Texas Instruments Inc Capital Management Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Timothy Arcuri - UBS Securities LLC - Analyst : Thanks a lot. Haviv, I'm wondering why you are excluding the grants and the loan support. I think you also -- you got the $1.6 billion in grants, but you also have $3 billion worth of loan support. That's part of CHIPS Act. So why is that being excluded? Is that because you haven't -- you don't have final terms yet on that? Can you just give more details on that?

Question: Timothy Arcuri - UBS Securities LLC - Analyst : I do, yes. Can we -- can you just give some view on what your share is? I mean part of -- if we just look at your share, your share of the analog market

Question: Vivek Arya - BofA Securities Inc. - Analyst : Thanks for taking my question. Haviv, I'm curious what is driving the lower CapEx for 2026, right? You changed it from $5 billion to $2 billion to $5 billion, and TI has had several calls in the last year consistently talking about the $5 billion CapEx target for '26. So what changed in the last few weeks to drive this CapEx lower? Should we interpret that as more conservatism about growth? I'm just curious as to what has created this big change. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 20, 2024 / 3:00PM, TXN.OQ - Texas Instruments Inc Capital Management Call

Question: Vivek Arya - BofA Securities Inc. - Analyst : Yes, thank you. The second question I have is you're using 2022 as part of the historical trend line, but that was sort of in the peak of a lot of the COVID-induced shortages. So is that data point really representative of the trend line? Can it really be used to drive any forward conclusions? I mean, if I ask the question in a different way, Haviv, are you saying that the consensus expectation, which is about $20 billion in TI sales for 2026, is that very low relative to how TI expects to grow? Because that would still imply double-digit, well above trend growth for the next several years. So that's why I'm just curious, why did you use 2022 as an important part of the trend line given how abnormal that year was?

Question: Ross Seymore - Deutsche Bank AG - Analyst : Hi, guys. Thanks for taking my question and thanks for the presentation. It's great to see the scenario analysis here to clarify things. Haviv, for my first question, I wondered, it's great that you have significantly greater flexibility in 2026 and beyond. But exactly how early do you need to make the bet if at the beginning of the year, you think it's going to be $20 billion? Do you just slash it to the $2 billion in CapEx? Do you have that visibility on revenue? And how far ahead of time do you really need to adjust the CapEx?

Question: Ross Seymore - Deutsche Bank AG - Analyst : Yes. One for Rafael about the CHIPS Act side of things, and I appreciate that it's not in the numbers here. But the $1.6 billion, how theoretically does that flow through? What's the depreciable life? How many years do we divide it by? Is that the max number? Or when you do Sherman 3 and 4, does that come into the equation? So the $1.6 billion could be larger? Just trying to figure out when it flows in, how much and for how long. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 20, 2024 / 3:00PM, TXN.OQ - Texas Instruments Inc Capital Management Call

Question: Stacy Rasgon - Bernstein Research - Analyst : Hi, guys. Thanks for taking my questions. First, I wanted to ask about the revenue range, so $20 billion to $26 billion. So I get the idea that the low range is no growth off of '22 but off of the least where things look likely to be in '24, even the low end would be a 13% CAGR for the next couple of years to get there, and the high end '26 would be almost 30% CAGR. Both of those, I could argue, if we don't get some big cyclical bounce, they could still be aggressive. I mean, what are the plans if 2026 revenues are lower than $20 billion? I guess I would ask if you see that as a possibility and where would CapEx and other things go in '26 if our revenues are lower than $20 billion. Is that $2 billion of floor on CapEx?

Question: Stacy Rasgon - Bernstein Research - Analyst : Yes, I do. You didn't mention our depreciation targets. I know you've given us those in the past. Do those depreciation targets change at all based on anything that you've presented today? Or it sounds like the big change is in '26, so maybe it would take time for any of that change, if it's lower, to roll through. But how do we think about depreciation going forward versus what you've said before?

Question: Stacy Rasgon - Bernstein Research - Analyst : Got it. That's helpful. Thank you.

Question: Joshua Buchalter - TD Cowen - Analyst : Hey, guys. Thank you for taking the question. I wanted to ask about some of the assumptions in your scenario analysis for 2026. It seems like if I do back-of-the-envelope math, they're all landing at around high 30s to low 40% free cash flow margin and sort of low- to mid-double digits CapEx to sales ratio. Anything in between those metrics you can give us to get us confident in the free cash flow per share floor, whether it's across OpEx or working capital or any incremental details on CHIPS, which I guess you're not going to be able to share? Thank you.

Question: Joshua Buchalter - TD Cowen - Analyst : Thanks, Rafael. And I might actually re-ask one I asked in the last capital management call, now that Haviv is here and give him a shot at answering it. Have your priorities or thoughts on M&A changed as the capacity investments have been ongoing, but revenue hasn't really followed, and that gap has widened? Has the ROI decisions on any potential deals where you could bring something on to your manufacturing network increased meaningfully -- and I fully recognize that's a lot easier said than done, but I would be curious to hear your updated thoughts on potential M&A. Thank you.

Question: William Stein - Truist Securities - Analyst : Great. Thanks for taking my questions. First, I just want to make sure I understand. Maybe you can dumb this down for me a little bit. Relative to the capital management call we heard earlier this year, I think there's sort of two changes. One is the overt change in the 2026 spend plan going from $5 billion previously to $2 billion to $5 billion now. I think there was some expectation among investors that perhaps this call would introduce a more flexible spend in the next couple of years based on demand. And what I'm perceiving as the change in today's call is now what you're showing us is sort of the dependencies, the operational dependencies, and the reasons why you can't spend less through at least the early part of 2026. Is that the right way to characterize this update?

Question: William Stein - Truist Securities - Analyst : Yes, that helps, and I do have a follow on. Thanks, Dave. Today, you reiterated an underpinning sort of expectation for TI, and that is that auto and industrial should be the fastest-growing end markets over the long term. I wonder when was the last time you reevaluated that in a really deep, meaningful way? Some might argue that based on what's going on in new AI-oriented data centers could make that a faster-growing market. We're sort of in the midst of that today, maybe not over the next 20 years, but who knows. And I wonder to what degree this is evaluated in a sort of thorough way. Thank you.

Question: Chris Caso - Wolfe Research, LLC - Analyst : Yes, thank you. My first question is regarding some of the timing of these decisions. And you provided the revenue scenarios. But obviously, you would need to make decisions in advance of that. I guess, as you're contemplating what ultimate scenario you'll face for '26 CapEx, what will the signals be along the way? And I guess how far in advance do you have to make those calendar '26 decisions before finally making a decision?

Question: Chris Caso - Wolfe Research, LLC - Analyst : I do, and that was helpful. Thank you. Just with regard to CHIPS Act grants again, and realize tough position because it was only announced last week. But Rafael, just in terms of the timing of when you might see some benefit to that asset value and therefore lower depreciation, you mentioned that it was primarily directed towards SM1. Does that mean it could have a fairly immediate impact, meaning perhaps next year? Or would it be more likely we would wait for '26 before we had some of that benefit?

Question: Tore Svanberg - Stifel, Nicolaus & Co., Inc. - Analyst : Yes, thank you for all the detail. I have a bigger picture question here. When I look at the free cash flow per share chart that you have on page 19, it just seems that you would not be able to get back to trend line without the ITC help. First of all, is that interpretation correct? And if so, obviously, it puts much more pressure on the top line. And I was just wondering, other than targeting, obviously, industrial and auto, which is the fastest growing segments of analog, how do you intend to accelerate the growth rate and take that share back up into the 20s?

Question: Tore Svanberg - Stifel, Nicolaus & Co., Inc. - Analyst : Yes, thank you, Dave. My follow-up goes back to sort of the market priority -- end market priority. Obviously, industrial and auto is the priority. The industrial part, I absolutely get. On the auto side, I'm just wondering if anything has changed there because obviously, it's a market that today is increasingly dominated by China. And we all know China obviously is trying to insource more and more. So I'm just wondering, as again we look to the next 10 years, is automotive still sort of the best opportunity for analog companies to go after?

Question: Tore Svanberg - Stifel, Nicolaus & Co., Inc. - Analyst : Very helpful. Thank you.

Question: Tom O'Malley - Barclays Bank PLC - Analyst : Hey, thanks for having me on and appreciate all the detail here. I just had one question. It's kind of a multiparter for Haviv. And I just wanted to reference to the slides you kind of showed here today. One is just the unit downtick over the past couple of years and just kind of the trend line over the last couple of decades, and then also kind of the TI revenue projection. So I think when you talk to investors, I think really what people want to understand is just -- I think the recovery of that market is understood over the course of the next several years. But there are two factors: one, kind of the pressure from China; and two, pricing that some feel may vary the recovery time frame. Something that could be helpful, maybe, and it's kind of a question framed as a statement here, but could you just help give some confidence that you guys have considered both the impact of China in that recovery, just thinking about the correlation between those units upticking and TI revenue upticking with it? And then also just on the pricing side and how is that kind of factored into your forecast on the CapEx side over the next couple of years? Just any commentary around that, I think, would be really helpful.

Question: Tom O'Malley - Barclays Bank PLC - Analyst : Yes. I think it was asked in a roundabout way earlier, but I just wanted to understand into 2026, the downside. Let's just say a scenario plays out kind of below the low end of your expectation. Can you just help us get a framework on the CapEx side for the downside? You've obviously expressed multiple times in this call that you guys can be flexible. But is there kind of a baseline where your CapEx can go that you need to kind of support ongoing business operations? Where would the CapEx go kind of the worst-case scenario in your eyes? That's it. Thank you.

Question: Chris Danely - Citigroup Inc. - Analyst : Thanks, guys. I'll be quick. So it seems like CapEx is peaking. Does that mean the depreciation would peak five years out, in let's say '29 or '30? And would it be substantially above the '26 number you guys gave?

Question: Chris Danely - Citigroup Inc. - Analyst : Yes. Just a quick one. So putting all this stuff together, you guys have given your free cash flow margin goals in the past. And like you said, you got above there. As we're going through the next five, 10 years, is there anything that would prevent you structurally or otherwise from getting back to that previous free cash flow margin peak?

Question: Joe Moore - Morgan Stanley & Co. LLC - Analyst : Great, thank you. As you think about 2026, can you give us a sense for the revenue generation potential that you have, or maybe just the factory utilization that you're implying with these scenarios? Your PP&E will have roughly tripled from the low. I know that's not capacity, but there's buildings and stuff in there. But the PP&Es up a lot -- if the revenue is kind of at that 2019 level and like-for-like pricing is up, just curious like what kind of fab utilization is implied by these numbers.

Question: Joe Moore - Morgan Stanley & Co. LLC - Analyst : Okay. Yes, that's helpful. Thank you. And then I wonder with the -- the grant money, how do you think about the loans? How are you thinking in terms of that longer-term capital structure? I mean, obviously, there's still a lot of cash generation potential in the business. Do you need to think about government-sponsored loans as a value creation opportunity?

Question: Joe Moore - Morgan Stanley & Co. LLC - Analyst : Great. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 20, 2024 / 3:00PM, TXN.OQ - Texas Instruments Inc Capital Management Call

Question: C.J. Muse - Cantor Fitzgerald & Co., Inc. - Analyst : Yes, good morning. Thank you for taking the question, and thank you for hosting today's event. I guess, first question, as it pertains to your flexibility in '26 for CapEx, I'd be curious how to think about ITC, which I believe is expiring at the end of the year, how that plays a role in kind of your thinking about how aggressive to spend or not?

Question: C.J. Muse - Cantor Fitzgerald & Co., Inc. - Analyst : Yes, Dave, I do. I guess going back to the capital intensity, 1.5x moving to 1.2x seems like a big deal. So I would love to hear maybe more granularity on those efficiencies. It sounds like you've got better throughput, so higher productivity. But are there other drivers that are enabling that kind of seismic shift in intensity? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 20, 2024 / 3:00PM, TXN.OQ - Texas Instruments Inc Capital Management Call