Okay, good morning, and welcome to the third day of J.P. Morgan's 51st annual Technology, Media, and Communications Conference. My name is Harlan Sur, semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Eric Bjornholt, Chief Financial Officer of Microchip, here with us today. Microchip is the number two largest microcontroller supplier in the world. It's been a busy earnings season, so I've asked Eric to maybe kick us off with some opening commentary and then I'll be more than happy to jump into the Q&A. Eric, thank you very much for joining us this morning.
All right. Thanks, Harlan. Thanks for having me. Good morning, everybody. Just to give you kind of a quick summary of the business environment for us, Microchip just reported a couple weeks ago our fiscal year ended March 31, 2023. We had record year, record quarter, and we're guiding again for growth in the current quarter. Guiding up 2.5% sequentially, expect to have record gross and operating margins. Operating margins at just above 48%, which is above our long-term model, the company is performing really well. Obviously, we've been in a supply-constrained environment and, you know, the environment is changing a bit. Lead times are coming down, and with that, you know, our backlog has shrunk. You know, we still have a lot of backlog.
I'm sure we'll have some questions on the PSP program, but, you know, it's still a very popular program and represents well over 50% of our backlog. You know, the company is executing quite well. We're moving forward with our capital return plans, so we have plans laid out for investors to get to a 100% free cash flow return by the March 2025 quarter, so just seven quarters from now. This quarter, we're returning 67.5% of last quarter's adjusted free cash flow to investors. Company's executing well. Very strong operating margins, great cash flow. CapEx was a bit higher last year and is moderating a bit in the current year as we are catching up on supply. Overall, business is working very well.
We had some comments from one of our competitors this morning that I'm sure we'll get some questions on. With that, I'd like to open it up to Harlan for the Q&A.
Yeah, no. Thank you. Why don't we start off with that? I mean, your conference call wasn't that long ago. As you mentioned, one of your peers in the high-performance analog space reported today and they talked about seeing some weaker dynamics in their end markets and more of a normalization of the business activity going forward. I'm wondering, since the time of earnings, has the dynamics changed? Obviously, you just talked about sequential growth this quarter. I know Ganesh had qualitatively said that, you know, you certainly don't see declines in the September quarter. I'm wondering if the demand environment has changed. Has the supply side changed? Any differences relative to what you communicated to us back at earnings?
Really, really no change from a couple weeks ago. You know, we are getting a certain level of requests for cancellation and pushouts from customers, but I would say that's really stabilized at this point in time. From an end market perspective, you know, we're still seeing strength in industrial, automotive, and our data center business is holding up quite well also. You know that we have a very low exposure to consumer, and what we have is really consumer appliance, and, you know, that's been the weakest of our end markets for a couple of quarters. Really no change to point out since our earnings call, and, you know, we still feel it's very unlikely that the September quarter would be down.
You know, as is the case during these periods of sort of macro uncertainty, and I know you touched upon it, but, you know, end demand weakness, you go through periods of customers wanting to reschedule their backlogs. In your case, rescheduling regular and PSP backlog, right? In addition to seeing a deceleration in order rates, obviously, Microchip team has a very strong backlog coming into this period of weakness. Your customers didn't really have a chance to accumulate, I think, excess inventories due to the industry capacity constraints. All of this is helping to sort of cushion you through this weaker period.
As it relates to requests for pushouts, reschedules, as well as the current order trends, I mean, have these noisy dynamics, have they all started to stabilize relative to, let's say, the past sort of two to three quarters?
Yeah, I think there is some stabilization that is happening there. You know, clearly, bookings have been weak for the last couple of quarters. That's to be expected when we went from being severely supply-constrained and now capacity coming online, whether that's in our internal factories, where we do about 38% of our production internally and through the wafer foundries. Capacity is definitely freeing up. We still have a few demand corridors that are constrained. It's getting better. With that, you know, customers are not feeling the need to give us that extended backlog coverage that they had before. Just a reminder that, you know, in a normal environment, Microchip operates in a relatively high turns environment in any quarter. That has not been the case for the last couple of years.
Clearly not the case in the current quarter that we've guided to. Eventually, as lead times comes down, we will be in a turns environment again. Microchip functions very well in that environment. You know, the supply environment has definitely improved significantly over the last few quarters.
We had discussed China demand dynamics back in the February earnings call, right? It was a little bit too early to tell because it was right after the Chinese New Year holiday. There definitely seems to be a slower consumer corporate spending profile of recovery in this region. I noticed that your Asia business, which is largely China, was down about 5% sequentially in the March quarter. What did you see in March, and has the team seen any signs of a pickup in China distribution POS sell-through?
You know, we really haven't seen a significant increase in activity in China post-Chinese New Year. China is definitely our weakest geography.
Mm-hmm.
today. It was last quarter, as you mentioned, and continues to be today. you know, China's about 21% of our revenue based on where we ship the product. Taiwan is roughly about 15%.
Yeah, is it sort of just stable/bouncing along the bottom, or are you continuing to see some declines there? How would you characterize just the profile of that business?
I say it's okay, but, you know, a lot of investors were asking, you know, post-Chinese New Year, was there going to be a significant pickup in demand, and we have not seen that development.
As you mentioned on the last earnings call, today, you're seeing better supply availability. The equipment suppliers seem to be catching up now that their leading-edge customers are pulling back, right? But it still seems as if mature and specialty manufacturing capacity is somewhat tight, right? Especially at 28, 35, 55, 65-nanometer nodes, which support your high volume, 16-bit and 32-bit microcontrollers, which are produced by your foundry partners. But wanted to get your views. I mean, do you anticipate continued tightness with your foundry suppliers and your views on, you know, when you sort of get back to normalized lead times?
We have several constrained corridors, both at foundry and internally. I would say they are all getting better.
Mm-hmm.
You know, you mentioned some of the nodes.
Right
... that we have had constraints on, but we do see improvement happening there, but some is still very tight.
Mm-hmm.
In those tight corridors, you know, we still have, you know, a high degree of backlog and lead times have not come down significantly. That's more the exception than the norm at this point in time. Most capacity corridors are freeing up.
Perfect. Before I move away from sort of the near to midterm, does anybody have any questions? Feel free to just raise your hand, and we'll get a mic over to you. This didn't come up on the earnings call, but you did point it out in your quarterly presentation, but the team mentioned signing several long-term supply agreements with some of your major customers, right? I assume these are very different from your PSP agreements, which are typically only 12 months in length. It's great to have these longer term agreements in place because it gives the team the ability, you know, to plan your longer term capacity needs. It obviously gives your customers peace of mind and future assurance of supply. Other than longer term horizon, I mean, how do these LTAs differ from your PSP program?
Who is it primarily focused on? Is it primarily your industrial and automotive customers?
Okay. These long-term supply agreements or LTSAs, as we call them, have been put in place with several of our larger customers. This is customers that have been participants in the PSP program and been served very well through that. You know, typically, they're customers that have durable demand. The end products that they are selling, the semiconductor content in those products tends to be a very small percentage of the end sale price of whatever it is they're selling. You know, those that have been hurt during supply and demand crunch and also serviced very well through PSP, are doing things proactively to make sure that their supply is gonna be available for them. Essentially, customers that have these LTSAs have the highest degree of surety from Microchip that we will meet what their expectations are from a demand.
In the short term, these are typically five year agreements. They can vary a little bit, but typically five year agreements. In the short term, they tend to function just as PSP. Customers require to give us 12 months of kind of exact visibility of what they need. Then, you know, there's an appendix to the agreements that kind of list out the types of products or the specific products that they will be buying, and then they can vary the volume on that as they get out in time beyond 12 months. It just makes sure that Microchip is going to be able to support them well. Again, they get the highest level of support from us and, you know, these are all happy customers.
Essentially, these LTSAs give us a great opportunity to continue to build on these relationships that strengthen actually through the supply and demand crunch and, you know, to having much higher level conversations at suite levels with customers and open up new design opportunities for us. Typically, there's skin in the game from the customer, where they give us a prepayment for a portion of that supply that extends over five years. Then the expectation is when Microchip delivers and customer, you know, places orders over that five year period, that they earn that cash back.
Is pricing fixed over that five year period? I know volume is, you know, is a little bit flexible, but is pricing fixed over the life of the LTSA?
Pricing is not fixed, just like the PSP program. It's a unit volume program, and if we have inflationary pressures in the business, which we hope we don't...
Yes
... We've definitely seen that the last two years, we can pass those pricing increases on to the customer. That's not our intention, but if the environment calls for it, the customer understands that it is not a pricing program, it's a commitment on units that we will provide.
On the motivation for customers or your major customers to want to enter into these LTAs, you know, there appears to be some growing momentum for auto, industrial, defense-related customers to ensure more domestic chip usage on future programs, right? U.S. National Defense Authorization Act, which was put in place in December, had some additional restrictions on some China chip suppliers selling into U.S. military and government entities. I know auto suppliers selling to, you know, auto and industrial customers, I think, are getting wind of this. They're getting a bit concerned on a broadening maybe of these types of restrictions. You layer on top of that the past three years and the supply disruptions and so on. This is probably a mid to longer term driver of the business.
I mean, is the team seeing a pickup in customer engagements driven by all of these dynamics?
You know, I wouldn't say that it is significant. You know, obviously, we do have our wafer fab footprint for what we manufacture, internally is in the U.S. You know, our three major fabs are in Arizona, Oregon, and Colorado. You know, that can be helpful for certain customers, but ultimately, customers are looking for assurity of supply...
Yes.
diversification of the supply chain. You know, our foundry partners are getting the same message, either from us, other of their customers or from the end customers that they ultimately support and are making appropriate investment decisions based on that in multiple geographies.
Any questions from the audience? Let's talk about your technology, market share, position and, and a few other dynamics. The Gartner share numbers were out for calendar 22. I know they underreported your MCU share, but whether by your numbers or the Gartner numbers, you guys delivered another strong year of share performance, right? You outgrew the MCU market by seven plus percentage points. You gained about somewhere between 100-200 basis points of share. You took share in all of your markets, eight-bit, sixteen-bit, thirty-two-bit, but the fastest growing was your thirty-two-bit. Here you grew thirty-two-bit by, you know, 30%+ versus the market at 26%. Is it your total system solution strategy driving the strong share gains?
Is it the mega trends, which we'll talk about, in a second, or was it just relatively better, you know, supply versus your competitors that drove the strong share performance last year?
It's gonna be a variety of factors. You know, ultimately, you have to have the right product set to make customers successful. You have to have not just the hardware, but you have to have the software and then the support that goes around that. You know, some of that can be TSS, you know, the total system solutions and what we provide, reference designs, the application support. You know, all those things over time is what help us gain market share year in, year out. I can't point to a single thing this last year. Everybody was supply constrained, and clearly, that impacted Microchip. It impacted others too. I don't think that was a major driver of share gain this last year.
Your FPGA business, I mean, you drove record FPGA revenues in your fiscal year ended in March, right? It was up 30%+, higher than corporate average gross margins. Number three or number four in global FPGA share, strong position in the mid-range segment of the market, right? Your PolarFire family has been sort of the workhorse of the portfolio. You have some newer products like your Fusion family that integrates analog mixed signal along with your FPGA blocks. What end markets, applications is this team really driving the most growth and seeing the most customer adoption?
Yeah. Our FPGA business is doing great. It's very high margin, both in gross and operating margin business for us, and it's grown quite well, as you pointed out and Ganesh talked about on our last earnings call. You know, really the product is known for, you know, being really the lowest power in the industry, having exceptional reliability, and then having excellent security on top of that. From an end market perspective, you know, clearly Microsemi, where this business came from-
Mm-hmm.
-had its roots in aerospace and defense, industrial, and communications. We also have a growing presence in automotive and FPGA solutions. It's a broad-based business. It's doing extremely well. We've got new product introductions that are coming out that are gonna expand even on what the PolarFire product has done historically. It's doing really well. We're excited about it, and it fits in really well with our total system solution approach to the marketplace because these tend to be complex systems that the FPGAs...
Yes.
-are being sold into and create a lot of opportunities for other products to cross-sell around it.
Yeah, that's a good lead into my next question, which does wanna focus on your Total System Solution strategy, right? I ask this question every year hoping that the team will have an update for us because I believe this is a big part of the growth and share gains. You can get a sense of the breadth of your TSS offerings by just looking at, you know. I always look at two of your major distributors' websites and, you know, by my last check, they listed something like 4,200 reference designs from Microchip, and that's up substantially from a few years ago. How effective are these reference designs in helping to drive TSS, and do you have any updated metrics you can share with us?
If not, maybe qualitatively on a year-over-year basis, is the team continuing to drive increasing dollar content per customer engagement?
TSS has been a focus for us for a number of years now and really post the Microsemi acquisition when we've been purely focused on organic growth and not busy, you know, looking for the next acquisition or integrating an acquisition. That's been the team's focus and so it's been a major driver of our growth. We can see it in our design funnel.
Mm-hmm.
Absolutely, the number of parts per system is growing. You know, we haven't shared those metrics externally, but I think at the end of the day, the results are shown in the results.
Sure.
-that Microchip has produced-
That's right.
In terms of revenue growth and the market share gains, some of which that you've pointed out. It's doing fantastic. It's a key element of our business fundamentals going forward. There's not a customer discussion that happens where we don't try to bring value to them. You mentioned reference designs, right? That's a great starting point for interaction with the customer, and, you know, we can tweak that design to the customer's end application need. You know, we're trying to be more valuable suppliers to our customers and be more sticky over time, and the more products that we can sell to them make their life easier from an engineering perspective, speed their time to market, is helpful in building those relationships.
We have a question up here. If we could get a mic up here.
Hi. Thank you for taking my question. Two questions, actually. First, you earlier said that you expect your revenues in the third quarter to be flat sequentially. Is that essentially being supported by a drawdown in your backlog, and would your book-to-bill do you expect to be below one in the third quarter? The second question is can you speak a little bit specifically to lead times from your auto customers.
Okay. You know, the specific commentary that we've made on the September quarter is that it is very unlikely that it will be down. We haven't guided flat, we haven't guided up, but, you know, the confidence to make that statement is really driven by the backlog that we have in place and the manufacturing capacity that we have in place to be able to drive that. I think we're in a good position. You know, our thoughts regarding the September quarter have not changed. I think another piece of your question was expectation on book-to-bill. When lead times are coming down, you would expect that your book-to-bill would not be positive.
We don't break out book-to-bill specifically, but we've had relatively weak bookings for the last few quarters, and as lead times continue to come down, as supply comes on, I think that will likely continue. You know, book-to-bill is not a great way to measure what the expectation is for the future. Lead times is a better way to do that. You know, in our past, we have had a heavy turns-oriented business, as I think I said in my opening remarks, and we would expect to get back down there again. You know, we haven't really been in a normal environment since we acquired Microsemi. You know, we had the U.S.-China trade war that followed shortly thereafter, followed by COVID, followed by all these supply and demand conditions that have been different than what we've seen historically.
Eventually, we do wanna get our lead times down to much lower levels. We've said in the second half of calendar 2023, we expect the lead times to be at 26 weeks or less on an average basis. You know, for some of our, what I call classic Microchip products, it's not unusual to have eight week lead times, 10-week lead times, 12-week lead times. As that happens, as we get there, backlog will continue to come down, but it's not a sign that revenue is destined to fall significantly. Was there a third piece to your question? Sorry.
Auto lead times.
Auto lead times. You know, we don't break out lead times automotive versus industrial versus data center, but, you know, generally, lead times, they're not at 26 weeks on average today, but they have come down from where they were at 52 weeks. They've come down, and they are continuing to fall, and we have confidence that they'll be, you know, 26 weeks or below on average, kind of across the board. You know, there'll still be some capacity corridors that are constrained. You know, Harlan talked about that in some of his questions that, you know, we still do have a few corridors that are constrained, but outside of that, we'd expect lead times to normalize.
Thank you.
You're welcome.
Any other questions? Oh, right up here.
Historically, you've shown very resilient margins through the cycle. Right now, your margins are looking in middle to the top range of your terminal targets that you have. How should we think about your margin profile over the next three years and coming out of the next cycle? Is there structurally more upside, and how much support on the downside should we think of?
We introduced our, what I'll call our new long-term model back at our Analyst Day in November of 2021, you know, we've essentially gotten there on the gross margin side and well exceeded it on the operating margin side. You know, we've had challenges over the last 18 months in getting people hired, the team has done an extremely good job with a low level of resources to be able to support the growth that we've had, and we'd expect to kinda grow back into that operating expense model over time. I don't think in the current fiscal year that we will see operating expenses as a percentage of sales meet that model, though.
You know, we're well below it today, and we're paying our variable compensation quarterly bonuses at a very high level, and those are things that we can back off immediately of if we were faced with a softer patch of the cycle. I think the operating model is set up extremely well. On the gross margin side, you know, we've done a good job of getting margins to the level that they're at today. We are less dependent on internal manufacturing than we have been historically as a percentage of sales. Typically, if you hit a weaker environment, you're faced, you know, with underutilization charges. Since it's a smaller percentage of our cost of sales, I'd expect the fluctuations in gross margins to be more muted than they've been historically.
You know, on margins, we tend to get questions on pricing, 'cause pricing has increased with the inflationary pressures that we've had on the business over the last two years, but those prices are here to stay. They aren't going down. We're not looking to increase prices on customers in the future unless inflation continues at high levels and we get impacted that way. We are very confident that our average selling prices will remain stable at this point going forward and, you know, would only increase if we had inflationary pressures, but we're not planning on dropping prices.
Longer term in the next cycle?
The follow-up question, I guess was part of the first question, was longer term, you know, where we'd expect those gross and operating margins to be. We've shown that over time throughout the cycles, we've had higher highs and higher lows in gross and operating margins, and that would be my expectation. You know, when gross margins get to a certain level, you have to balance growth and revenue and those margins. You know, we're not, at this point in time, you know, looking to take gross margins significantly higher. You know, now is probably not the right time to be updating our long-term model. There's a lot of fear out there from investors that, you know, the wheels are gonna fall off the bus and Microchip is gonna crash and burn.
That is not what we see in our future, you know, I don't think this is the right time for us to be updating the model. We have high confidence in the model that we've put out there and think over time, as the top line grows, it will continue to show improvements.
Any other questions? I guess following up on that, as I think about the long-term model, and I know that I agree with you, now is not the right time to be doing it, but, you know, currently you're driving 16% year-over-year growth. Your OpEx as a percentage of sales is running about three percentage points lower than your target, right? The team has strong $9 billion of revenue scale. You've demonstrated the ability to drive share gains, market leadership, cross-selling opportunities. I mean, if you continue to drive your revenues within your long-term CAGR of 10%-15%, it's gonna be hard for the team to drive your OpEx ratio higher from here, and therefore you should continue to drive operating margins at or above the high end of your long-term targets.
I mean, is there something that I'm missing here?
No, there's really nothing that you're missing, Harlan. You know, again, it kind of comes down to, you know, where we are and where the perception is of where we are.
Mm-hmm.
-on the cycle in terms of not updating-
Yes.
the long-term model. You know, we're highly confident that we're going to maintain high gross and operating margins, you know, same as I said to this gentleman in the front's last question.
Mm-hmm.
I think we're in good position for that. The OpEx as a percentage of sales on a non-GAAP basis this quarter are projected to be 20.3%.
Right.
-of revenue, and the long-term model is 22.5%-23.5%. If Ganesh was sitting here, he would say that we need to make sure that we're making the appropriate investments in the business.
Sure.
to drive growth and profitability five, 10 years out in time from a new product and a customer support perspective. We're gonna continue to invest, so you shouldn't think that, you know, maybe we can stay at the 20.3%.
Right.
You know, if the top line continues to grow at healthy rates, it's going to be hard to.
Exactly.
at the rate of growth.
Right. That's right. Perfect. In your industrial business, there's, you know, everybody's industrial business is different and Microchip's profile is quite a bit different. I mean, you have good exposure to all of the trends like factory automation, building automation, robotics and so on, test and measurement. The team, I believe, has outsized exposure to the aerospace and defense markets, which is in the industrial business. Activity around commercial space programs, new satellite constellations, defense spending, all look strong for the next several years. You guys are number 1 in this, in this space and a strong player in the defense market. Help us understand the size of the A&D franchise within Microchip, your visibility, the growth trends, and sustainability of this segment in a weak macro backdrop this year.
Right. Okay. We report the A&D business as part of our industrial end market, which is, you know, roughly 41% of the total revenue. A&D is in the range of 8%-10% of total revenue, and it's a very solid high-margin business for us, and it has been stable. You know, the piece of it that is the largest is defense.
Mm-hmm.
Defense is the largest piece of that. Space, which you talked about, tends to be a little bit more lumpy with programs, but, you know, those programs are continuing to be invested in, and we've got good design, some that go well into the future on that. The third piece of it is commercial aviation. You know, many of the companies that are building airplanes have seven or eight years that they really haven't been-
Yes.
-building-
That's right.
significant amounts. You know, travel has increased significantly now, so we are seeing a significant uptick in that portion of the business too. It's really good business. You know, most investors don't think about it in the same way as they might kind of industrial IT-
Right. Right.
Automotive and the growth trends. It's stable, high margin, continuing to grow. There's also a lot of allied countries that are investing in defense spending. We are participating in that heavily.
Data center. I know that there was some cautiousness by the market going into your earnings call around data center because data center fundamentals have been rather weak. And data center and compute is about 20% of your overall business. And I assume data center within that is the bigger contributor, right? And your data center products are quite application specific, so much easier to track RAID, storage controllers, enterprise SSD controllers, PCI switches, Ethernet PHY, et cetera, right? As I mentioned, the demand dynamics in cloud and enterprise have clearly weakened, the Microchip's data center business clearly is holding up quite well. I think last call you mentioned exposure to some of these accelerated compute dynamics with your strong PCIe switching product family.
What other segments within data center are, you know, seeing strong demand trends?
Maybe I'll start by just saying, you know, this business has performed extremely well, really since we've acquired Microsemi and the largest piece of the data center came to us. There's other pieces of the Microchip business that support that historically, and it's been very supply constrained.
Hmm.
you know, we still have backlog to catch up on that business and, you know, that will help, you know, help us maintain and grow that business from where it is today. It did grow as a percentage of revenue in terms of our end market exposure last year.
Yes.
Data center is the, by far, the largest piece of our data center/computing business, so that's just kind of the first part of your commentary. In addition to the PCI switches that you mentioned, timing products have been.
Mm-hmm.
quite strong in data center, root of trust, and then as well as we have requirements for data center interconnect, memory infrastructure solutions, and Active Electrical Cable solutions. The other piece of it is we also enable the most efficient power supplies.
Yeah.
in the industry with our dsPIC products. These are classic Microchip products as well as some of our analog products.
Perfect. Back to the financials. You know, you're driving 48% operating margins this quarter. Over the last two down cycles, peak-to-trough operating margins declined about 200 basis points. If I go back further, last four to five cycles, peak-to-trough operating margins declined on average about 400 basis points. Over time, not only has the business grown, but earnings power cyclicality has also become more muted. What are the biggest factors driving this favorable profile? Is it diversification? Is it revenue scale, end market focus, or a combination of all of the above? Am I missing anything?
No, I mean, I think you've summarized it there. I mean, ultimately it's the depth of the product portfolio...
Mm-hmm
...the diversification we have for manufacturing, which I talked about in one of the answers to the previous questions about how only about 38%-
Yeah
of our manufacturing on a wafer fab side is internal. You know, that allows us with very long-lived products to be able to invest in those products and build some inventory in a down cycle, and that the situation that we're in today with the higher levels of inventory that you've seen, our internally manufactured inventory is still quite low. Our foundry inventory is higher.
Mm-hmm.
We've made some adjustments to our foundry purchases, which we're very constrained. When that capacity started to free up, our business units and operations team, you know, kind of jumped on getting that product, but probably got a little bit further out ahead than we needed to, and now we're moderating that. That's gonna contribute to the five to 10 day reduction in inventory that we're forecasting for the current quarter, as well as focusing on having the right level of raw materials. Again, in a supply constrained environment, we were keeping more of that in-house. You know, our internal factories, you know, we're continuing to run those at a high level.
Mm-hmm.
Would be comfortable building inventory if we hit a softer patch for a period of time, which would help margins remain at a high level. Throughout the cycles, we've seen higher highs and higher lows in gross margin.
In the March quarter, the team hit an important milestone, right? As you drove your net leverage ratio below one and a half times, unlocking five percentage point increase in your free cash flow return per quarter until you hit 100% in about seven quarters. Between now and then, will the team be paying down debt? What's the target ratio on the capital return dividend versus buyback?
Okay. You know, as we go through this journey from going from 67.5% of free cash flow return to 100%, getting to 100% seven quarters from now, we're continuing to be paying down debt. You know, for example, in the current quarter, we'd expect to probably pay down $350 million of debt. Leverage will continue to come down. You know, we're below our long-term leverage target today.
Mm-hmm.
I think it's appropriate in a rising interest rate environment to continue to use some of our-
Yes
...free cash flow to pay down debt. That's what we're doing. The second portion of your question related to the capital return strategy.
Mm-hmm
...and split of dividend versus buyback. You know, historically, our dividend has been lower than the buyback since we introduced the program. That flipped a little bit this quarter because we made some pretty significant investments last quarter in working capital that will flip this quarter. It's still going to be quite a period of time before dividend catches up on a long-term basis with the amount of stock buyback, which is good in this environment where we think we have a undervaluation in the marketplace, and we'll continue to address that internally by buying back more stock. Over time, we think we'd probably get to about a 50/50 split between dividend and buyback. You know, the dividend is increasing sequentially or increased sequentially this quarter by 7%-
Mm-hmm
on a quarterly basis. Last year, we increased it 9% per quarter. You know, the board makes that determination each quarter, but you should expect the dividend to continue to grow quite nicely on a sequential basis.
As it relates to onshoring initiatives, US CHIPS Act programs, you know, you're already benefiting from the Investment Tax Credit for equipment purchases targeted for domestic manufacturing. Any updates on the potential for grants? I know applications have been submitted, right? Any updates for us there?
Yeah. We've submitted a couple of pre-applications, working on a couple of others. You know, we don't know what the results of that is going to be, but, you know, we do have expansion activities planned in the U.S., and we think we are a prime candidate for, you know, receiving funds. We're gonna work through the process and see what we can get. You know, we think that that can help us accelerate investments in certain areas and provide some unique advantages for our customers with that domestic footprint.
Great. Well, thank you for the insights today, Eric, and appreciate your participation.
Great. Thanks, Harlan. Thanks, everybody.