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

Good day and thank you for standing by. Welcome to the TTM Technologies Annual Meeting 2021 Conference Call. [Operator Instructions] I would now like to hand the conference over to our speaker today, Thomas Edman, CEO of TTM Technologies, Inc. Please go ahead, sir.

Thank you. Welcome. Welcome to everyone joining us via webcast for this meeting of the shareholders for TTM Technologies Inc. The Annual Meeting of Stockholders of TTM Technologies, Inc. will please come to order. I am Tom Edman, CEO and President of TTM Technologies, Inc., and I will act as Chairman of this meeting. Dan Weber, our Executive Vice President, General Counsel and Secretary, will act as recording secretary and will report as to the mailing to stockholders of the proxy materials and notice of this meeting. Once we conclude the official business of the meeting, I will provide a short presentation about TTM with the help of Todd Schull, our CFO. And then we will answer written questions that come through the webcast portal. [Operator Instructions] Dan?

Thanks, Tom. An affidavit of mailing of written notice of this meeting prepared by our transfer agent, American Stock Transfer & Trust Company, LLC, states that the notice of Internet availability of proxy material was duly mailed commencing on April 1, 2021 to stockholders of record on March 15, 2021. Only stockholders of record on March 15, 2021 may vote at this meeting. If there are any stockholders on this webcast that wish to vote their shares at this time, please click the link provided on the webcast. Tom?

I now appoint Craig Leibell of American Stock Transfer & Trust Company, LLC, who is attending the meeting via teleconference, as the inspector and teller of election. Mr. Leibell, please canvass the number of shares of TTM common stock represented at this meeting to determine the presence of a quorum. Anyone that wishes to vote their shares at this time should do so by clicking on the link provided on the webcast.

Mr. Chairman, the shares present at this meeting, either in person or by proxy, represent the majority of the outstanding shares of TTM Technologies, Inc. common stock.

Based on the reporter of the inspector and teller of election, I declare that we have a quorum and that the TTM Annual Meeting of Stockholders may proceed. The items of business before stockholders at the meeting today are: the election of John G. Mayer and Rex D. Geveden to serve as class III directors, each to serve for a 3-year term expiring in 2024; to approve on an advisory basis the compensation of our named executive officers; the ratification of KPMG LLP as the independent registered public accounting firm for the fiscal year ending January 3, 2022. The polls with respect to these matters are now open. As a reminder, a stockholder that would like to vote at this time should do so by clicking on the link provided on the webcast. [Voting]

Mr. Chairman, no stockholders have elected to vote their shares at this time.

Thank you, Craig. The polls with respect to the approval of these matters are now closed. I now ask for the report of the inspector and teller of election on all votes of the stockholders of the company.

Mr. Chairman, the inspector of elections report that each of the class III director nominees received the plurality of the shares present in person or represented by the proxy entitled to vote. The advisory vote on the compensation of the named executive Officers was approved by the majority of shares present in person or represented by proxy and entitled to vote. The ratification of the appointment of KPMG LLP as the company's independent registered public accounting firm for the fiscal year ended January 3, 2022 was approved by the majority of shares present in person or represented by proxy and entitled to vote. Tom?

Thank you. I declare that the director nominees have been elected; the compensation of our named executive officers was approved by our shareholders; and the appointment of KPMG LLP has been ratified. The final results of today's vote will be made available on Form 8-K to be filed with the SEC. Prior to adjourning the meeting, I would also like to take this opportunity to thank Mr. Rob Klatell for his years of service as Chairman of the Board for TTM Technologies. Rob has served as our Chairman for 17 years and has successfully managed the Board through significant transitions, as we grew revenues from about $200 million per year to over $2 billion today. Rob's steadfast leadership and mentoring has been a tremendous value to me personally as well as I transitioned into the CEO position 8 years ago. Fortunately for the company, Rob's planned retirement, which is in line with our policy of Board retirement at the age of 75 years, has allowed us to position Rex Geveden, CEO of BWXT and Chair of our Compensation Committee, as our next Chairman of the Board. I welcome Rex to this position and look forward to working with him as our next Chairman of the Board. As there is no further business to come before the meeting, I will now adjourn the meeting. So we will now proceed to the TTM company overview presentation. If you would like to follow along with the slides, you can access them on the TTM website on the link provided on the right side of your screen. And I will call out slide numbers as we proceed. And again, Todd Schull will help me here as we get to the financial piece of the presentation. So let me start out on Slide 3 in the presentation by speaking a little bit to our organization. There have not been major changes here in the last year. We have Doug Soder as President of our commercial sector; Cathy Gridley is President of our aerospace and defense and specialty business unit; chief Operating Officer is Phil Titterton; Asia Pacific business development, Canice Chung; our Chief Financial Officer, Todd Schull; Senior Vice President of HR, Shawn Powers; General Counsel, Dan Weber; Senior Vice President of Information Technology, Dale Knecht. That constitutes our executive team. We did -- unfortunately as we closed our EMS facilities, Tony Princiotta, who was running our EM Solutions business, has recently left the organization. But that constitutes the executive team. It's a tremendous team that I have the privilege to work with. If you move to Slide 4, here we show our Board members, and again no significant changes here. As I mentioned, Rob Klatell will be retiring from the Board, but the rest of our Board members doing a terrific job in support of TTM. So thank you to all of our Board members. And just to name them, we have Kent Alder; Julie England; Phil Franklin; Rex Geveden; Rob Klatell as I mentioned; Chantel Lenard; John Mayer; and Dov Zakheim. So thank you again for your service. Moving to Slide 5, let me just give a quick background on TTM with a focus on last year. You can see shown here our pro forma revenues fiscal year '20 at slightly over $2 billion, our profitability at $270 million pro forma adjusted EBITDA. And then a listing of the diverse end markets that we service on the right-hand side, and I'll speak more about those later. If you go to Slide 6, our strategic focus as a company has remained consistent. We are diversified in terms of the end markets that we service, with a near-term focus on aerospace and defense. We are differentiated in terms of our technology breadth, our global footprint, and our capability in terms of early engagement with our customers with our very strong field application engineering team. And then we are disciplined in terms of operational execution, our focus on cash flow generation, the discipline that we practice as we integrate new acquisitions into the company. And that's really how we've built the company. If you look at on Slide 7, some of the highlights from 2020. Really solid P&L performance despite the COVID-19 impact. We actually -- and again as you look year-to-year, if you pull out the sale of our mobility business and the EMS facilities that we did shut down at the end of the year, we grew year-on-year about 2.7% in revenue despite those significant challenges of COVID-19. Really, that's due to the efforts of our employees at TTM. I can't say enough, both in Asia and in North America, in regards to how our employees remain focused on our customers, on keeping operations going despite those challenges. During the course of the year, we did sell our mobility business unit. That allowed the company to remove a very seasonal and highly capital-intense portion of our business, allowed us to improve TTM's operating margins and also the consistency of revenues quarter-on-quarter. And it enabled us to repay $400 million of our term loan B, put us in a very strong balance sheet position as well. In addition, we determined in April that we were going to shut down 2 of our EMS facilities, one in Shenzhen and one in Shanghai. We moved the third facility into our PCB business, into PCB operations. The reasons for doing that is really these businesses were impacted by the tariffs that had been put in place between China and the U.S. We were subscale in terms of commercial assembly capability as well. And so in a longer-term effort to improve operating margins, it just made sense that we shut those facilities down, and that really despite the tremendous efforts of our employees in those facilities. So at the end of December, we did complete the shutdown of both facilities. I talked about our strength in balance sheet. The lowered net debt to last 12 months EBITDA to 1.4x, we're in a terrific position there. That allowed us early this year to announce a $100 million stock repurchase program. We were also early this year able to restructure our high-yield bonds and moved our interest rate from 5.6% down to [ 4.4% ] there. So some really good work on our balance sheet, positions our company well for growth going forward; and in the right markets that as I mentioned, are very diverse. Let's go to the next slide. I talked about the history of TTM built on acquisitions. You can see that reflected here. And that has really been the core strategic effort in TTM as we moved into a diverse set of markets, broad technology capability, and then building on top of the circuit board, starting with the Anaren acquisition adding that RF capability to our portfolio, allowing us to really move to a design specification capability on our aerospace and defense business. So tremendous move there as well, and then the divestitures that I spoke of last year. If you move to the next slide, 9, really what this is about is reducing our exposure to consumer and commodity areas and investing in engineering and technology capability that allows us to truly deliver high-valued products to our customer, so that we can take that ability we have to engage with our customers early in product life and move ever earlier now into really the design phase in partnership with our customers, allows us to then support those customers through the life of critical programs. So you'll see us continue on this path as we go forward. Slide 10 shows you the markets that we're involved in. I'm going to focus a bit on the growth that's projected. These are market forecaster growth figures and then our 2021 view as we look forward. Starting with aerospace and defense, which is the most significant part of our business, we are looking at a longer-term forecasted growth rate of 2% to 4%. As a company, we've been growing for several years in the low double-digit, high single-digit area in aerospace and defense. We do expect in 2021 with the commercial aerospace challenges that we'll be in line with the growth projections this year: strong defense but year-on-year subdued commercial aerospace. And that's the mix going on there. If you move down to automotive, 3% to 6% long-term growth rate. We'll be significantly above that area this year with the year-on-year growth rates, particularly in the first year -- first half of the year helping to drive that growth. Significant demand in automotive has continued in the first quarter and expected to continue in the second quarter as well. Data center computing, and I'll highlight the fact that we did change this end market name. We used to call it broadly computing. But really for us, about 70% of this category is data center. The balance is primarily semiconductor. We benefited from growth in both areas, and we expect to be above the 1% to 3% projected here. Medical industrial instrumentation, very broad area for us last year, and again a tribute to our employees. We were responding to the emergency needs of our customers around patient monitoring systems and ventilators. That drove tremendous demand in the second quarter and third quarter of last year. And our employees just bent over backwards to get that production out, tremendous job there. This year what we're seeing is really we're coming back to the broad-based growth that we've seen in this area. Year-on-year, that's going to be -- it means that we won't grow, at least in the second quarter and third quarter. But what we're seeing now is sustained demand across MII, as we call it, which really bodes well for the future and very encouraging. And then networking communications, again projected to grow about 5% to 8%. This is a market, about 1/3 of this end market for us is in telecom. The balance is in networking. Networking demand has held up well. Telecom primarily has been benefiting from spend in China. This year we're now seeing spend outside of China, which is the good news. And we're expecting China spend to start coming back towards the second half of the year. But we do expect because of the year-on-year compare on the China side, that we'll probably be below the 5% to 8% growth area, but still looking to grow overall in networking comm through the course of the year. So that's a quick look at the end markets for us. Again, I'd just highlight a great set of diverse end markets for TTM. If you go to Slide 11, another key factor of our differentiation is our global footprint. On the commercial side of our business, we do a lot of our new product introduction prototyping support for customers in North America. And then we transition business to our China facilities for volume production. For aerospace and defense, we support our customers entirely within our North America footprint. A great set of capabilities here and [ charters ] for each one of our manufacturing locations. And then another feature that I highlighted on Slide 12 shows you the broad technology capabilities of TTM. I won't go through each of these areas, except to point out that this is very broad. It's a capability that extends from conventional boards through advanced boards. I wouldn't get too hung up on those definitions, because the work that we do in conventional is really high-end work in conventional as well as the work that we do in what is classified as the advanced technology, print and circuit board area. And then I'm going to turn this over to Todd Schull. But again hopefully, you've got a picture now of how we've developed as a company, our 2020 performance, as well as the diversified company portfolio that we have today. And it really gives us a differentiation in our marketplace. Over to you, Todd, to talk through the financials.

Thank you, Tom. If you're following along on the slide deck, Slide 13 presents our financial performance for the last several years. You'll note the big change here is in revenue, where you see a big decline in 2020. That decline is really a reflection of the sale of our mobility business and the closure of the 2 assembly plants that Tom referenced at the beginning of his comments. If you discount for that or remove that to try to normalize 2019 to 2020, we actually grew 2.7% in 2020 with that normalization. And that's in the face of a very challenging economic environment with COVID and its impact on the global economy. If you move to the center of the slide, you'll notice that change in our business model, removing those 2 businesses, was very constructive to our operating margins. And we see an uptick, again despite the challenges that we faced in 2020 as a result of COVID. So a good upturn and an improvement in the financial model of the business and stability on the EPS, notwithstanding again the sale of those 2 businesses or sale and closure. If you go to the next slide, Slide 14, you'll see how we're doing on cash flow generation, which is a very important metric for the company. We've been very consistent. Obviously, the dollars can fluctuate with revenue. But if you look at the center, you can see the percentage, cash flow as a percentage of revenue, which has been very good. We target 10% to 12%. So we were above that in 2020 as we collected some of the outstanding receivables from the sale of the mobility business. But generally speaking, we have very solid performance there. And that really results in the good news in the chart on the graph on the right, where we not only used the proceeds from the sale of the mobility business but the cash flow generation of our own business to pay down our debt. And we had 2 significant paydowns. We paid down over $400 million of our term loan B. And then additionally in December, we paid off the convertible bond principal amount of $250 million. So that really positions us very strongly with a leverage ratio of only 1.4x. Our target range is kind of between 1.5 and 2x. So we're actually below our target leverage range, and that's a function of the cash generation capability of the business. If we go to the next slide, you see some of our 2020 performance, which I kind of highlighted some of the metrics already. But you see where we're going and where we're targeting our business to be. Growing our revenue organically in those mid-single digits; driving our operating margins up into the 12% to 14% range, which will then generate some strong EBITDA margins; and keeping our cash flow consistent in that 10% to 12% range, and getting our return on invested capital in that 12% to 14% range. To get to this target, we need some revenue growth. And we believe we can do that. And we see these as very realistic when we get asked questions about this. We're talking kind of in that 3-year plus/minus kind of range to get into this target. So if you go to our next slide, on the basis or the foundation of strong balance sheet and strong, consistent financial performance and cash flow generation, we have revisited our capital allocation strategy. And we said, okay, we've now paid down our debt and gotten our balance sheet in a good healthy position. Where do we go from here? Key for us is always investing in differentiation. That's what sets us apart. That's the key to us staying successful as we go in the future. And so that's investing in new product technology and development as well as strategic acquisitions to add to our portfolio. But we've concluded that based on our more consistent performance now that we can also implement, and we did implement, a stock buyback program. So these are things that we can do together in balance to help the company and to help our shareholders improve their returns. So we announced the $100 million buyback in February. And we'll be hopefully be able to execute on that as we go over the next 2 years, which is the life of the program. So in conclusion as we look going forward, we're going to continue to focus on those markets that Tom highlighted. We feel that they have good growth characteristics and good mega trends that support or underlie the growth and sustained growth opportunities in those end markets. We're going to continue to invest in differentiation, whether that's fine-tuning our manufacturing footprint, adding technical capabilities in our RF and advanced technology space and additional A&D engineered products. And then we'll continue to maintain a focus on our balance sheet, making sure that we're executing, managing our working capital, and delivering strong operating cash flows. So that concludes our formal remarks. We certainly invite any written questions if you have any. And we'll go to that point. Tom, I'll turn it back to you.

Thank you, Todd. Dan Weber, General Counsel, will be helping here as we take your questions. If you have any, please send them in. We'll give you a few moments here to send any questions that you might have. Dan, I don't see any questions coming in. Do you?

I do not. Thank you, Tom and Todd, for that presentation. And having no questions from shareholders, that concludes our meeting. Thank you for participating.

Thank you very much. And thank you for your support.