TTM Technologies, Inc. (TTMI) Earnings Call Transcript & Summary

Okay. Thanks, everyone. This is Frank Jarman, the high-yield technology analyst here at Goldman Sachs, and we are very pleased to have TTM Technologies here with us today. For the next 30 minutes or so, Todd Schull, who is the Chief Financial Officer of TTM Technologies, will give you guys a presentation, to the extent that you have any questions, please feel free to e-mail them in through the webcast. And with that, Todd, the floor is yours. Thanks very much.

Thank you, Frank, and hello, everyone. I hope we're all getting used to this novel approach to investor conferences. But certainly, technology is helping us at least to stay connected. I appreciate the opportunity to present to you. If you turn to Slide 3. TTM is a leading PCB specialty components and technology solutions provider. We've got over 26 facilities in North America and China, with almost 20,000 employees. Our revenue last year on a pro forma basis, and I'll talk a little bit more about that in a minute, just under $2 billion and profitability -- adjusted EBITDA just over $270 million last year. We serve customers in 5 key end markets, and I'll talk a little bit more about that in just a second. If you flip to Slide 4, our strategy is centered around 3 key elements: diversification, discipline and differentiation. If you look at the next slide, Slide 5, we go through a little bit of a history of what TTM has done from an M&A perspective and how it's grown. And this will highlight some of these key strategies. If you look starting back in '02, we acquired Honeywell, which brought us into the networking and communications business. So adding to our diversification. It also introduced a technical capability from a high layer count conventional circuit board manufacturing capability. In '06, we got into the aerospace and defense business. So again, additional diversification. In 2010, we acquired Meadville, which was a Chinese Hong Kong listed company which introduced us into the cellular end market, which was just beginning to boom at that point. And it also provided us an Asia footprint, so a key capability that we needed to offer our customers. In 2015, we acquired ViaSystems, which brought us into the automotive end market. And then more recently, we've had transactions that are less end market oriented because we like the markets that we're in. But focused more on differentiating capabilities. So in 2018, TTM acquired Anaren, which gave to us or introduced to us a build-to-specification capability as opposed to just a build-to-print capability. And brought to us RF technology, particularly in the design and engineering as well as the manufacturing of components. Last summer, TTM acquired the IP and technology from i3 technologies, a company based in New York, that allowed us to add additional manufacturing capabilities and technology to handle increased densities and circuit boards and provide an alternative to substrate-like PCB technology that we already have in place. And then most recently, earlier this year, we announced actually our divestiture. So our first one, and I'll go into that in a little bit more detail as well as the restructuring of our assembly business. So all of these actions brought us diversification, but importantly, differentiation in many aspects. And even our decision to exit a couple of businesses was really driven by differentiation. If you turn to the next slide and kind of say it a different way, we're reducing our exposure now into consumer and commodity-type businesses where we don't have or don't continue to enjoy a strong differentiating capability. And we're going to continue to invest in engineering and technology that will allow us to further differentiate the business, with the end result being creating a company that is highly valued partner, with product lines that have longer life cycles and better visibility and improved earnings and capabilities. I turn to the next slide. I want to take just a moment to review our most recent announcements. So I'm now on Slide 8, transaction overview. So in April, we closed the sale of our mobility business. Essentially, that comprised of 4 factories in China, which represented substantially all the assets associated with our mobility business to a company called AKMMeadville, a Chinese partnership and that business, where we sold those factories for gross proceeds of $550 million. And we also expect to be able to collect receivables associated with the business that we'll retain over time that will bring an additional $95 million approximately in cash flow to the business. This is a 100% cash transaction. We expect net proceeds from the sale of the 4 plants to be about $485 million. And then you add to that the $95 million that we expect to reduce from our working capital. We expect these proceeds because in China, you have to go through a certain protocol to transfer cash in and out of the country. So we expect that the timing required to do this will take place over the next few months, but we do have a backstop secured by bank guarantees drawn on Hong Kong banks that will allow us to have -- to receive the cash no later than August 7. Could be sooner, but it won't be any later than that date. So we're very excited about that. Now the reason we did that, I highlighted on the next slide, our strategic rationale, really, the business is maturing in the mobility business. High-end cellphones are no longer a hit every year. You have very -- variability in the success of the product cycle. You have differences in the business. And you also have seasonality continues to be a big issue as well as cyclicality within the industry. Notwithstanding that, the business requires a high level of capital investment. And so when you combine all of those things, the financial returns just aren't there. Additionally, we're striving to improve the mix or increase the mix of our business from longer cycle markets. And the short-cycle consumer markets just didn't fit that strategic objective for us. The benefits will result in, I think, a much less volatility in our financial performance. And the proceeds that we receive will be used and will help significantly strengthen our balance sheet. If you turn to Slide 10, you get kind of a picture of the company before and after this transaction. In the top left-hand corner, you see a pie chart that highlights how our revenue broke down for 2019. You can see cellular is circled there at a market of about 13% of our business, and computing was about 13% of our business. Further, if you slide down to the bottom left-hand table, you see that Apple was a dominant -- well, not a dominant, but a very large customer at 14% of our business. And you can see that our top 5 customers included 2 that were in the cellular end market with Huawei and Apple. If you move to the middle, the pie chart shifts a little bit. Obviously, the cellular business is gone, but there's also a change in our computing end market. About 1/3 -- well, about 25% of our computing end market was -- represents high-end laptops and iPad tablet kind of products. And those are being divested along with the cellular business. So we're seeing that piece of our computing end market also declined. So those are the 2 big shifts in terms of dollars, but you can see how the pie reapportion on a percentage basis with aerospace and defense, now our largest end market at 33% on a pro forma basis. If you slide down to that table on the bottom left, you can see that we don't have any customers in 2019 that were greater than 10%. And as you look at our top 5 customers, you can see that aerospace and defense customers are being added to that top 5 list. On the right side, I'll go through a little bit more detail in a minute, so I won't dwell on that right now. If you turn to the next slide, our priority on the use of the proceeds is to repay the debt. We have the option to reinvest in the business or to repay debt according to the covenants associated with our term loan. We don't really have any significant M&A opportunities in the immediate future. So our intention is to pay down the debt. And that will be a significant advantage to the business, getting our net debt leverage ratio down below 2.0 when we're done by the end of the year. And I'll talk a little bit more about that in just a minute. If you turn to the next slide, I want to also talk about -- we announced that the fact that we were exiting our assembly business, what we call electro-mechanical solutions and closing a couple of plants. So if you turn to Slide 13, historically, we've had 3 plants that we acquired in the ViaSystems transaction-based in China, 2 in the Shanghai area and 1 in Shenzhen that provide assembly services to customers. Generally, those services utilize circuit boards manufactured by TTM. So there was some strategic rationale for why we wanted to try to continue in that business. As we've evaluated it, though, the landscape has changed, and it's just not going to be as attractive going forward. And so we've decided to close one of the Shanghai facilities called Shanghai EMS, and we're closing the Shenzhen facility. The Shanghai backplane assembly facility, which is very closely tied to the 5G market upswing, we will continue to hang on to and will be absorbed into our communications and computing business unit as part of the commercial sector. If you turn to the next slide, we kind of go through why we decided to do this. Again, a key for us is differentiation. And this business just wasn't offering the differentiation for us any longer. We couldn't really get the scale to compete with larger players. The U.S.-China trade tensions that we've been experiencing for the last couple of years now were weighing heavily on this business as a significant amount of the business associated with these 2 plants was exported to the U.S. And then to kind of cap it all off, the Shanghai plant that we're closing was the subject of an expropriation notice that we received from the local government. So we're going to have to close that facility in the relatively near future anyway. So when you add all that together, plus what we were looking at in terms of financial performance throughout 2020, we concluded that this business just didn't make any sense for us. And we're in the process now of winding down operations, which will take virtually all of 2020 to do that successfully to take care of the customers that we have in those facilities. If you turn to Slide 15, you kind of see what the -- what does the business look like financially as a result of these actions. The left-hand column was our numbers as reported for 2019, $2.7 billion in revenue, operating margin of 7.6%, adjusted EBITDA of 14%. In the middle column, you see the contribution from the businesses that we're exiting in 2019. And then obviously, the right column then is our pro forma financials, excluding those businesses. So revenue of just under $2 billion, operating margin improved to 9.1%, and adjusted EBITDA margin is relatively flat at 13.7%. And then if you look at the bottom 3 rows there, cash debt net leverage, you can see our net leverage ratio improved substantially as a result of the proceeds that we received from the sale of the mobility business. So let me -- that's kind of an update on current events. I'd like to take the rest of the time to focus on our strategy. We have -- the first part of this is diversification. So if you turn to Slide 17, TTM is focused on 5 end markets that we believe offer above-average growth opportunities in the PCB industry. The first one is aerospace and defense, representing on a pro forma basis, 33% of our business in 2019. Industry forecasters project growth rates over a 5-year CAGR of about 2% to 4%. But we have grown significantly faster than that over the last few years, and we expect to be above that growth rate in 2020. Well, why is that? If you turn to the next slide, you get a sense of what's driving that from our perspective. Increasing defense budget is the key. Obviously, on the commercial aerospace side, with COVID and so forth, that's been kind of a big negative and it's quite soft right now. But the defense side of our business is very strong. And more than offsetting any negative impact from the commercial aerospace in the near term. And the reasons for that is we've seen nice strength in the defense budgets and increases over the last few years, 2017 to 2019. The 2020 and 2021 budgets are already agreed to with modest increases. But importantly, as the defense budget starts to stabilize. And as we deal with COVID, how that plays out in the future, even within that defense budget, we're seeing shifts in the allocation of funds away from feet on the ground more towards technology. And technology starts with a PCB. So that's a good thing for us. A key element for us is the second point here is key programs. We're on 80 different key programs. That -- so we're diversified even within the defense budget. And focusing on key programs is really very strategic for us. Yes, there's walk up or transactional-based activity in the defense market, and we certainly participate in that, but these key programs provide us a long-term foundation for business that improves predictability and improves financial performance and stability. And these 80 programs are across a wide range of applications, and I'll show you the slide with a little bit of detail on that in just a minute. One of the areas that's increasing in the budget is really around monitoring and surveillance, and that's all a function of radar. And AESA radar, which stands for actively electronically scanned array (sic) [ active electronically scanned array ], is the new leading-edge technology in radar. And this is -- this technology leverages capabilities that we acquired in the Anaren acquisition. So we're well positioned to participate in a rapidly growing area within the defense budget. And then finally, we're seeing consolidation, not only of suppliers, but of the customers. You've seen big announcements of some of the big primes coming together, whether it's L3 or -- and Harris or Raytheon and Collins, which was UTAS. I mean there's been a lot of consolidation there. And that's creating opportunities for TTM to do more for our customers as they rationalize the business models that they want to go forward with. If you turn to the next slide, you get kind of a snapshot of 2019. Revenue grew by 15%. And even with that strong revenue growth, our backlog grew. Our program backlog increased to $600 million. And at the end of Q1, it was up to $612 million. So it continues to grow. You can see the rapid growth in this section. In 2019, about 18% of this end market was commercial aerospace oriented. Obviously, it's less than that now with COVID and the impact of that. But as I mentioned earlier, our defense market is growing substantially and mitigating a lot of that. And then we've realized our initial revenue synergies as a result of the Anaren transaction, where we are actually winning business as a combined company that neither one of us could win individually. And the latest example was the LTAMDS award that Raytheon won with the Pentagon, which is a replacement program for the Patriot missile system. And we've got a significant piece of the revenue pie on that program, which is going to be a 10-plus year program for the company. If you turn to the next slide, you see a snapshot of the different programs that we participate in and some of the categories that they're involved with. This is just half of the programs, but it just gives you a sense of our diversification and the nice stable programs that we have with nice opportunities going forward. If you turn to Slide 21, I'll cover quickly the commercial end markets. Automotive, 19% of our business on a pro forma basis in 2019, expect to grow 5% to 8% over a 5-year horizon. But obviously, with COVID, that market has been really, really impacted here. In the first half of the year, we expect to be below that growth range, obviously, because of that. One of the key drivers here for us is really the electronic content theme. If you have had been in the market or rented vehicles recently, you know that there's just a lot more features on the cars. And a lot of them are safety related. And as well as the advent of electric vehicles, which are rapidly increasing, these all increase or have increased demands for PCB content. Several weeks back in 2015, when we acquired -- got into the automotive business, there was about $55 per vehicle of PCB content. Last year, that was up to $83 per vehicle, and it's forecasted to continue to grow. Now there's just a great opportunity here, and that's what excited us and got us into this business. In the short term, unit vehicle sales or SAAR will be a challenge. But as we go forward, we'll continue to see the benefit of the electronic content theme. Next up, computing, storage and peripherals, which for us is perhaps a bit of a misnomer, very focused on semiconductor test and burn in boards and high-end data center servers. Think AI applications used by the cloud, big cloud guys and their own internal infrastructure. No longer has laptops or tablets, as we divested that business, expected to grow 1% to 3%, but we expect to be well above that range here this year as we're seeing nice rebounds in semiconductor and in data center servers. Medical, industrial instrumentation, representing 13 -- or excuse me, 17% of our business in 2019. It's projected to grow 3% to 5%. We expect to be in line with that range for the year. Obviously, in the first half of the year, we're seeing strength in medical and ventilators and monitoring equipment. And as the -- as that bubble kind of works its way through the pipeline, we'll see, I think, a restoration to more normal medical growth, which has been pretty consistent over the years. We're also seeing strength in instrumentation, which for us tends to be oriented towards semiconductor capital equipment. We are seeing some softness in the industrial segment, but I think that mirrors the broader industrial economic environment that we see in the U.S. And then finally, network and communications, representing 18% of our sales last year, expected to grow 3% to 5% over a 5-year horizon, but that's definitely back-end loaded and very much driven by 5G. We expect to be below that range this year. As 5G gradually starts to grow, we're pleased. We're seeing green shoots there in Q1 with 5G deployment, particularly in China and somewhat in other Asia countries. And we're expecting that to gradually increase as we go through time. The rest of this year should be better and going into next year. So we're encouraged about this end market, and 5G is really the key for us. And why is that? If you turn to the next slide, people are looking for higher speeds and bandwidth and with lower latency in the system. And 5G can provide that. But what happens with 5G, because of the use of higher frequencies, they -- the signal will not travel as far. So you have a geographic coverage challenge, which will result in increased density of base stations or micro cells. That's significantly different than what we see in the 4G environment. So that's a bigger capital outlay. You also see increased massive MIMO antennas, which will increase RF content, which is a good use of components that we manufacture. So we see a lot of opportunity here, and that's why we're excited about this end market. 5G has been a little slow to get off the ground. We had kind of a false start in 2019, but it looks like we're getting some real traction now and should start to see improvements here on a sequential basis as we go throughout the year. Next slide, we'll get into the second key strategy for us, which is differentiation. If you turn to Slide 24, we focus on 3 different elements of differentiation and the first is technology. End-user demand is driving technical requirements for products. I mean increasing complexity, miniaturization, faster signal speeds, improved performance. All of this is resulting in putting a lot of demand on circuit boards, which if you look in the middle column is ever-increasing circuit density, higher layer counts, which is caused by another vector of density, same with microvias and also material innovations that are oriented or focused on increasing signal speeds. All of this places a lot of new demand on manufacturing technology in order to be able to produce the products that meet these demands. And what we've listed on the right side, in the right column, is some of the technologies, the newer technologies that have been implemented to try to address some of these demands. Substrate-like PCB, high-density interconnect, which is now pretty well established, but is becoming more broadly adopted. Rigid Flex, RF radar and higher late count on conventional technology. TTM is one of the few companies, if not the only company, that can offer the complete breadth of this technology to our customers. So staying on the technology curve, offering the high-end technology products and the end markets that we serve is a key strategy for us, and this is a way that we differentiate ourselves. On Slide 25, you can see that we've added to that technical capability through the acquisition of Anaren, where we now provide RF design and component capability. If you look at the stack on the left, you can see we have much deeper customer engagement. We are designing products and simulating the performance of those products and then building them. And at the heart of all of them, obviously, is a PCB substrate. Combining Anaren's design, technology with TTM's manufacturing capability really presents a very good competitive position for us. And as I indicated earlier in the LTAMDS example, where we've won some nice business with a lot of potential for new opportunities. On Slide 26, we look at the second differentiator, which is really our focus and the engagement model. In the first arrow, the consumer arrow, the green one there, if you can see the color, is what we've divested of. So we're focusing on longer-lived product cycles but these product cycles require significant engineering upfront engagement to help our customers design solutions that are going to be effective for them in their products. And that engagement model is unique. It's an infrastructure that we put together, but it allows us to get in deeper with our customers and add more value. And then finally, on Slide 27. Our third differentiator is our manufacturing footprint. We can support customers in North America and Asia, particularly China, and so depending on what they need. Do they need prototyping? Do they need other capabilities? Do they need volume capabilities? We can address those needs on either continent. And with a lot of discussion more recently about supply chain resiliency in the light of COVID and other issues, we are well positioned to help customers who need to have supply sources based in North America. The last strategy focuses on disciplined, discipline through operational execution, that's the P&L and cash flow. Discipline in our M&A strategy and discipline in integrating mergers and acquisitions so that we realize the benefits that we envisioned when we did the deal. If you turn to Slide 29, you can see the benefit of these 3 strategies, diversification, differentiating and discipline in our financial results. We've had really good revenue growth over the last several years. 2019 was a dip. It was unique. And all of our commercial end markets were soft for various reasons in 2019. We've seen significant improvement in most of those end markets. Automotive, probably be even 1 exception as we go into 2020. But notwithstanding that, you can see in our operating margins in the middle chart that, yes, they went down, but we were able to maximize our position by managing our costs to minimize the damage, if you will, from softening revenues. If you go on to the next slide, in the middle chart, you see the benefits of our cash flow focus, where despite the challenges in revenue, we delivered strong cash flow from operations in 2019. That's a key focus for us. And as you go to the right-hand chart, you see that as a result of that, we're able to maintain our net debt leverage ratio below 3.0. As I mentioned earlier, that will drop below 2.0 when we receive the proceeds from the sale of the mobility business and repay our debt. On a gross basis, our debt leverage ratio was increasing, but that's only because we've been accumulating the cash that we've been generating in anticipation of repaying our convertible bond, which comes due in December of 2020. Finally, on Slide 31, you see the as-reported for 2019. Just a reminder, again, operating margin on a pro forma basis, though, would improve to 9.1%. And so significantly better than the under -- the businesses that we're maintaining are doing significantly better than would suggest. Our targets for the business are operating margin of 12% to 14% and a return on capital of 16% to 18%. And that's really very doable. We need some revenue -- we need to recover some revenue that we had softness in last year. And can grow at that 4% to 6% rate. But we need about $300 million of incremental revenue. So for a $2 billion today, we need to be around $2.3 billion to be able to get in this range. That's our estimate. So that's very plausible in the next 2 to 3-year time horizon, the economy willing for us to be able to achieve these targets. So then finally on Slide 32. Our focus on differentiation, diversification and discipline has led to significantly improved results and the company is well positioned to handle the short-term storm that we're in called COVID as well as well positioned to enjoy long-term success. So that concludes my formal comments. I think we've got just a minute or 2 for a question, if there are any, Frank?

Great. Thanks so much, Todd. We've got about 30 seconds or so. So I think maybe it's best just to go ahead and wrap things up and move on to the next presentation, but I want to thank you very much for all this insightful commentary, for obviously hitting it right on the money in terms of the timing. That was excellent. So thanks very much.

All right. Thank you.

Bye.