Good day, ladies and gentlemen, and welcome to the Texas Instruments First Quarter 2020 Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to hand things over to Mr. Dave Paul. Please go ahead, sir.
Good afternoon and thank you for joining our Q1 2020 earnings conference call.
For
any of you who missed the release, you can find it on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through our website. 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 the earnings release published today as well as TI's most recent SEC filings for a more complete description.
Given the likelihood of a significant economic recession due to COVID-nineteen, we're changing the format for this quarter's earnings call. In addition to Rafael Lizardi, our CFO, we will be joined by Rich Templeton, our Chairman and CEO. Rich will be covering a broader frame of how we're approaching the current environment. I will then provide a summary of Q1 and Rafael will wrap up with the financial details of Q1 and our outlook for Q2. Our prepared remarks will be longer than usual as we hope to cover a range of anticipated questions.
Let me turn it over to Rich.
Thanks, Dave. At the highest level, to understand how we will approach the likely significant recession resulting from COVID-nineteen, I remind you of the 3 ambitions that for decades have driven all decisions inside of TI. These ambitions are: 1st, we will act like owners who will own the company for decades. 2nd, we will adapt and succeed in a world that is ever changing. And third, we will be a company that you are proud to be part of and would be proud to have as a neighbor.
When we pursue these ambitions, our employees, customers, communities and owners will all benefit. These guiding ambitions have served us well for decades, but they are enormously valuable in these times because they help simplify many decisions in an uncertain environment. Like many companies in the COVID-nineteen crisis, we have acted aggressively, keeping our people safe and able to support their families. We have kept our operations running to support our customers with special emphasis on our medical customers. And in the communities where we operate around the world, we have provided direct financial support and medical supplies to provide some relief.
The list of actions is lengthy. So starting with the economic framework. No 2 economic recessions are identical, but the 2,008 financial crisis provides us the most recent significant recession and therefore is the best example to study and inform decisions on operating plans, revenue forecasts and investment and spending plans. As a reminder, if you look back to 2,008 and specifically to September of 2,008, our new orders turned off overnight. This led to a 26 percent sequential drop of revenue in the Q4 of 2008, an additional 16% sequential decline in the Q1 of 2009 and then a rapid snapback for the next 6 quarters.
By the Q2 of 2010 or within 2 years of the start of the sharp decline, revenue moved back above the level of the Q3 of 2,008. For the benefit of hindsight, our customers overcorrected to the downside and we then spent a year and a half chasing back up to support demand. With this in mind, we are not trying to predict this economic recession and recovery, but instead we want to ensure that we have the highest degree of optionality so that we can deal successfully with any outcome. Therefore, regarding our operating plan, looking at the pattern from pre and post-two 1000 and 8 in the Q2 of 2020 and quite likely the Q3 of 2020, we will be running our factories at about the level they ran in the Q1 of 2020. This will likely result in an increase in inventory during the Q2, but this will be important to support our customers during a time when they have limited ability to forecast.
Our product portfolio of primarily long lived products makes this an easy decision and maximizes our optionality. Regarding 2nd quarter revenue guidance, Rafael will elaborate in a minute, but with reduced visibility of customer demand, we have used the historical transitions that I mentioned from 2,008 and adjusted for seasonality. We are not implying precision, but explaining the assumptions. We are using an expanded range to account for the current uncertainty. Regarding spending and investments.
First, research and development spending will be essentially unchanged as these are 5 to 10 year time horizon decisions. We will continue to make ongoing portfolio adjustments, but these are unlikely to make meaningful changes to investment levels. On SG and A, we will maintain critical investments in new capabilities such as strengthening ti.com because these are important times to gain ground. Where we can minimize expense, we are and we are we will certainly continue to do so. On capital spending, our plans are generally unchanged because the bulk of capital spending is driven by roadmap capacity needs in the 2022 to 2025 timeframe.
We will continue with previously announced construction plans that are underway for the next generation 300 millimeter analog wafer fab in Richardson, Texas. Lastly, regarding how we are operating in the current environment, we were fortunately prepared for the unforeseen disruptions of COVID-nineteen as presented. We updated our customers in late March that our lead times remain short and unchanged and that we could respond to short term demand. This is because we invested in inventory, had a robust business continuity plan and invested in a geographically diverse internal manufacturing footprint. Our manufacturing teams are operating throughout the world, including countries like Malaysia and the Philippines, where local restrictions have resulted in partial operations.
We've adopted protocols quickly to keep our people safe and minimize any disruptions. Our team was prepared and is comfortable getting our work done remotely. We continue to actively work new design wins customers via virtual selling processes that we instituted several years ago. On most days across TI, we are averaging a peak of 10,000 VPN connections and 2,000,000 meeting minutes per day, about 4 times higher than normal. We all look forward to things getting back to normal, but in the meantime, we are focused on execution.
Let me hand things back to Dave.
Thanks, Rich. I'll provide the standard comments of 1st quarter revenue by end market and then I'll add some additional insight about the quarter in light of COVID-nineteen. First, for highlights on Q1 revenue by end market versus a year ago. Industrial increased mid single digits from a year ago quarter and improved compared to 4th quarter. Automotive declined mid single digits and decelerated in the quarter as our customers' factory downs impacted demand.
Personal electronics declined mid single digits, but by sector was a mixed bag. Mobile phones declined low double digits, while by contrast PCs increased low double digits. Communications equipment declined about 50% as expected due to a comparison against a very strong Q1 2019. Communications was up sequentially. And lastly, enterprise systems increased double digits on strong data center demand.
For additional insight, the Q1 ran as expected into Chinese New Year, but was slow coming out of the holiday as Chinese factories struggled to come back due to COVID-nineteen. In early March, we saw a pickup in orders from most markets as supply chain disruptions led to increased customer concerns about being able to secure supply. This increase in demand that we experienced in March had continued into early April with the exception of automotive as manufacturers' plant closures reduced consumption. This increase in orders has steadily abated in April, but returned to levels we saw in early March. The midpoint of our range assumes that this decline continues through the quarter as customers have reduced visibility to end demand.
Rafael will now review profitability, capital management and our outlook.
Thanks, Dave, and good afternoon, everyone. Revenue was $3,300,000,000 down 7% from a year ago. Gross profit in the quarter was $2,100,000,000 or 63 percent of revenue. From a year ago, gross profit decreased due to lower revenue. Gross profit margin decreased 20 basis points.
Operating expenses in the quarter were $794,000,000 about even from a year ago and about as expected. On a trailing 12 month basis, operating expenses were 23% of revenue. Over the last 12 months, we have invested $1,500,000,000 in R and D. Operating profit was $1,200,000,000 or 37 percent of revenue. Operating profit was down 10% from the year ago quarter.
Net income in the Q1 was $1,200,000,000 or $1.24 per share, which included a $0.10 benefit for items that were not in our prior outlook, as we have discussed. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $851,000,000 in the quarter. As a reminder, Q1 is typically the seasonally low point for cash flow from operations due to payout of profit sharing and bonuses. Capital expenditures were $161,000,000 in the quarter.
Free cash flow on a trailing 12 month basis was $5,600,000,000 In the quarter, we paid $841,000,000 in dividends and repurchased $1,600,000,000 of our stock for a total return to owners of $2,500,000,000 In total, we have returned $6,600,000,000 in the past 12 months, consistent with our strategy to return all free cash flow. Over the same period, our dividends represented 55% of free cash flow, underscoring their sustainability. Our balance sheet remains strong with $4,700,000,000 of cash and short term investments at the end of the Q1. In the quarter, we issued $750,000,000 of debt with a coupon of 1.375 percent due in 5 years. This resulted in total debt of $6,600,000,000 with a weighted average coupon of 2.81%.
Since then, we have repaid $500,000,000 of debt due in Q2, and we have no further debt due this year. We have $550,000,000 of debt due in 2021. Regarding inventory, TA inventory dollars were flat to 4th quarter and days were 145. Distribution owned inventory declined again in first quarter by about $50,000,000 the 6th consecutive quarter of planned reductions, as we continue the transition of our channel to have fewer distributors and bring more customers direct. We had about 4 weeks of distribution inventory, the lowest since Q3 of 2017.
Tactically and strategically, we're very pleased. We have steadily decreased total inventory dollars while increasing the percent of inventory concentrated inside TI and therefore in fewer places. This enables us to maintain short lead times and high availability, which is critically important in an environment where end demand visibility for our customers will be limited. With a recession likely upon us, as Rich mentioned earlier, we're using the 2,008 financial crisis to inform our 2nd quarter outlook. To reflect the increased uncertainty, we have also expanded the range.
For the Q2, we expect TI revenue in the range of $2,610,000,000 to $3,190,000,000 and earnings per share to be in the range of $0.64 to 1.04 dollars Regarding our operating plan for running our factories, we expect that customers in this recession, similar to past recessions, will overcorrect in the short term as their visibility of their end demand drops. We believe it will be an important advantage to maintain consistent lead times and to offer customers high levels of product availability. Our product portfolio of mostly long lived parts affords us to have a steady hand. Therefore, we will be running our factories in Q2 at approximately the same level we ran them in Q1 of 2020. The inventory will likely grow during the Q2, while distributor owned inventory will likely drain.
In closing, we continue to invest in our competitive advantages and in making our business stronger. History has shown us that this is in time like this is when we can make the most strategic progress. With that, let me turn it back to Dave.
Thanks, Rafael. Operator, you can now open the lines up for questions. In order to provide as many as possible to ask a question, please limit yourself to a single question. And after a response we'll provide you an opportunity for a follow-up. Operator?
Thank you, We'll take our first question today from Vivek Arya, Bank of America.
Thanks for taking my question. For my first one, I understand visibility is low and I understand the way you are predicting Q2. But just a few weeks into Q2, have your orders or bookings played out the same way as it did during the financial crisis? Does your consignment program now provide you better visibility? Then last time, I'm just curious what you have actually seen so far in the quarter so that we can get a better handle on the outlook that you're giving.
Yes. So let me I'll start and Dave, you want to chime in on that. But as we said in the prepared remarks, April has in fact behaved very differently than 2,008 in the comparison. March was not only April, but March. March was strong.
Coming out of Chinese New Year, as we said in the prepared remarks, we came out a little slowly, but then things strengthened and into April, those things have abated in the second half of April. But we think that is due to the concern that many customers have on supply disruption. So we our range and particularly the midpoint of our range implies an expectation that demand will drop as customers internalize better their end demand and frankly, they're going to have very low visibility. We expect them to have very low visibility of demand. That's why the important point here is that we're keeping high optionality throughout this process so that if things snap back, we can support that.
We can support it on the other side of this. Dave?
I think that's well said. Do you have
a follow on to that?
Yes. Thank you. You mentioned that you're continuing to run your factory loadings in Q2 as the same level as Q1. I'm curious if you can give us some color around what you're modeling days of inventory to be exiting Q2. Is there a certain maximum limit to the amount of inventory or in terms of days or dollars that you're willing to build before you have to start taking actions?
Yes. Thanks for that question. So Vivek, just as you frame it, I'm glad you frame it that way.
It is a capital allocation decision.
So we are allocating And the inventory will increase And the inventory will increase. We expect very likely to increase into 2nd quarter. But that is that's what gives us the optionality that I mentioned, having that inventory on hand. The key thing to remember, and you know us very well, we the vast majority of our products are long lived, they're highly diverse, they sell to many, many customers, they live a long time on the shelf and the customers' product life cycles are very long. So that inventory will not go bad.
So it's an option with a fairly low cost upfront to have that option.
That's great. Thank you, Vivek. We'll go to the next caller, please.
Next up, we'll hear from Stacy Rasgon, Bernstein Research.
Hi, guys. Thanks for taking my question. For the first one, if I go back to 2,008, I think the decline was
a lot quicker. But if I
look from Q3 'eight peak to Q1 'nineteen trough, revenues fell about 40%. This cycle has been longer, but if I take maybe that the peak was Q3 'eighteen to your guide in Q2 'twenty, you'd be down about 30%. Does that suggest that maybe there's still a little more to go for following the same kind of trajectory? And I guess also if the decline from peak to trough is longer, does that suggest that you might be thinking about the increase off the peak and also being longer? Like how do we compare the 2 situations?
Stacy, this is Rich. Given the recollection of 2,008, I'd be careful of too much precision in where you're trying to draw that to. I do think the valid comparison that and I think you know this very well from the history is that 2,008 was a reasonably 2,000 and 7 and first half of two thousand and eight were reasonably hot semiconductor markets, not overheated, but pretty hot. And clearly 2019 Q1 of 2020 were cooler compared to the heat of 2017 2018. So when you try to get peak trough, that's a little more complex.
We just tried to basically look through what did we think demand was doing for a couple of years prior. And that was what helped inform and help set where we would put the operating
plans. Got it. For my follow-up, I know you generally don't have tons of visibility into what true end demand is doing. But do you have any way to gauge just given the amount of pull forward that we might be seeing right now, whether it's gauging the pace of rush orders or anything like that? Is there anything that we can that you can give us to try to gauge how much of the strong near term demand might be pull forward versus anything else?
Yes. Stacy, as you imagine, I don't think we have any precision on that. I think that as we saw after Chinese New Year's is we saw strength. We believe that that was due to the customer concerns. It's hard to have any precision around what percentage of that was due to that concern with any degree of accuracy.
But yes, Rafael, you want to add to that?
Yes. So I agree. The only thing I would add is that we know is the channel is clean, the Disney channel, because as we said, we're at 4 weeks. We drain about $50,000,000 on that channel and we plan to continue draining for the next 3 quarters or so about another $200,000,000 or so plain drain as we convert more and more customers to going direct. So the channel we know is clean and will continue to be clean.
But as Dave alluded to, we really don't know the end customers when they pull, how much of that is true in demand versus stocking up for potential disruption?
Yes. And I might add too that, as you know, Stacy, 65%, 70% of our revenues on consignment. So we're not turning backlog, but we see plans that are in our customer factories. But as they have reduced visibility, all those plans are not updated. So they're being updated slowly as they're deciding what build in those factories.
So those updated plans are rolling through and that's what's creating the uncertainty as you'd imagine. Okay. Thank you, Stacy. And we'll go to the next caller please.
Next up from Morgan Stanley is Craig Hettenbach.
Yes. Thank you. And appreciate the color on the OpEx side of things. Any additional thoughts around just kind of variable compensation and as revenue comes down, some mitigation in terms of EPS impact in the next couple of quarters?
Sure. So as we said in the prepared remarks, in general, OpEx will be relatively unchanged. So R and D, those are long term investments. SG and A, we also have some investments areas there with ti.com. In other places, we frankly run the company pretty tight to begin with, but wherever we can tighten up more, we do.
On your specific question on variable compensation, that tends to be profit sharing and bonus. Profit sharing moves according to our formula, so it's very formulaic. So depending on what happens, that adjusts. And bonus is determined by the Board depending on relative performance on 1 to 3 years on several metrics. You
have a follow on, Craig?
I do. Thanks. And understand the different cadence by geography in terms of China was weak then came back and Europe and North America maybe weaker now. But just love to get your thoughts just for Q2, how you're expecting kind of things within your guidance from a geographic perspective?
Yes. I always give caution on when asked about geographical revenue and sometimes we can see distinct patterns, but where we ship our product is very rarely where it's actually consumed as you know. So we ship a phone that or a product ends up in a phone built in China, it may end up in Europe. So, if there was something distinct in our guidance that was impacted by geography, we'd share that and we don't have anything specific to share with that right now. So thank you, Craig.
And we'll go to the next caller please.
Our next question is Ross Seymore, Deutsche Bank.
Hi, guys. Thanks for all these additional details, especially with Rich on the line. Maybe one for Rich. In your comments earlier, you said you wanted to use 2,008 as a template and that's about as fair a template as I could imagine as well. You also laid out about how the pattern was a steep fall then a steep rise back.
Given that you're behaving your actions are very different this time where you're keeping the utilization flat, etcetera. Is that because you view this cycle as being any different to short duration matching the same one as a decade ago? Or is it simply just the optionality side of the equation at the end of the day that you're trying to maintain?
Let me have Rafael.
Ross, just to help on that. I think Rafael covered this in some ways. If you think back to 2,008 and you know and a bunch of folks know we were very much different. We had a large wireless business. We had portfolio reprofiling.
We had to do we had a high percentage of our product that wasn't exactly custom, but it behaved a lot like custom. So building inventory was a much more difficult game. And the beauty about where we are today is, as Rafael pointed out, is that high percentage of the portfolio is a long lived product. We've got our R and D and our resources well deployed in the areas that we want to be long term. And that's what really puts us into a wonderful position where the cost to have maximum optionality is actually pretty low in our particular case in 2020 versus where it was back in October of 2,008.
Great. Thank you for that. And I guess as my follow-up, just switching over to the cash return side of the equation, it looks like you guys had pretty much the 2nd biggest buyback in a single quarter you've had in a decade. Can you just remind us on how you guys are thinking about the ability to return cash? I know your long term policy of returning 100% of your free cash flow and it's not just dictated by any single quarter, I appreciate that as well.
But this was significantly above what you guys generated in a single quarter and maybe even in a couple of quarters of free cash flow. So just talk about how much leverage you're willing to put on the balance sheet to take advantage opportunistically of a pullback in your stock when it's below what I guess you view to be your intrinsic value?
Sure. So let me first you alluded to it, but let me just remind everybody on the call that our objective when it comes to cash return is to return all free cash flow to the owners of the company, and we do that through buybacks and dividends. So for example, on a trailing 12 month basis, we generated a $5,600,000,000 of free cash flow and we returned 6.6 dollars So obviously, all free cash flow there being returned. And then you mentioned debt and we have debt on the balance sheet, as we said on the call, dollars 6,600,000,000 we finished. On a net basis, it's $1,800,000,000 because we have $4,700,000,000 of cash on the balance sheet.
But we use that to increase the rates of return with some leverage when it makes sense. So that's how we view the returns and the debt for many, many years as we talked as we have talked about it on capital management.
Okay. Thank you, Ross. We'll go to the next caller, please.
Next up is John Pitzer, Credit Suisse.
Yes. Good afternoon, guys. Thanks for letting me ask the question. Dave, I just want to go back to your comments in your prepared remarks about bookings slowing as we've been coming to the end of April. Was there any end market distinction you can talk about?
And I'm particularly interested in kind of understanding how auto and industrial is behaving at the beginning of this pandemic versus maybe things like PC, data center and comms.
Yes, John, I'd say that when we looked at last quarter, it was very distinct that we saw strength in PCs. We saw a strength in data center. We saw a distinct slowing in auto as we talked about. I'd say that the relative strength in orders that we saw in the quarter that happened in March and continued into April was broad based generally and was across the board with the exception of auto. And then the slowing, I would say that it is also broad based.
You have a follow on?
Yes. I think this is my follow on. Returning to Ross' question about capital allocation and return. Rich, since you're on the call, you guys have always been good at sort of zagging when everybody else is zigging and you've got a longer duration out there. I'm kind of curious about how you're viewing your current environment relative to M and A and if that's something sort of an error in your strategic quiver as we go through the next couple of quarters of what's clearly going to be a recession?
Yes. John, if you think about it, and you can't even you've watched this for a long time, you can go back to 2,008 and then look at what we did through 2,009, 'ten, 'eleven and such. And clearly, if you think about capital allocation, the things that I step through, keeping on the right R and D investments, keeping on the right capital expenditures, making the right capability investments on things like ti.com. That's where you get just very excited about. We will be getting stronger during this period and those strengths will help us even as the secular trends of more semiconductors in your life are growing.
To the degree that we have an opportunity to buy used equipment or used factories or potentially M and A, as with anything on capital allocation, I think that one just goes down to the it depends type comment, meaning it would have to be probably a more prolonged downturn. If you think about what the mood was in 2010 2011 well, 2,009, 2010 2011, that mood had to be there for a while before opportunities became available. But we're certainly we try to just be wise over the long term.
Okay. Thank you, John. We'll go to the next caller, please.
And we'll go to Chris Danely, Citigroup.
Hey, thanks guys. And Rich, thanks for making the cameo. My first question, Rich, do you think or do you anticipate any longer term structural changes in the business either in terms of end markets or anything you're looking at as a result of this pandemic?
Chris, I think it's early. I think, I know your world tries to get ahead on trying to guess what will happen. I in general think that the secular trends that we've seen with semiconductors and more semiconductors coming into people's lives are going to continue, okay? And I think somewhat as John alluded to in his question, it's obvious in the near term that server sales and PCs are going to do well as working from home continues. But I just think longer term, if you look at industrial products, industrial equipment and even automotive.
Even though in the near term people will see SAR numbers come down, the secular trend on semiconductor growth inside of automotive is going to make it a great market to be in for the long term. So, no, I don't think from that point there'll be a big structural change. I do think we've got a great advantage of having structural channel advantage. So the changes that we've been working towards for a number of years of building closer direct relationship with customers, things that you now see playing out with a higher and higher percentage of inventory being in our hands to where we can be more efficient. That's going to be a fantastic trend.
TI is well prepared to take advantage of that with our breadth of channel reach through the industry.
Thanks. Do I get a follow-up?
Yes, sir. Go for it, Chris.
Great. Thanks. And then, Rich, to the extent you can, if you could give us any insight into what the customer conversations are like, what are they asking, what are their big concerns? And I guess at the root of it, you guys talked about it. I've thought about this.
Why aren't we seeing this sort of fall off in orders yet? Is everybody just kind of frozen in place out there? Why is that happening?
Chris, I think if you and Dave, I thought was very direct with what he described as we saw orders rise starting to pick at 1st, 2nd week of March. You saw them rise up. You've seen them start to trend down. They're still at that level we saw approximately ending February and in early March. I think that's starting to filter through for us especially and Dave will have the number where we're 60%, 70% consignment.
It takes a while for those consignment feeds to really get updated because companies have got to to start getting better numbers on that front. So I think customers are just still processing through what their customers are telling them and we will see that play through. It's why we've made the assumptions that May would be down from April June down versus April as well for the range.
Okay. Thank you, Chris. We'll go to the next caller, please.
Next up is Tore Svanberg, Stifel.
Yes. Thank you. And I appreciate the wide range of the guidance in this environment. But could you maybe elaborate a little bit on what the assumptions are sort of at the low end and at the high end of the range?
Yes. So I'll give you my take. Frankly, there's no signs on that. As we talked about earlier, we're using 2,008 as the model for that. Again, it doesn't imply precision, not even similarity.
It's just that it's the most recent exogenous event that we can use. So we're using that. And the midpoint is the closest thing to that, kind of adjusted for seasonality. What you normally would see in a first, second quarter transition, now you're seeing a negative 13% at that midpoint. But the entire range and the other reason we widened the the other reason we widened the range is to reflect the great level of uncertainty that we have going on.
As Rich mentioned, many customers right now, they're still processing what's happening. And we've actually heard some of them haven't been able to update their feeds to us, right? So they got to go through all that process. And so that's embedded in that wide range. The biggest point I want to make and we made it a couple of times already is the optionality that we're going to get based on how we're running the factories, right?
So this thing can go multiple ways for Q2 and Q3 and beyond, but we have just great optionality the way we're running the business, both strategically, the type of parts we build and the end products and so forth, but tactically, the way we're running the factories and the inventory in 2nd
You follow on, Tore?
Yes. Thank you, Dave. The other question goes back to what you just mentioned there, Al. So I'm sure your customers are probably thinking about this too and maybe they are perhaps building some inventory too to be able to respond to eventual demand. If that's indeed the case, how long would you be willing to have this sort of optionality or perhaps the inventories a
little bit longer than normal?
It's going to depend on a number of factors that today we don't know, right. And I think we and the world and the industry will learn over the coming weeks months and then we will adjust as necessary. I think the advantage we have with the way we're set up strategically, with the type of parts we build and the type of customers we have and the type of end market is that we can afford to have this optionality, right? These parts are not going to go bad. It was very different in a custom centric custom parts centric world, in personal electronics type of centric world, that's not the case with the way we structured the company.
So we have great optionality to go through this beyond Q2.
Okay. Thank you, Tore. We'll go to the next caller please.
And next from BMO is Ambrish Srivastava.
Hi, thank you. Rich, good to hear your voice. I'm sure nobody really wanted to hear you in this kind of forum. I had a question back on capital allocation and going back to the 2,008, 2009 template or playbook. You raised your dividend in the Q4 back then.
It was a small portion, but it was I think on a percentage basis was pretty meaningful. So as we compare what where we're heading now versus I'm sure nobody had any idea what next quarter was going to be. What's the right way to think about capital allocation based on the comments you and Dave and Rafael are making? It sounds like no change in 100% free cash flow back, divvy plus buyback, no change to that. So just kind of just help us understand the thinking or scenarios that you're playing that you're thinking through, which might lead to a near term modification in that, Rich?
And then I had a follow-up.
Yes. So I'll set up
and I'll let Rafael cover it. The answer is no change, Ambrish, because we really have tried to have a very thoughtful long term plan. But I think it's helpful for Rafael to summarize some of those points.
Yes. So just to comment and then bridge, as you said and Rich just confirmed that, yes, there's no change in our the way we think about capital management and our long term objectives. So as I said earlier, cash return, return on all free cash flow. On dividends specifically, as you alluded to, the objective is provide a sustainable and growing dividend to appeal to a broader set of owners. And as a reminder, on a trailing 12 month basis, our dividend was 55% of our free cash flow.
Now of course, it's a backwards looking metric. I understand it, but it's a great place to start. Frankly, few companies are at that level in our industry and in the S and P 500. So it's a great place to start. But that objective of providing a sustainable and growing dividend, it has been and continues to be very important for us.
Follow on, Ambrish?
Yes, I did. And this is more to do with I think Chris asked a good question on structural changes. Given that we are all working from home, at least those of us who can afford to work from home, how is it impacting the design activity that TI engages in multiple geos, multiple customers, so many end markets? What's the right way to think about the changes that you're seeing there? And does it portend poorly for when we ultimately get to a more normal world?
Ambrish, it's why we included in my remarks comments about how we're operating in. It's one of these deals I produced some an update for internal. And basically, I'd had a bunch of people telling me, gosh, we got lucky on some things. And I explained there's this great quote that luck is what happens when preparation meets opportunity. And we put in place this mass market selling, really virtual selling technique starting 3 years ago.
It's an instituted standard process. Our sales teams work it, applications people work it, comfortable with customers. And so it's almost been like nothing has changed in terms of where we spend our time working between ourselves and the customers. They all want to do it on the phone anyhow, our products group connecting in on that. So the readiness that we had to operate in this world is actually enormously high.
Having ti.com more capable support customers' decisions, to be able to support online commerce as we're bringing more customers direct. The comfort of our product groups, design engineers and people to work collaboratively because we've always had to do that is really very, very unchanged. I do think people are working more hours just because the days and hours tend to blend into one another as I'm sure everybody on this call is experiencing. But it's very impressive to watch the team performing and watching what it's getting done. We're even at the point where all the set of customer visits even next week where those customer visits will be virtual as well.
So we're just well into the way of operating this way.
I just want to comment on a slightly different topic what's related in the spirit of preparation meeting opportunity, just want to highlight and we talked about it during the prepared remarks, but we were prepared for the unforeseen disruptions with a combination of our inventory strategy, our business continuity program and our geographically diverse manufacturing footprint, which of course is part of our one of our competitive advantages of manufacturing and technology. So we're having all of those together. We were able and continue to be able to provide our customers with short lead times and inventory availability in this time where they need it most, not now and in the coming quarters when their visibility will be impaired.
Yes. And I would say that we've had customers actually contact us and they're rather surprised that our lead times are stable and they can get the product that they need. So they're
very happy with that.
So thank you, Ambrish. We'll go to the next caller please.
And next is Harlan Sur, JPMorgan.
Good afternoon. Thanks for taking my question and I appreciate the additional commentary on Rich being on the call today. I know you guys don't like to talk about sort of specific geographies, but fact of the matter is China is coming out of this pandemic and starting to open up their economy and throwing quite a bit of stimulus at it. Are you seeing this being reflected in your order rates or consignment forecast for your domestic China customers? And roughly what percentage of your business today comes from domestic China consumption?
Yes. I'll start and please chime in Rafael if you'd like. So again, I'll give the numbers of products of where we actually ship the product, but always offer the caution that it's where the box ships from. So we've got 50% of our product ships from into China. But again, like cellular phones as an example may be built there, may be designed in California and end up in Europe as an example.
So and yes, we are seeing those factories coming back online as we talked about in our prepared remarks. But I think the uncertainty is how much demand will actually be there as those factories come back online. And I think that that's what's creating that uncertainty. So do you have a follow on?
Yes. Thank you for that. So IHS in its most recent forecast is calling for global light vehicle production to drop almost 20% this year. This is twice the year over year drop as experienced in the 2008, 2009 financial crisis. Outside maybe just the near term inventory correction to kind of normalize to the lower production trends.
How is the TI team thinking about your content growth in auto to potentially partially offset the significant decline in production this year?
Yes. I think Harlan, I'll make a couple of comments and Rich, if you want to jump in afterwards, feel free to. And I think that what's important for us is just the longer term opportunity in automotive remains unchanged. And we continue to invest in 5 different sectors inside of automotive. There will be more content per vehicle as you know Harlan and as you're pointing we will respond tactically to those changes in demand.
And we know how to do that and take care of that operationally. That's not something that we'll be able to control, but we will keep our investments steady and be prepared to support that growing opportunity as it arrives. So, Rich, do you have anything to add to that?
Yes. I would just harrow and amplify as I suggested earlier that the secular growth themes that are embedded in things like automotive or embedded in industrial are alive and well, okay. They're going to be with us. They are not going to offset a 20% SAAR drop in any 1 year and you know that, I think everybody does. But when it comes to making investments, as Dave said very well, you got to be looking 5 6 years out.
We think automotive will continue to be a growth, a great average upper of our long term growth in our performance.
Okay. Thank you, Harlan. We'll go to the next caller, please.
And up next is Toshiya Hari, Goldman Sachs.
Hi, good afternoon. Thanks very much for taking the question. I just had one probably for Rich. I was hoping you could talk a little bit about the competitive landscape that you're seeing today both in embedded processing as well as analog. You guys have been a pretty consistent share gainer over the past 5, 10, 15 years.
I wanted to get your thoughts on share growth potential going forward. Obviously, you guys are going through this recession, which all else equal, I would think would be positive for industry leaders like yourself. You're also going through the go to market strategy change. You've also got the trade tensions between the U. S.
And China. So when you think about those three items, if you can talk to your confidence level around share growth over the next call it 3 to 5 years that would be helpful. Thank you.
Yes. Toshi, I think you've almost answered the question. I think you described a couple of secular tailwinds. If we do our job well with a secular headwind depending on trade tensions, but even there, if we do our job well, I think we can mitigate some of that. I think you also and I'm sure Dave is smiling, you got to the right context, which is you've got to look at this over 2, 3 4 years.
I think he reminds everybody all the time. And so you look at the share we gained going kind of into and then the position we were coming out of the 2,009 downturn and we gained momentum in that. And that's certainly what our plans are right now. And that's about both analog and embedded. And it's about the markets that we focus on.
It's the customers, the products, the technology, the capabilities like ti.com that we put in place. And it's where all our energy is going on a weekly and daily basis is to get better at that.
Okay. Thank you, Toshiya. We'll go to the next caller, please.
Next up is Timothy Arcuri, UBS.
Thanks a lot. I had 2. I guess the first one is another how to think about how Hello, Dave?
Hey, Tim. Yes, we're having trouble hearing you. Could you start over, please?
Sure. Okay. So the first question really is around how the cycle evolves and how to think about it. And I guess I understand that the magnitude, the peak to trough magnitude is hard to look back at 'eight and to sort of look at that. But it seems like the near term supply chain boost that or the concerns that customers have about that, that's boosting near term demand.
It seems like for you that effect is sort of beginning to wane, maybe a little earlier than others because of your consignment model. So, currently you're seeing it first. And I wonder if you'd agree with that, that it relates to the consignment model. And I guess the question is, does that agree that or does that argue that you would maybe see it out the other side first as well?
Yes, Tim. So I don't know. So first of all, we haven't seen what others have reported yet or what they've seen. So it's probably too early to do that. And we've had theories of us seeing it early and seeing late.
Just rather not weigh in on that debate and just report the facts that we have and let others debate it, right? We do believe that by pulling and controlling that inventory, we'll get much cleaner signals. But as we've talked about before, our customers right now, they're not sure what their demand is going to look like. And so what they're telling us hasn't been updated yet. So even what they're telling us isn't completely clear.
So it's going to take a little bit of time before all that stuff is updated. So you have a follow on?
I do. I do. Yes, it's for Rafael. So I guess on inventory, so if I assume that it's sort of flat to up in dollar terms, obviously days are going to go way up in June, maybe they're 170, 100 and 80 days like that and possibly even up again in September. I guess I was just wondering like can you give us some sense of the pain point is where you might cut utilization?
Is it an inventory dollar thing? Is it days thing? Or is it a sort of just a duration of recovery thing? Thanks.
Yes. No, good question. First, let me step back and remind you that for us, the objective of inventory is to maintain high levels of customer service, minimize obsolescence while we improve our manufacturing asset utilization. The target of 115 to 145 frankly is kind of incidental, right? It's just a calculation.
At the end of that age, it is a capital allocation decision. We're going to have $2,700,000,000 of inventory. That's real money on the balance sheet that if it wasn't there, it'd be back in the owner's pocket. So we're very thoughtful in how we're going to how we make those decisions to put potentially more inventory on that balance sheet, right? That's less cash that we have.
But we just think it's going to give us great optionality throughout this thing, right. And like any decision when it comes to capital management, it's going to depend, right. So that's the decision we're making now. We have to see how things develop in the coming months. And based on that, we'll adjust.
The important thing, the inventory lasts a long time. This is inventory that the scrap levels on this inventory is very, very low. So the others that well, there's a working capital and an opportunity cost to it, but it's very low given that it's highly unlikely that it's going to be scrapped and it gives us just tremendous optionality on the other side.
Okay. Just to follow-up, Rafael and Tim, Rafael said this before, so it's just me repeating his comment. The other thing to keep in mind and he spelled this out is while our inventory would be growing in Q2, we will drain yet again distribution inventory. So we just got to keep these multiple variables in mind and it just keeps putting us in a better and better position when we're doing that. So our balance sheet may show higher inventory, but we love the fact that that channel inventory will be getting leaner and leaner and the inventory will be in one place where we can get the most effective use out of it.
And I'll go ahead and add when you and all the investors listening on the call, when you compare us to most or maybe all of our competitors, our balance sheet is very different in that regard because we have many consignment arrangements, well, 65%, 2 thirds of our revenue goes through consignment, whether it's through distribution or directly with the end customer. So that puts upwards pressure on that inventory level that we have. We also have our own manufacturing to including assembly test operation, whereas to a very high degree, about 80% of our output goes through our fabs and maybe 60% or 70% through our assembly test operations. So that's also very different than our competitors. So that's why it's not apples to apples when you compare our inventory levels to those of our competitors.
But let me make the point though that we think owning and controlling that inventory is a strategic asset. So we're very pleased with we have in those consignment arrangements, clearly very pleased with owning our own manufacturing and what that has enabled us to do anytime, but particularly in times of disruption like what we just experienced and continue to experience, where it just really puts us in a much better position to support our
customers. Right. Okay. We have time for one last caller.
And we will go to Mark Lipacis, Jefferies.
Great. Thanks for taking my question. So I had one. Our own field work in the supply chain downstream from you guys indicate that inventories are indeed like normal, if not lean levels. And as the virus spreads around the world to places like Malaysia and Philippines that there are shortages of components, understanding that your inventories are higher than at the high end of the range and not hearing anything about TI shortages.
But basically supplies being disruptive and there's a reticence to give up any excess inventories downstream for you. I'm wondering if you could describe what you're seeing on your own supplier base that you want to run your factories at consistent levels here. Are you seeing any of these supply chain disruptions that your customers are seeing at other components. Are you seeing that and how are you managing that and there's a risk that you're not going to be able to run your capacities consistently because of your own supply disruptions? That's all I had.
[SPEAKER JOSE RAFAEL FERNANDEZ:]
Yes, sure. Yes, not a problem. The short answer to that is we're not seeing anything worth mentioning on this call. Little things here and there, but nothing that we cannot manage. Remember, I referred to our business continuity program and we've been in this call, we've been talking mainly about inventory, finished goods inventory that we carry, but that also applies on multiple other angles.
So for example, we also carry raw material inventory buffer. We have many dual and triple and quadruple sourcing of key raw materials. And we also have, as I talked about earlier, geographically, the diverse manufacturing footprint in Malaysia, in the Philippines, in Taiwan, in Mexico, in China. So that just really puts us in a very our we pay them in 30 days. We make that's part of our thinking to be fair to those suppliers and we don't play games on that.
So that's also from a long term relationship standpoint, I think we are in very good shape with all of those suppliers.
Would you like to wrap this up?
Yes. So let me just wrap up by reiterating what we have said previously. History has shown us that it is times like this when we can make the most strategic progress. We will continue to invest in and strengthen our 4 competitive advantages, which are manufacturing and technology, portfolio breadth, market reach and diverse and long lived products. We will also continue to pursue the 3 ambitions Rich mentioned.
We will act like owners who will own the company for decades. We will adapt in a world that's ever changing and we will be a company that we're personally proud to be a part of and would be proud to have as a neighbor. When we are successful, our employees, customers, communities and owners will all benefit. It is this ambition that will guide our decisions in the weeks months ahead as we navigate these uncertain times. Our best to you and your families.
And ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.