Kurt Sievers: Yes. Hi, Joshua, I would say no. Fundamentally, the concept of a software-defined vehicle, which is actually moving a lot of performance parameters from hardware to software and creating much more flexibility, is completely independent of what kind of powertrain it has. Now the matter of the fact is, however, that all OEMs, I know, are extremely busy with developing electric powertrain-based new vehicles. And for most of them, it is actually the core of their activity going forward. And that is, of course, the reason why when they think then about STD implementations, it falls together with electric drivetrains, but that is not because there would be a technical reason. I actually know that several STD implementations where we are a leading partner for OEMs, this comprehend both ICE and Electric drivetrains.
So it is the same STD content which splits then on a much lower level into an implementation for a combustion engine car or in an implementation for a battery Electric Vehicle car. But fundamentally, there is no difference.
Joshua Buchalter: Appreciate the color there. And maybe for Bill, as you just paid down the $1 million note in March, I think you don’t have anything to do for over a year now and only $5 million next year. In the passing of NXP has been more aggressive utilizing the balance sheet. And I think your past target was two times levered. Can you maybe talk about how you’re thinking about utilizing the balance sheet and the capital returns? Thank you.
Bill Betz: Yes, sure. So again, Josh, no change to our capital allocation strategy, if I just look back over the last three years, we returned $8.4 billion or 107% of our free cash flow last trailing 12 months, it’s below 100% because we retire that debt that you just mentioned. And so that’s about 82%. And in the past quarter, we did 90%. So I think we did take the opportunity to deleverage the company. We looked at our gross leverage metric, and it was at 2.1 times, now that 1.9. Clearly, with the credit rating agencies and sweet spots below 1.5%. If we look at – we’re going to continue actively buying back our shares. We think it’s a great use of our cash. have approximately $1.1 billion left on a board authorization plan of buybacks this year.
We continue to pay a healthy level of dividend. So if you look at that as a percentage of cash flow from operations over the last 12 months is about 28%. And as we talked about in the past that we treated someone as fixed, we’ll continue to execute and invest in the business. That’s the number one priority, right? We’re going to stay within our financial model, invest in the business, continue a lot of small tuck-ins of our M&A that we’ve been actively involved in. So overall, I think we’re committed to continue returning excess free cash flow back to you all.
Joshua Buchalter: Thank you.
Jeff Palmer: Hi, Tawanda, we’ll take one more question here today.
Operator: All right. Please stand by for our final question. Our final question comes from the line of Chris Caso with Wolfe Research. Your line is open
Chris Caso: Yes. Thank you. Good morning. I wonder if you could talk a little bit more about the China for China manufacturing strategy that you’ve spoken to in the past. I mean I guess in one point, how that protects the business in China? And then secondly, what margin implication that may have if you change that manufacturing strategy going forward?
Kurt Sievers: Yes. Hi, Chris, that’s indeed that’s a very important point. There is a clear ongoing and I’d say, increasing requirements from our Chinese customers in Automotive and beyond to go for localized manufacturing. We are pursuing this quite forcefully. We have chosen the Nanjing factory of TSMC, which happens to host the 16-nanometer technology, which is the core of our microprocessors for Automotive. We are working with SMIC, which we have done historically outside of Automotive and continue to do so outside of Automotive. And we just ended up choosing a third foundry partner, which I’m not going to name here, but a third foundry partner for the analog mixed signal space in order to produce our products in China for China.
That is helpful in two ways, Chris. The one is indeed that we can follow that requirement of local manufacturing. And I believe NXP is in a comparably good position here because several of our peers have their own factories. And for them, that move to China is really not easy. Secondly, cost. You just mentioned it, there is certainly a competitive market in China. And if we want to successfully play against local Chinese competitors, which certainly over time will continue to try and come up, it is good when we can use the same cost base, which means – which is local foundries in China. So in an ideal case, Chris, and again, let’s see how it plays out. You will not see any impact on the margin from doing this but it keeps us competitive. I mean the whole point is that we can play against them successfully because we can leverage the same cost competitiveness, which they have in the local manufacturing environment.
Good
Chris Caso: Thanks.
Kurt Sievers: I look at Jeff here. Do you have a follow-up?
Chris Caso: Yes, I do. And if I could follow up also with China from a competitive standpoint regarding what they could actually produce. And you’ve addressed it from a manufacturing standpoint and putting you on an equal cost base with them. What do you think about the capabilities of some of these local players? Obviously, there’s an imperative in China, to try to bring as much content locally as possible. Do you see the competitive threat rising in terms of the capabilities of some of the local players that could be a factor going forward?
Kurt Sievers: Look, Chris, in principle, and that’s an overriding statement, we are always paranoid about competition because I’ve learned in my career in this industry, you better be paranoid at all times because it keeps you hot to run successfully against competition. Actually, in that particular case, we see two areas, where China is very, very busy from a local competition perspective. One is power discretes, especially for Automotive and that ranges all the way from IGBTs MOSFETs to silicon carbide. We just observed that for us, it doesn’t matter since you know that this is not part of our portfolio. But that’s something where it appears they actually make quite good progress. Secondly, lower end microcontrollers. There is a number of companies and they together have a couple of hundred million of dollar business already.
That’s outside of Automotive. We think with the fast move and requirements for higher processing performance and a lot more software in Automotive. This is a long way for them. Again, we are paranoid, but I think it’s just another set of competitors, which we are facing like in other places in the world. So we are not fearful of this anytime soon. In the analog space, I could imagine, again, we haven’t really seen much, but I could also imagine that they get into the lower end catalog analog at some point. I mean if I was China, I would try and do this. So overall, clearly a trend, so I completely agree with you that this is something which they want to do. We don’t see it really moving in our space at this time. And certainly, with the localization of our manufacturing, we kind of want to counter that, at least from a competitive cost base and from a compliance perspective.
Good. With that, we are a little bit over time. I want to conclude the call with summarizing and just making the remark again. This is a tough cycle. We have, over many quarters, operated a soft landing strategy in order to keep the P&L earnings and profitability in a reasonable shape with some cautious optimism, we are seeing now that the second half is turning around. It’s hard to say what the slope of that is going to be. But given our low inventory position going into this, we are cautiously optimistic that we can land the year in this plus/minus zero kind of fashion, which we discussed during the call. In the meantime, we keep every possible control on anything we can do about gross margin and OpEx, as well as CapEx. With that, I would like to conclude the call and thank all of you.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.
