D obviously adds more great products to that portfolio, the broadest in the industry. On the SG&A front, investments in ti.com, in a reach of market channels, that puts us in a strengthened competitive position, a competitive advantage to put us in a better position. We look at that independent of percent of revenue, independent, frankly, of whatever our competitors are doing, and what can we do to maximize long-term growth of free cash flow. If doubling R&D would do it, we would double R&D, okay. If cutting in half would do it, we would do that, too. It's not an exact science, but we're confident in the way we do it. I think we've been getting good results on that consistently over many years. Every year, our leaders look at that, and we evaluate projects on different bases and then decide where it makes sense to make changes to our portfolio, add a little bit in one place, take in another place to maximize ultimately that long-term growth of free cash flow per share. Yeah. I'd also just add that one way to judge the efficiency of that R&D is just market share. If you stacked up our growth over, again, go back to the long term, you have to look at it over long term, and our dollar spent in R&D and the growth that that's providing versus the dollar spent by others and the growth that that provides. We're very pleased with that, not only the dollar amount, but the efficiency of it and what that's driving. You have a follow on, Craig? I do. Appreciate all that color. Just a longer term question. You've been driving the mix for a number of years now towards autos and industrial, and that's been getting bigger. How do you think about longer term, the whole topic of China insourcing? Is that something that naturally the markets where you see the most differentiate in terms of autos and industrial would continue? Does it mean you accelerate some of that in more consumer type markets? How do you think about the longer term, where your mix is going and how any potential effects of China insourcing could influence that? Yeah, let me start, and if Rafael wants to add. China is and will continue to be an important market to us. I think that any place with the trade tensions that we have there, certainly, those trade tensions, if you've been a student of world history, those aren't things that will be solved in a short term. They'll be with us probably for decades to come. Given today, if there were teams at our customers in China, if there's an alternative to select a local company, they're going to choose it. Our job is to ensure that there aren't any ties in that selection process. We've got to have better products, better service, better cost, better availability, and not allow there to be ties. You think about that's what we had to do before. We've got to do that not only in China. We've got to do that in other regions. To some degree, that's not really anything different, but that is very important. We continue to do and make good progress there. It will be an important market for us, and we will continue to do that. Yeah, just to add one comment to that. We have great respect for the competitors we have in China. There are many local players there that are good semiconductor companies. They tend to be smaller in size. Their portfolio is nowhere near our portfolio. That goes back to our competitive advantages, and specifically that broad portfolio. We have, what, 80,000, 100,000 different parts, and you need that kind of portfolio to compete in the analog space, especially in industrial and automotive. Right? As Dave said, our job is to stay ahead of that competition, right? To release more great products, so we augment that portfolio, drive our competitive advantage on manufacturing technology, so we have the absolute lowest cost in the industry, so we can compete effectively. The reach of market channels, to continue to strengthen that, to make it really easy for our customers to choose us versus anybody, whether it is in China or anywhere else. We're going to wrap up with that. Before I turn it over to Dave, to finish the call, I want to thank all of you for taking time today to go through our capital management update. Let me emphasize a few points. First, we remain focused on consistent execution of how we manage capital. Second, our disciplined allocation of R&D is delivering growth from the best products, analog and embedded, in the best markets, industrial and automotive. We have great diversity across all the sectors within these markets. Our 300 millimeter analog manufacturing strategy is a unique advantage and will continue to benefit TI for a long time to come. We remain committed to returning all free cash flow to our owners. Dave? Okay. Thank you all for joining. A replay of this call will be available on our website, as well as all the slides that we used today on the call. Good day. This concludes today's call. Thank you for your participation. You may now disconnect.