Sorry, my microphone fell off. Welcome back. Again, I'm Chris Caso, covering Semiconductors here for Credit Suisse. Our next presentation is Texas Instruments, which I'm sure you all know. Here, from TI is Haviv Ilan, the Chief Operating Officer of TI. Haviv, thanks for attending. Thank you. Thanks for letting me. Maybe as I kinda jump right in, you know, we were just speaking about it a little before. The what's on all investors' minds right now is the cycle and kind of what's the same and what's different in this cycle. I think what's interesting for TI is you guys have been through a number of cycles yourself. You certainly do not manage the business around the cycle. I think that's been some of the controversy this year, is that you are looking out, you know, for a 10-year plan. Perhaps you can give some perspective, and you've been through some cycles yourself, about, you know, perhaps what you may see, you know, similar and different to past cycles, from what you have right now. You have seen some weakness in some areas and in some areas some strength. Yeah, Chris, thanks. I'll start with a high level comment. Mm-hmm ... about what you described, how we view cycles, we've had plenty of them. I had some. You've had more. In general, we never ignore the cycle. We watch it, but we do spend 90%, 95% of our time on how to get prepared for the next opportunity. Mm-hmm ... or looking beyond the cycle. Especially with many of the actions we take, they have long lead time- Mm-hmm ... in terms of how they convert to results. If you think about getting capacity in place, getting our inventory in the right levels, that's where I spend a lot of my time. Not ignoring the cycle, watching it, but, you know, it's gonna do what it wants to do. We have to think beyond that, and that's where the energy of the company is. It has to be. Specifically, yeah, the cycle has been in some ways different because, you know, maybe not all markets are behaving the same. Mm-hmm. We've seen PE and notebooks, so Personal Electronics and notebooks starting in Q2. Dave talked about, you know, we are seeing spreading weakness in industrial into Q3. automotive is still holding but, you know, I'm not gonna try to predict what it's going to do and when. My high level, you know, view is that they usually correct so, that would be my guess if I had to. As Dave mentioned during the last call. Right ... the last earnings call. Yeah. And saying that not necessarily because you know something, but perhaps because you don't know. We don't know, exactly. Yes. We simply don't know. You know, do they usually behave the same? Yeah, maybe, yes, so. Right. That would be a high-level guess. Right. Maybe you could dig into industrial a little bit and, you know, one of your competitors, Analog Devices, had reported recently. They talked about, you know, some stabilization and, you know, they had started to see some cancellations back in the summer and expressed some caution on that. More recently, you know, the optimism was that there was some stabilization in orders. It didn't exactly get that from you folks on your recent earnings call. I wonder if you maybe contrast, you know, what you're seeing and maybe, you know, is it somewhat different than we heard from ADI? Yeah, I think, I don't have a lot to add here to what, Dave said. Mm-hmm. You know, in October, we'll have to let the quarter run its course. Mm-hmm. We'll see what it did in January when we report back. I will say that industrial, again, if you look at the secular growth in industrial, we are excited about it. Right. That's why we spend so much time preparing for that next opportunity because, you know, content addition in industrial, less visible than what you see in automotive, but it's across all the sectors, all the end equipment. We are excited about that, and it will drive. It's a big engine. It will drive the industry in the next 10 years and beyond. I think it's in the early phase of change and adoption of semis. I will also say that our position in industrial and automotive has been stronger than it ever was. We finished 2021 at above 60%. Mm-hmm. Again, as I said, our eyes on what it can do. Right ... in 2025, 2030, and getting the company ready for that opportunity. Right. That seems to be precisely why you're embarking on the CapEx program that you are and spending for that. You know, what Dave has told me in the past, as Rich's, you know, mantra in the company, is you'd rather be three years early than three months late. Absolutely. Right? Unfortunately, over the last, you know, year and a half, you know, the whole industry and certainly I put myself in that shoes of was surprised at the resiliency of the macro post-COVID and there was some opportunity that was lost due to short, just not having the capacity in place. I suppose that's why you're embarking on this program. Yeah. Again, we have embarked on the program even before the cycles. Think about RFAB2. We have started that investment back in the previous cycle. Mm-hmm. We didn't get a lot of cheering at the time. "Hey, why are you know, why are you investing in a downturn time?" You know, could RFAB2 been even earlier for us and would serve us even during that cycle? The answer is yes. Again, wanna be prepared for the next opportunity. In generally, if you go to the, to way TI, you know, performed in a cycle and what we have seen, I think we've done okay. The beginning of the cycle was a little counterintuitive to us internally, but Rich was, you know, very convinced, let's run the factories open and at full capacity in the second quarter of 2020. Mm-hmm. Demand was vanishing during that time. There was no demand. It served us very well. We built a nice level of inventory that served us almost through the middle of 2021. We ran out, ran out of gas, and that's part of the lessons learned, to your point, of how we prepare for the next one. Getting capacity ahead of demand and having it at the right level, but also at the right location and this concept of, we call it Geopolitically dependable capacity. Mm-hmm. That can ease customer minds of where the parts are coming from, and can I rely on TI for the long term? That's a very important parameter. Right. The second one is, as I mentioned before, the getting the right level of inventory because our parts, most of them have this unique attribute of diversity and longevity. Building ahead that inventory die by die, part by part at the right levels, according to the future potential demand of them could serve us very well for the next opportunity. I spend the majority of my time on a couple of these actions. Right. If we go back to what you said around middle of 2021 when, you know, you started to run out and you ran the fabs hard before that, but then things got tighter. You know, at that time, TI was often, you know, one of the first companies that your customers had talked about of being short. Of course, you're the largest in the industry, so perhaps that's it. Do you feel that the shortages that happened in 2021 and 2022 put you at any competitive disadvantage, or is it just simply a function of you're the biggest guy on the block, so in an industry that's short, you know, you're the first one the customer's gonna speak about because you're the largest? First, I think there is a parameter of that, just statistically. I mean, the breadth of our products, the number of customers, and also our decision to support all of them. Mm-hmm. In a way, you can say, "Hey, let's down select the customer base we are going to support and maybe make life a little easier." We said, "No, we're gonna support all of you customers, even if you're a smaller industrial customer in Europe, and you don't have the voice or the pockets that the big customer has." We took that approach. It's a very hard one because you kind of have maybe more folks to take care of, and statistically, you have maybe even more challenges. The team has done very well. Not only that we grew in all markets, we biased the growth into industrial, into automotive across a very high breadth of customers, and I think it will serve us very well. Even more than that, customers, especially in industrial and automotive, are paying for more attention to these issues. Mm-hmm. Because first, their bill of materials is now more based on semis compared to before because end equipments are being re- Right redesigned with more electronics in them. us having the plan that we have with our RFAB2, you know, in production, with Lehi ramping in Q4 this year, that's a great, you know, strategic advantage for us because customers do care about this capacity coming online, especially on the 130- 45 nm. Think about analog products, think about flash-based products for embedded. Having that capacity and already ramping now, and having it in the right locations is a great advantage, and I think customers are turning to us, and we'll see that materializing in the years to come. Right. I wanna pivot to that a bit and speak about, you know, your manufacturing strategy is different than most of your competitors. What your competitors have been doing largely now is moving into sort of a long-term supply agreement situation with customers, the large customers. That's being backed up since most of your competitors use some degree of foundry, being backed up as long-term supply agreements from the foundry. How does TI's approach give you an advantage? Because, you know, you have the captive capacity, so, you know, perhaps that makes it less important for you to enter a long-term supply agreement because you don't have a secondary agreement with a foundry partner. It's your own capacity. The other side is you wanna keep your fabs loaded as well. How does TI do that, and how is it different than what maybe ADI might do? No, I, Chris, I think it is different, in the sense that we own our manufacturing plan. We've put an aggressive plan to have, as we said, capacity ahead of supply. We tell our customers, "You don't need to write these Long-Term Agreements with TI." We do have discussions with customers that when they understand the level of investment and they understand the where the capacity comes from, I do believe they turn to us, but we don't harden that. Right ... discussion because I think it's simply not good customer service because customers would have changes in the next five and 10 years, and they want to have that flexibility. I think it's just better customer service to have the capacity ahead of their demand, having the right level of inventory so they can count on us as they grow their business. You talk about those many customers, and we have tens and thousands of them, that you can't write LTAs with all of them. Mm-hmm. Right. Some of them don't have the financial means even to commit to such a deal, and I think serving these customers is as important to us. Right. I do believe that, again, we've stayed very disciplined to our competitive advantage of controlling our supply chain, controlling its costs. It's just... We've done it for years. I mean, we've come with this strategy 10, 15 years ago. I think customers get it now, and they do realize that what we do serve is gonna serve them very well. Right. Maybe to paraphrase and correct me if I'm wrong, it's case of where TI is making that investment in ahead of demand and, you know, whereas, you know, Because you do it yourself. You can make that decision on your own and see where the market is going. Whereas perhaps the competitors have to convince the foundry that to make that investment, have to make some commitment to it, whereas you control that decision on your own. It's controlling the decision. Also, the confidence we have is high. Now, as part of that confidence has grown. I mean, we came with that plan earlier in 22. Mm-hmm ... and during the Capital Management call. Since then we've talked with so many customers. Since then, our excitement, our confidence in our plan has grown. Right. It is a big bet, it's a big spend to build a 300 mm wafer fab. It's not an easy investment, but again, the secular growth of what the market will do and our position in these markets and our ability to control our supply plan, I think will pay dividends in the long term. Yeah, I agree with what you said. What levers do you have? I think, you know, the investor concern that kind of goes around with that is, well, you know, what happens and what happens if we hit a downturn, you're making that capital investment, you have to go through a period of underutilization. Are there ways that you mitigate that, you know, in the event of a downturn, the event it's not that different this time. We do see automotive and industrial slow. Is that a case of TI is just willing to take that risk right now looking at it over the 10-year lens that it's gonna be, you know, better for you over a 10-year period? It's a good question. From a high level, it's kind of the latter, meaning we. Mm-hmm we can't time our investment to the cycle because by the time the market wants to go up again, it's gonna be too late to make the investment. Right. The lead times of building these factories are years. This is not measured in quarters. We do have to stay very disciplined about it. Again, we don't ignore the cycle. Mm-hmm ... but we don't let it lead our strategic decisions. Having said that, there is always tactics, you know. These factories are very efficient, so running our material or our parts there versus our, you know, old technologies is important. You know, we announced closure of our last 150 mm wafer fabs. So we can the fourth row of running, you know, the factories. Either building the inventory to the levels we want or just getting the nice cost advantage when you run the variable cost to run. Mm-hmm ... a wafer in a 300 mm wafer fab, which is so much better. We will take these tactical decisions, so we are thoughtful about it, but again, can't let the cycle slow us down in getting ready for the next one. Right. I'm gonna pivot a bit and one of the things I always think is interesting with analog companies is the R&D process and the product selection process. Well, we always felt that was a differentiator, just making investments in the right place and the right time, not chasing a market, being ahead of it. Maybe you could speak to how TI does that. Oh, absolutely, Chris. You know, growing up in R&D and then going into the business, I spent most of my career there. It's actually an exciting process that we run. As everything that we do, our approach to R&D has always been steady hand and long-term. Maybe not everything shows on the P&L because we also had some restructuring the last 10 years that we had to go through. If you just take analog, for example. We had a very steady hand on the analog investment over 20 years. Mm-hmm. Okay? And continuously grew our portfolio, continuously grew our market share. The way we do it, and, you know, people talk about broad and breadth of products, but the fact of the matter is that each and every product has to be very competitive. Mm-hmm. It has to be at low cost, it has to be high performance, and otherwise, over time, you know, you fall out of competitiveness. We pay a lot of attention on that, on that topic. We have tens and thousands of products, you know, into hundreds of product families, into 65 product lines. It's a granular detailed work that we do. I think the way we spend R&D is, again, steady hand, but very efficiently. Mm-hmm. I do believe in the concept of scarcity when you put R&D in play, because that's how the team would choose the best opportunity and get the best policy, the best return on investment over time. I think TI is becoming better and better at that. Again, our commitment to R&D investment is always been there. I will say, if I refer to the past decade, we did have a lot of moving parts, getting out of wireless, the comms business and making some big shifts in R&D. Right. That's more or less, I mean, there is always, you know, fixes and shifts you do, but most of that work is behind us. I'm very excited about, you know, the future. We've based our R&D in the areas we wanna have. The last work we've done was on the embedded side. From here on, I expect a very steady hand on R&D moving forward. Right. You mentioned embedded. That was gonna be my next question, is that's one of the areas that you sort of have changed your focus. Right. Is that... Well, I mean, one is from an R&D and investment standpoint, is that done? What does that mean for sort of embedded growth going forward? Does that become a smaller piece of revenue over time as, you know, some of the R&D has been reallocated? Again, the embedded R&D was not reduced. It was, as you said, reallocated into the best opportunities. I'll describe it in a high level. We've done that three years ago, I think. We embarked upon it, and most of that hard work is done, meaning get your R&D based on the best product portfolio, and we think about it as how do you align your investment to your competitive advantages. Mm-hmm. Manufacturing technology, can you build these products internally? Lehi is a great example that will enable us that. You know, 65 nm flash, 45 nm parts, that's where embedded is mainly based in. Think about the breadth of our portfolio. Can we concentrate on product out that This idea of they can sell multiple customers, multiple end equipments, multiple sectors, and that's where we are taking that investment and then use the channel advantage to get them into customers and design them in. That work is from a restructuring from an R&D retuning is done. It's the hard part, as I said. The products are starting to come out, and that's where the excitement is. We are seeing the early indicators of that business can be performing very nicely for our future. I have very high confidence with what I hear from my sales team and how they reallocated their resources to go and put their energy around this part. It will be a great contributor to Free Cash Flow growth. We are not trying to match margins to the analog product. We do think about how can that embedded business generate cash for us and Free Cash Flow Per Share growth, and it can. Don't wanna tell you the exact timing. Sure. Most of the hard work, to your point is, I think is behind us. I guess maybe I'll take a pause here if there's any questions in the audience or let you think about them in a second. Randy, you want to ask one, there? I'll pick up. I'm curious about China market. I know it's a question. I'm not sure if you have China. I wanna China. I wanna a short-term question on China, how you're seeing the low end of the market, pricing competition, inventory demand, if that has much impact in the mid to long term, how much you see the impact of localization or local suppliers ramping up. China market and how much of it in it. I think we reported, Dave, shipping to China is about 50%. If you look at revenue, you know, we ship to customers headquartered in China, it's about 25%, that would be the number. That's your first part of the question. Again, China has been a very competitive market for us for several years now. Yes, we do see competition there, local competition, as you said, and these are hungry, aggressive companies that we compete against. The market is growing, and it's big, and we wanna play there. We are competing. We tell internally to our teams, "Hey, China is gonna be harder, but it's still a great opportunity." We are very committed to that opportunity. I will say that again, the competitive advantages for us in China play a big factor. You mentioned, you know, price, but, you know, controlling our manufacturing and our costs. I mean, we are competing with fabless and AT-less companies, okay? These folks, the foundries that they use or the ATs, they don't give the parts for free, okay? There is a margin stacking there. I think we can be very competitive on costs. The breadth that we have is just incomparable. Most of this competition, I see I have 65 product lines in the company. The typical, you know, competitor in China usually attacks half a product line or a couple of products families just because it's very hard to build that breadth. It takes time and expertise and technology and many, many years. The breadth is helping us because when you engage with the customer and you have a set of parts to offer, that's, it's a big advantage. When you move into this, the market that we serve, automotive, but especially industrial, you do have to reach many of the customers. that's, you need the scale here. This is why you see most of these competitors kind of more narrow or more vertical in terms of their product offering and the same on the market they attack, because they do look for a high level of concentration of revenue per socket, if you will, 'cause otherwise you need a scale and the breadth to go attack it. That's how we address the competition there. I always say to my team, "If you're gonna be on par with the same price, same performance, same level of service as a local competition, you will lose." Okay? You do have to be ahead. If it's a tie, it's gonna go away. I think our ability to compete in China is strong, and I think it's even growing with the investments we are making. Follow-up question. Just on pricing environment. Some of your competitors that use more foundry, there's selective price increases and they're passing it on. How do you see TI, just industry pricing and your pricing outlook into next year? I like to separate cost and price, right? To me, pricing is set by the market, and we always had a steady hand on that, thinking about the long-term, you know, opportunity for us to gain share. That's how we price. We price with a very steady hand like everything we do. Now, you know, when the market turns up and, you know, prices go up, we react. We don't ignore that. You know, pricing did contribute to some of the growth in the last couple of years. Our approach is always make pricing a non-barrier for customers to adopt us, but that's not how we gain share. Customers turn to us not because low price. They turn to us because, you know, what we have, our capacity, the breadth of the product portfolio, the performance, the breadth of the technology and the process technology we have, and that's how, you know, high-performance analog works. I don't think that's gonna change in the future. If I could follow on that, though. Mm-hmm. Because, you know, the, the reason and what most of your competitors say is they've raised prices, because their input costs have gone higher, foundry costs in particular. If you're using TSMC had to raise price in order to make investments in lagging edge because they needed to get the same margins between both. In your case, your investment, your costs are still going higher. The used tools that you got in the, you know, financial crisis, those are no longer available. Your price is going up, perhaps, you know, do you feel that your costs are going up at a lesser rate such that you can either be, you know, I wouldn't say price aggressive, but more attractive to customers or that, you know, you don't have to follow those same steps. Is it? Yeah. Does it work out to be a competitive advantage for you? Yeah. I think there is a competitive advantage here on the way we control our costs. I'll touch upon it in a minute. Mm-hmm. You know, at the end of the day, why did prices go up? It's always, like, supply and demand mismatch, right? Demand was high, supply was scarce, then that's what happened. Does it fix over time? It depends. How fast it does, it depends because you're right. The investments are, you know, the intensity of the investment is higher. Mm-hmm. The access to used tools for a company like TI also is. Right. If I look at Alpha 1 versus Alpha 2, it's a big difference. Right ... even Lehi that we bought a year ago, you know, it's a mix because we got, you know, a shell and we got some used tools, but we also had to augment the factory with new tools. Right ... because you can't find, you know, these used tools like you used to before. However, the return over the long term is still wonderful. Even with newer tools, that is a great investment or a great ROI for TI, and that's why we are embarking upon that investment. Regarding do we have a better control of our cost, I think we do. I mean, if you just, you mentioned foundries, look at their margins and what they did, right? Mm-hmm. We, when we control our input costs, and we are not immune or insulated for inflation, but when you own your manufacturing capacity, I think it's a competitive advantage, and I think it will serve us in the years to come, and it will fall through to your question. Do you think longer term that this elevated cost of manufacturing analog now is now, sort of a permanent phenomenon such that, you know, we're not gonna go back to where we were five years ago where these used tools were available? This is something that's permanent, and therefore, the pricing increases that we've seen are permanent. 'Cause one of the investor concerns is the pricing is gonna come back down once the, you know, once demand slows down. Yeah, I would say, again, the way we plan forward and still decided to make the investment, you know, we believe capacity investment or capacity or capital intensity, let's call it. Mm-hmm ... is not going down. Right. I think that's a fair assumption. That's how we make assumptions, and that's how we decide to make decisions, whether we want to invest or not. You know, what the industry will do will determine pricing, meaning. Right ... is there gonna be, you know, if, I'm worried of oversupply, I'm not very worried about it. What we know is that to support our growth or our ambitions, we need to make the investment. Right. There is no, you know, free capacity out there that you can just put your hands on. We wanna control our destiny. We do wanna make the investment. I think it will pay off. Mm-hmm. That's the direction we are taking, Chris. I don't know. Hopefully, that helps. Yeah. No, it does. One final one, and, you know, with regard to kinda how this affects cash flow going forward. Certainly, cash flow is how you manage the company. Mm-hmm. Now that, you know, we've kind of set this investment level, it doesn't sound like necessarily that the capital investment needs to go higher from where you are right now. I suppose that, you know, as you start to utilize the, you know, the new fab and such, you know, that we should start to see the cash flow results, you know, starting 2023, 2024, as we're kind of at this new level of CapEx. You know, revenue grows, whatever, as we get through whatever downturn we're going to see, and you start to see that in your, in your Free Cash Flow. Is that an accurate description? Yeah. Again, the unknown is what the cycle wants to do. Right ... and what the shape of it gonna be. If you look beyond, if you just stick with trend lines, this is where, as you said, these investments, you don't need to wait 10 years for that to fall through to your point. Mm-hmm. Meaning, once you put the investment, you know, fab is moving wafers, the variable cost to run them is very attractive, and that's what we intend to do. Now, you know, Free Cash Flow is a parameter not only of your CapEx, it's also what, you know, revenue will do, for example. That's where we, as I said before, we have to think about it in the long term. When we run the what ifs, you know, assuming that our assumption that the market can grow in a higher rate because of the secular changes in industrial and automotive, because of content addition. If that sits on a certain trend line that we believe in, and we make that investment and, you know, I'm not talking about a specific year, but Free Cash Flow Per Share can grow very nicely. You know, it will have to come from top-line growth, mainly because there is not a lot of margin leverage we have left. You know, our confidence of that investment falling through and being a great or producing great results on Free Cash Flow Per Share is very high. Maybe we'll end with that. Right. I know we are out of time. Yes. That's a good way to, good way to end. Haviv, thanks. Thanks, Chris. thank you for joining us today. Appreciate it. Pleasure. Thank you. Thank you.