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

Okay. Great. Thanks, everyone. We're going to move on to our next slide presentation. Very excited to have TTM Technologies here. As a reminder, I'm Frank Jarman, a high-yield technology analyst. From TTM, I'm very pleased to introduce Sameer Desai, who is Vice President of Corporate Development and Investor Relations; and Lynn Wang, who is Vice President and Treasurer for the company. So Lynn and Sameer, thank you both very much for joining us. They're going to run through some slides, and we should have a little bit of Q&A at the end. So thank you both. The floor is yours.

All right. Thanks a lot, Frank. I appreciate the introduction and having us here at the conference. I'm going to go through some slides first, and then Lynn will talk about the financials. The slides are available on the Goldman Sachs website as well as our website as well. So I will shout out the slide numbers in order for people to follow along. Slide 2 is the normal legal disclaimers that we have. And I'll start with really Slide 3 on the presentation. This is just a snapshot of the company. Printed circuit boards are a key part of electronic systems. We're the largest printed circuit board company in the United States as well as the top 5 globally. We have 24 facilities roughly split between the U.S. and China, about $2 billion in revenues, $270 million in EBITDA. And we touch on a variety of end markets here. You could see some of the customer names and markets here between semiconductors like NVIDIA, automotive, Tier 1 suppliers like Bosch, defense contractors like Raytheon. It's just a snapshot of some of our customers. Moving on to Slide 4. I really want to highlight the strategic focus of the company. We feel good about our end markets. We have a nice mix of diverse end markets. And we've always had financial discipline when it comes to cash flow generation and improving our margins. We're really focused on differentiation and trying to increase how we differentiate our products versus our competition, both organically and inorganically. And I'll touch on that kind of through the presentation. Moving to Slide 5. These are some highlights from last year. Obviously, everyone was impacted by COVID in some way. All our manufacturing plants remain operative during the entire year. So we had pretty good performance in 2020 despite the impact. And we had actually some stronger performance in certain market areas that were benefited by the COVID pandemic. We made some strategic changes last year, which were very positive for the company. First, we sold our mobility business unit, which had a large U.S.-based cell phone manufacturer there that we were supplying. It was very seasonal, very cyclical. It had lower margins than the rest of the business. And by selling it, we will improve our margins as well as repay a term loan, $400 million of a term loan we had outstanding. So that was all very positive for the company. And then we also closed 2 of E-MS plants. E-MS is a lower-margin manufacturing business. It was subscale. It was brought to us through an acquisition, and it started to lose money as well. So we closed those plants last year. We had solid cash flow last year, almost $300 million. And we were able to lower our leverage down to 1.4. And this was a target to get below 2, and we reached that target last year. And we also repaid our convertible bond with cash and didn't require any dilution. So that was a positive. In the first part of the year, we've also had some positive impacts. We announced the stock purchase plan of about $100 million. And we also refinanced our senior notes at a much better rate at 4% versus the existing 5.625% that was previously. Again, moving to Slide 6. This is kind of just fills in the strategic focus. As you can see in the early part of the history on the left side, we were really building the company up in terms of getting scale and getting into different end markets. These acquisitions helped us get into different end markets. And now we're really focused on differentiation and really focused on acquiring companies that have differentiated assets and kind of selling off our assets that maybe are not as differentiated and lower margins. And Slide 7 really kind of highlights that. This is really the focus of the company, reducing any of the consumer businesses or commodity or lower-margin businesses and really investing both organically and inorganically in kind of the higher value-added engineering capabilities. Anaren was a perfect example of an acquisition we did. That was our first foray outside of printed circuit boards, and the margins of that business were almost double what we had in PCBs. And that's really kind of the future and the ongoing focus of the company. I'll shift gears a little bit, talk a little bit about differentiation. So I'm going to move to Slide 9 and then go through some of the end markets. So aerospace and defense is our largest end market. It's just under 40% of the company's revenues. And this is pro forma, so removing the mobility and the E-MS plants we closed. And the third-party research firms are really seeing this market grow at about 2% to 4%. This year, we expect to be in line with that. And part of that market is defense and part is commercial aerospace. So the defense market is actually growing faster, while the commercial aerospace is seeing year-on-year declines, not unlike many of their customers there. Move on to Slide 10 to give some more details on the aerospace and defense megatrends, starting from the left side of the slide. Defense budgets are looking to be stable at a high level. There was some concern with the new administration there would be cuts to defense. So far we're not seeing that. The new administration announced that they'll be looking for a bit of an increase over the fiscal year 2022 budget. And hopefully, Congress will agree to that, and we should see kind of the details of that coming out over the next few weeks. But at this point, we see stability in defense budgets and broad bipartisan support there. We tend to focus actually more on the programs than the budgets. We can't control the budgets, but we can control the programs. And we're on about 80 defense programs. So there's a broad set of programs are on, which kind of reduces the volatility and shows more stability on a quarter-to-quarter and on an annual basis. One of the key areas that we're really focused on and our business is focused on is AESA radar, and that stands for active scanned array, active electronically scanned array. And it's really a solid-state radar. So when you think of radar, you think of a mechanical dish moving around. What this business really, rather than moving, it uses waves to move the signal around. So there are no moving parts. And that's where all new radar systems are being deployed in the military right now is this type of radar system. And the last part is, there's been a lot of talk about onshoring. As I mentioned, we're the largest PCB maker in the United States. And as a result, we get a lot of interest now because of this onshoring trend. And the new administration has also been very positive in trying to increase domestic suppliers. So this is clearly a benefit for us in the aerospace and defense segment. And again, going to Slide 11, just gives you some more financial details and metrics of the business. Last year, defense grew 7%. That's a really good number, because as I mentioned, commercial aerospace had been weaker for most of the year last year, except for Q1. So that really shows the defense business, which is actually growing stronger than that at 7% number. Backlog, which is a sign of our visibility here for aerospace and defense, we ended last year at $687. In Q1, we're actually at $694 right now. So we're still seeing strength in kind of this end market as we kind of start the new year. And again, that's really on the defense side. Commercial aerospace is down a lot year-on-year, about 30% to 40%. That's in line with a lot of our customers there. If I look at the kind of the end market mix, as I mentioned, defense is a large part of the business. I think in Q1, it was a little bit higher than that. And commercial aero was around 16%. And you can see from the bar chart all the way to the right, we've really grown this business. I mean it was only a $300 million to $400 million business 5 or 6 years ago, and it's pushing $800 million, getting over in that ballpark. So we've really done very well here, and we consider one of our strongest areas and a key part of TTM. Moving to Slide 12. This shows you examples of a lot of the programs that we're on. A number of these are the big key programs. The left side, you see a lot of microwave systems. That's a big part of our business. The LRDR; the LTAMDS, which is a refresh of the Patriot defense system; AMDR; F-35, I mean, these are all marquee programs that we're on, and these programs last for a long time. I mean these are 10- to 20-year programs. So we have great visibility in this business. Moving on, Slide 13, I'm going to talk about a few other end markets. First, automotive, last year, it was around 13% revenues. So it was down a lot last year because of COVID. We've seen a very strong increase this year, starting even later last year. So we see that market growing well above that 3% to 6%. That really is the rebound in the market in addition to some of the secular trends. Data center computing, that's been very strong for us this year. Last year, it was around 13% of revenues. In Q1, it grew 24% year-on-year. So we're going to attract well above the 1% to 3% here. And that's really just the data center CapEx expansion going on there for cloud computing. MI&I is basically medical and industrial instrumentation. That business has been a little bit volatile. We saw a great growth last year because of COVID-related ventilator demand. That has now tailed off. And so on a year-on-year basis, we're down because of that surge last year. So we don't think we'll make that 2% to 4%. But on a sequential basis, we're seeing an improvement on elective surgery-based devices. So we're seeing an improvement there on medical as well as industrial as the economy improves. And the last segment is networking and communications. The customers here on the networking side like Cisco and Juniper. And on the communications side, it's Ericsson Telecom, Huawei. There we're going to see growth on the networking side, but the telecom side is actually a bit weaker in the first part of this year. And that's largely because of Huawei. We're still waiting for the Phase 3 of the 5G spending to occur. They did a chunk of it last year in the first half, and now we're seeing a lull before that next wave starts. So we're going to be below that 5% to 8% as a result. But on a secular basis, if we move to Slide 14, you could see what 5G does. It's a different network architecture. There are very large base stations called massive MIMO. These have double the RF content, so very intensive RF components, which our Anaren products will benefit from. And in addition, because the frequency ends up being higher, it doesn't go as far. So you need these small cells to densify the network in order to carry the signal even further. So that results in a larger, more complex network, and that will drive more PCB and RF content, which would benefit us longer term. I'm going to move on to differentiation next. That's Slide 16. So we start at the left. This is just kind of a summary of the trends driving our business and our markets. A lot of it is very similar to semiconductors. I mean we're selling the bare boards. You're seeing the picture down at the left is a board that's especially popular. So we're selling the bare boards, and the semiconductors go on top of it. But as you get more complex semiconductors, smaller sizes, faster speeds, better battery life and performance, it forces demands on the PCB industry in that middle column. So we need to produce boards with more circuit density, higher -- there's more layers in the circuit board. There are smaller holes. We need material innovations. And then that drives more CapEx and allows us to create differentiating products. As mentioned here, we see these advanced technologies as HDI, rigid flex radar for RF use in automotive or substrate-like PCBs, which are even a finer line with smaller than HDI. So this is the next level of technology. I'm going to move to Slide 17 next, which goes into more detail some of these technologies. So if you look from left to right, around 70% of our business is considered conventional. So this may be smaller layer count boards for automotive that are highly reliable, 3 or 4 layers, 1 to 2 layers. It could be RF technology that's used in aerospace and defense or high layer count boards in networking and data center. That's how we view kind of the conventional technology. On the right is the advanced technology. And that's what I mentioned before HDI, which is you made with laser drills; rigid flex boards, which is a combination of a rigid and flex board; and then some of these RF subassemblies that really came through the Anaren acquisition. And so we're really trying to push on the right side. That's where we're trying to increase, and we've seen increasing trends over the years doing that. So that's a key strategic focus of the company. Moving to Slide 18. Another differentiation is our ability to engage early in the process. So this isn't -- PCBs and these components aren't necessarily just off the shelf. I mean you need to have a board that's built to the end system. So we engage in the prototyping and R&D phase with our customers, you can see on the left side. And you see that fast line, though, on the consumer, consumer markets change quickly. So you need to have new models every year. If you look at kind of automotive and aerospace and defense, you can see the long cycles, and that's really what we're trying to do from a market perspective. It's really getting to these long-cycle programs, so we don't have to kind of every year come back to market and have a new model and then risk the consumer reception there. And then the last slide on the differentiation before I turn it over to Lynn is on the manufacturing. Our manufacturing facilities, on Slide 19, we have roughly 24 facilities. Half or more than half are in the United States, and the rest are in Asia. And we see this as a differentiator, because as I mentioned, we're the largest supplier in the U.S. So we will definitely benefit from any onshoring trends. But if people want a lower-cost solution or customers who want a lower-cost solution, the -- we can offer them that as well. So maybe the little prototype in the U.S. and they want to go to volume in Asia. And so we offer both those solutions. And nobody else -- no other real large-scale player can really do this. Almost all the manufacturing right now is in China or Japan or Korea. So really nobody can offer this type of solution other than TTM. And with that, I'm going to turn it over to Lynn to talk about financial discipline. Lynn?

Thank you, Sameer. So starting on Slide 21. Our financial results demonstrated good performance despite all the headwinds with the COVID-related inefficiencies, commodity prices and foreign exchange. 2020 was a growth year for TTM. We finished with $2.1 billion in revenue. This revenue is a dramatic decrease from 2019, and that's because it reflects the sale of the Mobility business. We sold that business in April of 2020. The sales allow us to remove some of the seasonalities in our business structure that was directly tied to the consumer market. That business was also capital-intensive and with a high customer concentration. In terms of execution, our company took a lot of steps to protect our employees and to make sure that they have a safe environment to continue to manufacture our products and to deliver them to our customers. I talked about the headwinds and -- earlier. So despite of that, we delivered an operating margins of 8.6%, up from the prior year, but relatively consistent on a pro forma basis. From an EPS standpoint, we were down nominally year-over-year. Moving to Slide 22. Cash flow from ops were solid at $287 million or about 13.6% of revenue. Typically, we're driving for a 10% to 12% range, which is a very strong cash flow from operations number. The cash flow that we generated from the business as well as the proceeds from the sale of our Mobility business allow us to drive down our leverage. In 2020, we repaid about $650 million in borrowings. As a result, we finished the year at 3.1 leverage on a gross basis and 1.4x leverage on a net basis, with about $450 million of cash on hand. In Q1, the cash equivalent was about $540 million, and we did go out in the market to raise debt by $100 million of the 4% coupon due in 2029. The proceeds from that was used to repay our prior high-yield bond deals as well as to add some cash to the balance sheet. Moving to Slide 23. Our performance in 2020 on a pro forma basis for that Mobility sales and the restructuring of the 2 plants in E-MS units that Sameer had already mentioned. Our targets for 2021, we're looking to grow the business 4% to 6% organically. And from a margin standpoint, our goal is to achieve 12% to 14% range. Part of it is driven by the transformation of our business this past year. And the other part is to grow our business organically. On Slide 24, you'll see that the improvements in our business model over the last couple of years has allowed us to revisit our capital allocation strategy. We are in a position to invest in differentiation through new products and technology development and potentially strategic acquisitions to strengthen our product portfolio. We talked about the debt repayment. We said that -- we have said that we'd like to manage our net leverage to be below 2x, and we've done that. But for the right acquisition, we're not afraid of leveling up as we did for our ViaSystems in 2015 or for Anaren in 2018. The priority will be to repay the debt as quickly as we can. We recently announced a $100 million share buyback program. This program is over 2-year period, and we do believe that is something we can do in conjunction with our efforts. So moving to Slide 25, TTM going forward. We continue to focus on markets that have favorable trends that we can grow with. Our investment focus remains on how we differentiate our business and to add more value to our customers. And lastly, I wanted to highlight that we have a very strong balance sheet. We're in a good position and have a lot of flexibilities. But we do focus on discipline, and in terms of operational execution, satisfying our customers and delivering good financial results. And so that concludes our formal presentation. Frank, do you want to -- let's open it up for Q&A.

Great. Yes. Thank you so much, Lynn and Sameer. Maybe just to kick things off, so you guys obviously did a lot in terms of improving the balance sheet over the past year. You're below your 2x net debt-to-EBITDA target today. Now as you think about the transformation of the business, both from an M&A perspective as well as also just additional shareholder value creation like the share buyback, how do you think about the balance sheet? And how do you think about balancing essentially your credit metrics with what you want to do from a strategic standpoint long term?

So Frank, as I mentioned, we typically like to operate in about that just below 2x leverage on a net basis, and that's where we would continue to. If we have good open dialogues with the rating agencies, from a credit standpoint -- credit rating standpoint, becoming IG is not our goal, if you will. We still want to continue to satisfy our customers. And now with the amount of cash that is generated from operations, we do feel that we can use that little bit of the cash for stock buybacks to kind of begin to assist our equity -- to bring value to our equity investors, if you will.

Yes, this is Sameer. I would just -- I would also add that we're obviously focused on M&A. I mean, the company has been an acquisitive company over the years. So M&A is clearly a big focus for us and will remain to be that way. So that would -- I would say that would be the priority. And then we can fill in on around the edges then on the buyback and other activities. But our debt and our leverage is in a really good position right now. So if we need to lever up to do a transition, we have done that in the past, and we can do that in the future as well. I just wanted to clarify one point on the presentation if it wasn't clear. The financial targets we have aren't annual. They're multiyear in the future. So we don't give annual financial targets. We give target for the quarter. And then we have targets for multiple years out. So I just want to make sure that was clear.

Great. And maybe just as a follow-up there, Sameer, as you think strategically about the business mix and whether it's aerospace defense or RF or some other markets, how do you think about driving the strategic transformation of the business mix as a whole? What markets or verticals are you specifically focused on as you think about that long-term M&A strategy?

Yes. Yes, that's a good question. So as I mentioned before, we feel really good from a market standpoint. We have a great mix of markets. So we're very happy about that. I don't know if we'd want to get that much higher to be like 70% aerospace, I'm not sure, right, because then that would really tie us to one market. So we feel good about the mix of markets. I would say the real focus is products. And 90% of the business is still printed circuit boards. We would -- if we could do 3 more Anarens, we would, right? I mean that's kind of like something that uses PCB technology, but then it's much more advanced, has much more IPs, more design-centric, more engineering. That's really the focus of the company. And I think that -- and I think if we do that, we'd bring a lot more value to our customers as well as it would be great for just the business from a profitability standpoint, too, to add more engineering and IP-based products.

Great. Maybe if I could just fit one more in here. A question from the audience was just around how to think about managing your input cost inflation. And I think in the past, you've talked about some supplier diversification efforts and also some adjustments with regards to quotation. But just curious, in a world where, certainly, we're seeing a lot of cost in various markets increase, how are you guys thinking about managing that? And how are you thinking about broader supply chain stress overall?

Sure. Do you want to do, Lynn, you can get that.

Why don't I start? Let me start with the commodity price inflation. We did talk about that in our recent earnings call. The copper-clad laminates or the CCLs are the main raw materials used to make the printed circuit boards or the bare board sets Sameer had talked about as well as a composite of epoxy resins and glass cloth. The epoxy, as you are aware, is somewhat tied to the U.S. oil price, but we're also seeing glass prices going up. But the major pieces of the component is the copper prices, right? So the copper prices have moved substantially this past year, and that would result in a higher price of the CCLs. But there is a lag effect to when it affects our P&L. For one, the CCL suppliers don't immediately raise prices, and there is an older inventory that we are shipping. So the current copper prices won't really affect our P&L until about Q3 or Q4. And there is a road map that we're working toward. Our suppliers are amenable to taking on some of the costs, only because we're not being greedy. I think if you throw up the chart of the LME charts for copper, you'll see that. And then the second part is in supplies, right? And so since we have this visibility in increasing costs, we also have some time to put in mitigating effects such as supplier diversification, production efficiencies and really adjusting mix in order to pass those prices -- price increases. So our goal is to completely mitigate those higher commodity costs. Sameer?

Yes. I didn't have anything to add. I would just say that so far, we had a good quarter. When we reported, it was kind of in line and guidance was in line. So, so far, we haven't had that much of an impact on the P&L, our competitors have. A number of our competitors in Taiwan reported last week, and they saw pretty negative impacts in the first quarter, right? So I think we're doing a pretty good job. It's just that we've got to continue it in the rest of the year.

Great. Makes sense. Well, with that, we are out of time, but I do want to thank you very much, Sameer and Lynn, for joining us today. And thanks to TTM and thanks to everybody for dialing in. Hope you all have a great day. And we'll move on to the next presentation.

Great. Thank you, everyone.

Bye.