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

Ladies and gentlemen, good afternoon, and thank you for joining the UBS Industrials and Transportation Conference, and for tuning into this presentation for TTM Technologies. My name is Keats Sexton, and I'm an Executive Director in the UBS Global Industries Group, and I help lead our aerospace and defense coverage. I have the pleasure today of introducing and moderating this session with TTM Technologies. With me today from the company, I have Tom Edman, President and Chief Executive Officer; and Todd Schull, Chief Financial Officer. And just a quick logistical note, the company will present their slides, and we'll save some time at the end for questions, which you can submit real time on your screen, and I said we'll address towards the end of the presentation. So with that, I'll turn it over to Tom to kick off the presentation. Tom, go ahead.

Thank you, Keats. Welcome, everyone. I'm going to give you a brief presentation overview on TTM Technologies and focus really on our strategic areas of differentiation, and Todd will then cover our financials. So turning to the presentation. If you go to Slide 3, you'll see a nice overview of TTM Technologies. We are a leading printed circuit board, specialty components and technology solutions provider. Our overall revenue is about $2 billion, profitability about $270 million in terms of EBITDA (sic) [ adjusted EBITDA ]. We serve a nice set of diverse end markets that are listed here ranging from data center to aerospace and defense and then to automotive, a great diverse set of end markets, and I'll go through these in more detail later. Turning to Slide 4. Really want to focus on 3 areas of strategic differentiation or focus for TTM. The first is in terms of our diversification, we are diverse in the end markets that we serve. We do have -- the strongest presence for the company is in aerospace and defense, if you look at the percentage of revenue, but been a really nice set of other commercial markets that we service. In terms of differentiation, we're differentiated in terms of our technology breadth, our global footprint capabilities with high mix, low volume capabilities in North America, coupled with volume solutions in Asia Pacific, and then our ability to engage early as a result with our customer base. And finally, we are very disciplined in terms of how we practice and focus on our operational execution and cash flow generation and also how we practice our development as a company related to acquisitions. Now let me move to Slide 5 and just touch on some of the highlights from 2020. If you look at 2020, really, obviously, a very unique year for everyone and a very challenging year in many ways. I'm just very proud of how the TTM family overcame the challenges. From a P&L performance, we actually delivered. If you look at our core businesses, the businesses that we have exiting the last year, we actually grew at about 3% organically. In terms of revenue, we also grew our EPS by $0.09 up to $1.10 per share. So very strong P&L performance in the face of a number of challenges with COVID. During the early part of last year, we sold our Mobility business unit. That allowed us to remove a consumer-oriented piece of our business that tended to be very seasonal, also highly concentrated in terms of customer base, and allows now for more predictable operating performance, allows for more predictable return on invested capital and, frankly, for planning for the company as we go forward really with the right set of end markets. We also shut down 2 of our E-M Solutions business plants. These were lower-margin assembly plants in China. And by closing those facilities, long term, we'll be looking to improve our operating margins as a result. And finally, we strengthened our balance sheet, cash flow -- strong cash flow from operations. Obviously, the sale of the Mobility business allowed us to pay down a significant portion of our debt. So we exited the year with a net debt-to-EBITDA ratio of 1.4x. And early this year, actually, we're able to launch a $100 million stock repurchase program as well as refinancing our high-yield bonds, moving the interest rate from about 5.5% down to 4%. So we're positioned with a very strong balance sheet as a result going forward at the end of the year. If you look at the next slide, Slide 6, you can see how we've built the company over the years. And strategically, TTM is a result really of acquisitions, each one of which has delivered to us capabilities that TTM was looking for. Just a few examples. If you look at 2006, we acquired the Tyco Printed Circuit Board Group. That brought us our aerospace and defense business. We supplemented that then in 2010 with the acquisition of Meadville, which really brought our commercial Asia plants into focus and gave us some Asia volume capability. ViaSystems delivered the automotive business end market to TTM as well as strengthening our aerospace and defense position. And then Anaren allowed us to move above the printed circuit board into RF components, simulation capability and integration for our customers in aerospace and defense and really enhanced our ability to engage early in the design and specification stage with our customers. So each one of these acquisitions has served a very strong purpose for TTM. If we move to the next slide, you can see the result. We have, as a company, been reducing our exposure to consumer and commodity businesses and then building a portfolio that allows us to be a high-valued partner for our customers, delivering more differentiated engineering-based solutions. We'll continue on this path going forward as a company. If you go to the next slide, I'm going to talk a little bit about each one of the areas that I highlighted in terms of our core focus. First, I'll start with diversification, with a focus on the end markets that we're involved in. Of course, aerospace and defense is our largest end market, about 37% of sales in 2020, forecasted to grow at about 2% to 4% long term. This is a third-party forecaster called Prismark, it's really the basis for these numbers, but about 2% to 4% growth rate forecast. We expect in 2021 to be in line. That's after several years of growth that has been in the low double-digit, high single-digit range. In fact, if you looked at last year, we grew at about 7% last year in aerospace and defense. So in line. The reason for that is commercial aerospace weakness, more than anything else, coupled with a solid defense market. So going to the next slide, let me talk a little bit about defense mega trends on Slide 10. First of all, we're starting with a nice climate in terms of defense budgets. Stable budgets, we've had a change of administrations, but we're really looking at bipartisan support for defense. Certainly some tweaking around the edges on the budgets but really a core focus that hasn't changed much. We are involved in a very nice spread of programs, about 80 critical DoD programs, so a nice breadth of programs. And then if you look at particular depths of involvement, you move into the next category here, the AESA radar, active electronically scanned array. Really, these are the active radars that are being installed now across platforms by the Department of Defense, and we provide critical RF modules into these radar systems. So that's an area where we are particularly involved in terms of depths of program involvement. And then finally, we're looking at consolidation here with our customer base. That's changed our level of engagement. We also have grown accordingly as we've integrated ViaSystems completely now into our defense position, coupled with the addition of Anaren, to give that real RF expertise. Let me move to the next slide, a little bit of more detail on aerospace and defense for TTM. If you look at the last year, as I mentioned, we grew about 7%. Our program backlog at the end of the year was about $687 million. At the end of the first quarter, we had improved that to $694 million. So continuing to move up in terms of backlog that will then be delivered over the next several years, generally 1 to 2 years for the bulk of the backlog. As I mentioned, defense growth offsetting aero. Aero down to about 16% at the end of -- or for the full fiscal year 2020. I expect it to be even lower for the full year 2021 as we go through the course of the year. And then RF programs, in particular, growing for TTM in terms of content. You can see a nice revenue development for TTM, inclusive of the Anaren acquisition, defense becoming an ever more important part of what we do and a differentiated piece of our business. Moving to Slide 12. We highlight here some of the core programs that we're involved in, in defense. I'll just highlight a few. If you look on the left side, so microwave systems. RF and microwave systems are very involved here, F-35 program being one core program for us. Another one I'll highlight is AMDR. And then if you skip down to SABR, that piece, so the radar piece of the F-16, very important to us. Land-based radar systems such as LRDR, again, very good content there. And then down at the bottom, the low-tier air missile defense system, or LTAMDS, a relatively recent program for an upgrade to the Patriot missile defense system. This is another program going forward that will have a high level of TTM content, particularly on the RF side. So microwave systems very core to us. Great involvement in missiles and communications. And then if you cross over to space, which is a growing area for us, we're involved, of course, in defense systems here but also on the commercial side, and we've highlighted Viasat-3 here. That's one great representative program that we've been involved in, again, in terms of microelectronics and microwave supply into this program. So strong content across the board, terrific program involvement, and we expect that depths of engagement in the RF area, in particular, to continue to be a strength for TTM. If we move to the next slide, I've laid out the balance of the markets here for you, and I'll talk briefly through each of these to give you an idea of where we're focusing. Starting with automotive, about 13% of our sales in 2020. We, of course, will expect it to be a higher percentage this year as we go through the course of the year. The longer-term forecast is at 3% to 6%. We certainly expect to be above that level in 2021. And to give you a feel, year-on-year, in the first quarter, we grew by about 48% year-on-year in automotive and, of course, as that market has rebounded so strongly. The topic of interest out there is semiconductor components, how that's impacting automotive supply. What I can tell you is that we've continued to see strong demand for printed circuit boards from our customers. We are watching hub inventories at our customer base, but our customers do tell us that they have contemplated semiconductor shortages as they've laid out their forecast for printed circuit boards. So we'll continue to watch it closely but so far a very strong year in automotive. Data center computing for us, about 13% for TTM as well in 2020, forecast to grow about 1% to 3%. We expect to be above that level, really fed by both of the areas that we're focused on: data center, doing very well and a nice breadth of business across data center; and then semiconductor test and burn-in boards also a very active area for us. If you look at the first quarter, we grew data center by about 24% year-on-year in the first quarter, so strong strength there and also sequentially looking at a strong second quarter. Medical/industrial/instrumentation is the next area shown here, growth rate of about 2% to 4% forecast. We are particularly involved in some of the elective surgery areas and automation associated with that. That business has now come back. Last year, we serviced the emergency requirements for ventilators, patient monitoring systems in the second quarter and did very, very well in the second quarter as a result. But now today, what we're seeing is a better spread across medical, into industrial, with automation coming back, and instrumentation remaining strong. So as we looked year-on-year, in the first quarter, we did grow the business by about 1%. And sequentially, again, we expect the second quarter to be a strong quarter. And then finally, networking/communications, about 17% of our revenue last year. It's forecast to grow about 5% to 8%, and we do expect to be below the range of growth in this area this year. Right now, first quarter was relatively flat. It was up about 1% year-on-year. What we're seeing is telecom 5G strength outside of China, but we are -- we've been missing that China piece of 5G this year. We do expect the third phase of 5G investment in China to gradually start to pick up here as we exit the quarter and move into the latter part of the year, which will certainly help this market. But overall, we expect an improving situation as we head into the back half of the year, but it will be below the 5% to 8%. So hopefully, that gives you a picture again of the diverse set of end markets that we service, all with growth rates that vary but all growing. And that's really how TTM will be growing as well going forward. Moving to the 14th slide, or Slide 14. You can see a little illustration here of 5G. And if you press the button a couple of times, you'll see the antenna portion of 5G infrastructure also shown. We have strong printed circuit board and backplane content on the base station side. In antenna, we have stronger RF component supply there. And you can see content projected to grow with the antennas in 5G. That densification of the network is going to really drive antenna installations going forward. So we should see a nice, long development here of 5G as the rollout continues. And certainly, the antenna piece of this business, in particular, continues to be very interesting to TTM. If you move on to differentiation, which is the next slide. Let me move to Slide 16 that shows the spread of technologies for TTM. So the first focus is on differentiation, think about the spread of technology offerings for TTM. These trends are driven by a number of developments at our customers related to complexity requirements really being driven by miniaturization. So they are continuing to shrink the form factor requirements for the printed circuit boards, also increasing signal performance as well. And so that, in turn, is driving some of the PCB requirements shown here around circuit density, higher layer count to incorporate more components, microvias to accommodate the different layers and the connections to the different layers in the board and ongoing material innovations related to that signal speed. And finally, our response at TTM, we have our ongoing development efforts in fine lines and spacing related to substrate-like printed circuit boards, high-density interconnect board requirements, rigid flex to meet form factor changes at our customer base and ongoing depth, as I've mentioned, in RF radar engagement, starting with that board and then building above it with the components and the integration. If you move to Slide 17, you can see, again, how that breadth plays out in terms of end markets, both on the conventional side -- and while we classify this as conventional, you can see we incorporate RF capabilities and high layer count boards in conventional, which really are very complex printed circuit boards. And they feed in their needs in aerospace and defense, networking for the high layer counts and computing for high layer count boards as well. If you move to advanced technologies, again, our offerings really incorporated in all of the markets, both from high-density interconnect to rigid flex, substrate-like PCBs and, of course, as I've mentioned, the RF component area and integration capabilities that go into telecom as well as aerospace and defense. So it's a complete offering that our customers can take advantage of. Moving to Slide 18. What this leads to in terms of that breadth of offering, coupled with the footprint capabilities, this allows us to engage our customers early. On top of that, we layered out what Anaren brought to us in terms of design and specification capability. So when our customers in aerospace and defense release RF specifications, we're able to take those specifications, simulate RF performance and then build a package to meet that requirement that incorporates our printed circuit boards and components and then components that we bring in from outside and integrate to deliver a module that meets that specification for our customers. That allows us to engage very early with our customers' engineers prior to prototyping, so in the design stage, and then carry that through the prototyping and then into volume production. That's on the aerospace and defense side. We do -- on the commercial side, we're also engaged very early from the prototyping stage on with our customers. So that successful engagement model, absolutely critical to our differentiation. And then finally, our footprint capabilities. And we are unique in terms of the strength of our North America footprint, our ability to work with our customers' engineers in country and time zone and do that work confidentially and then, for the commercial business, take those requirements as they are commercialized and moved into volume. We're able to bring those over, transition that volume into our China facilities for our customers. Again, sets us up with a unique capability in terms of customer engagement. So all of these facets feed into that differentiation theme. And then let me turn the presentation over to Todd to cover discipline.

Thank you, Tom. Pleasure to be with you today, folks. If we turn to Slide 21, we highlight the financial performance of TTM over the last several years. You'll note that in '19 and '20, fiscal years '19 and '20, we showed a pretty significant decline in revenues. That's really a reflection of the sale and closure of some businesses. So Tom highlighted the fact that we had sold our Mobility business and also that we had closed 2 of our assembly factories in China. If you normalize 2019 and 2020 for those facts, we're actually increasing in 2020 by about just under 3%, 2.7%, led by strength in aerospace and defense, medical/industrial/instrumentation and our data center computing end markets. Obviously, automotive was challenged as a result of the COVID outbreak and, as Tom highlighted in his comments about the networking and telecommunications end market, some of the changes going on there with 5G and the embargo that impacted the deployment of 5G in China in the second half of 2020. So if you look at that still, in spite a very challenging year with the COVID pandemic, revenue actually grew almost 3% year-over-year. If you look at our operating margins, again, you see kind of the impact of what's happening there in '19 and '20, the actual numbers, including the Mobility business. Again, if you normalize and remove those effects of those closed businesses, you would have seen relatively flat performance. It would have been about 9.1% in 2019 and 8.9% in 2020, so relatively flat. We managed through the COVID challenges reasonably well. I mean there was a lot of puts and takes in terms of end markets. Medical was very exciting. Automotive was certainly depressed in the first part of the year, particularly. We had labor management challenges as we worked to protect our employees. All of that, though, notwithstanding, we were able to maintain relatively consistent performance. And you can see how those numbers reflect in the EPS. If you move on to Slide 22, you get a picture of kind of the cash flow generation capability of the business, which is quite strong. We generate consistently in that roughly 10% or better of revenue over the last several years from cash flow from operations. And that's cash flow that we use, obviously, to fund our CapEx but also, particularly, we've used that to drive down our leverage. And along with the proceeds from the sale of the Mobility business, we're able to reduce our leverage by the end of 2020 down to 1.4x EBITDA on a net debt basis, which is below our long-term target. Our long-term target is to kind of be in between that 1.5 to 2.0 range. And so this really positions our balance sheet very favorably and gives us a lot of dry powder, if you will, for potential opportunities. If you look also at Slide 23, I'd just highlight a little bit kind of how our performance was. I mentioned in the 2020 column our revenue growth and our non-GAAP operating margin. On the right side, you can see our targets for those metrics. We expect long term, given the markets that we're serving and the above-average growth rates that we see in those markets, to organically grow kind of in that mid-single-digit range. And then from an operating margin standpoint, we're really targeting to get ourselves in that 12% to 14% operating margin. Again, we're 8.9% in 2020. In Q1, despite some inflationary headwinds, and if you take those into account, we're, on a structural basis, kind of operating around that 10% neighborhood. To get into that 12% to 14% range, we need to continue to grow our revenue and to get ourselves somewhere in that $600 million per quarter neighborhood to be able to have the leverage that we need to drive the operating margins that we're targeting. And you can see similarly, targets for adjusted EBITDA margin as well as return on invested capital, which is an important metric. If we go to the next slide, Slide 24, you'll see our capital allocation strategy. We're a consistent cash generator, as we showed on the previous slide, and we use that, obviously, first and foremost, to invest in differentiation, both in terms of internal development, R&D as well as CapEx investments, as well as carefully positioned acquisitions from time to time that add to our portfolio of capabilities and end markets that we support. So that's one key leg of the allocation stool that we continue to focus on. I mentioned our repayment of debt. That has been key. We've now got ourselves down into the area that we'd like to be, even a little bit under in that respect, but a very strong balance sheet with a strong cash position. At the end of last quarter, our cash position was approximately $540 million as well as this leverage that we're looking at, so really a good balance sheet. And that gave us the confidence to implement a return to shareholders. And we announced in the first quarter a repurchase -- a stock repurchase program of $100 million over the next 2 years. And we've begun to execute that program. In addition to that, we have warrants that are maturing over the next several months that were related to our convertible bond that has now been paid off. Those warrants will mature between now and January of 2022, ratably every day. And we're using -- not only have the stock buyback but we announced that we were repurchasing or liquidating 60% of those warrants via cash rather than diluting the stock. So between the 2, we're sensitive to returns to shareholders and making sure that we have a balanced capital allocation strategy. And finally, if we go to the final slide, really our summary slide, as we go forward here, we're going to continue to focus on markets with above-average growth characteristics. The overall PCB market is an approximately $60 billion market that grows relatively consistent with GDP. But the markets that we're focusing on and the sub-elements of those markets that we're focusing on have better than that growth potential. So we're going to continue to look for those opportunities. We're going to continue to invest and focus on differentiation. Tom took you through some of the slides on how we differentiate ourselves from a technology perspective, from a geographic perspective. We'll continue to invest in those areas to help set us apart and to drive our business forward. And then finally, we'll consider -- continue to focus on maintaining a strong balance sheet. We're very conscientious about driving cash flow and making sure that we do a good job managing our working capital, which then positions us to take advantage of opportunities, whether that's funding shareholder returns or M&A opportunities down the road. So that concludes our formal comments, and we'd certainly invite the questions. Keats?

Tom, Todd, thank you for that. And just a reminder to the audience, if you have any questions, please feel free to submit it at the bottom of your screen on the presentation interface. We have a few questions that I'll ask beforehand as others come in. So maybe just going to the M&A strategy, and Tom, you touched on it a little bit in the context of Anaren and some of the acquisitions that the company has done in the past. Maybe just spend a little more time talking about the M&A strategy going forward. On a regional basis, from a product perspective, obviously, you guys have a very strong position today in printed circuit boards, and you made nice strides in RF and micro components, so just talk a little bit more about the strategy there.

Sure. Yes. So if you look at the priorities, and really the first priority, as we look at M&A, it is oriented around continuing our path in terms of building that depths of engagement and capability in the RF area, both in components as well as in the integration capabilities for RF as it relates to aerospace and defense. So that area is an area of primary focus for us. Secondarily, we'll continue to look at our printed circuit board footprint. And as our customer base's needs shift, we'll look at areas or gaps -- potential gaps. One of those is in Europe. We don't have a quick-turn type capability there. We don't have a volume capability in Southeast Asia. We'll continue to look at that potential. But the first priority, as I mentioned, really on that RF component and RF depth or engineering capability and building on that depth. So glad that our balance sheet is in great shape. But we have, as a company, always practiced discipline around our M&A strategy. We have a strong M&A pipeline process. We work the pipeline hard, and valuation is a critical part of that exercise as we look at M&A potential target. So we'll continue to work this, and we'll see where it carries us.

And just following on, just from a pipeline perspective, I mean are you seeing a pretty open M&A market? I mean folks are saying anecdotally that on the defense side, valuations are still pretty rich. Just at a high level, kind of what are you seeing there?

Yes, I think that's a good summary comment right there. I think as we -- first and foremost, we look at the strategic fit. And that's absolutely critical, first measure. But then we do take it through a valuation filter. And today, if you look at a number of assets, there's a gap there, which happens periodically, right? And you have to get -- those gaps have to close, between expectations and really what makes sense from a valuation model standpoint. And so for that reason, I don't see anything happening in the immediate future. But as we settle, as we come out of the COVID situation, I think markets start to settle in on valuations that are really cash flow-based, and that's where I think the meeting of the minds will occur with potential targets.

Hopefully, a little more sanity comes back to the market. So maybe just pivoting on the space front, given space is something that's garnered a lot of attention over the last 12, 18 months in the A&D world. You guys obviously have a strong presence there today. Why don't you just talk a little bit about your focus, which, I believe, is mostly in GEO, given -- I think a lot of attention over the last 6 to 12 months has been on the LEO side of things. Is that an area where the company wants to spend time going forward?

Yes. If you just think about where RF capabilities are required, then that's where you're going to find us. So yes, both -- you're absolutely right, GEO, for sure, has been an area of focus. LEO, as we go forward, we're going to -- we will be very active there as well. And overall, we started out with a nice position in space, and we've been able to build on it. It's an interesting area because while the peaks can be very high, you also have a diverse set of involvement there within space so that -- because the valleys can also -- you can get some real demand peaks followed by quarters where you're just not seeing that kind of volume. So you have to have the right mix of programs in the space area to continue to grow it methodically. And that's -- and we've got, I think, a nice position there, nice breadth, and we just got to continue to build on it.

Excellent. I assume that's going to kind of similarly follow the rest of the business where defense will be kind of a primary focus but then commercial opportunity as well is something the company looks at.

You got it. Yes, I think more and more -- the nice development there is on the commercial side. I think the recognition, that reliability of supply base but also reliability of technology, is absolutely job #1. And so I think there's -- perhaps as things started, there was a little bit of an emphasis on speed versus really robust systems and robust capabilities. And I think that's really shifted now. So that's a nice development for us. And also, we have a comprehensive capability that if you're a customer out there and you feel that you have the integration capabilities already in your system, TTM can -- we can be positioned as a component or as a printed circuit board supplier into your programs. If you're looking to integrate and really start to see a full RF module solution, we can simulate the performance. We can provide all of the data required and then actually do the integration as well. And so we have programs that really span the full breadth there of capability and trying to make sure that we fit what the customers need.

That's great. And then just more thematically on the defense side, we got a sense for what the Biden Administration is going to prioritize with the recent release of their budget request for fiscal year 2022. Certainly, some consistency with the Trump Administration, some new focuses on different parts of the budget. Where do you think TTM is particularly well aligned in the Biden Administration and their focus on -- within the DoD budget?

Yes. I'll tell you that the overarching theme, really based around technical -- technologies. And if you're looking really at Department of Defense overall that needs upgrading in terms of radar systems, radar capability, that's where we tie in. And the Biden Administration has continued, if not accelerated, the emphasis on development requirements to R&D capability. So we're in a terrific position from that standpoint. I think if you look at it on a program-by-program base, there's very little downside. I think you'd have to -- you can go to an F-35 and say, well, we're not sure how that program goes forward. But what I can tell you about TTM's positioning there is as long as the program moves forward, we have great content on the F-35, and it will move forward. The pace may be -- pace may change over time, but we're positioned very well on the platform and we'll benefit from the program as it moves forward -- however it moves forward. And I think that's what really benefits us. If you think about over 80 programs, we are in the right programs for -- to help our customer bases as we all move forward here.

Right. And if you think about the importance of microelectronics, it's kind of the underlying thread that connects a lot of our defense priorities. I think that's well said.

That's right. That's exactly right.

Well, Tom, Todd, on behalf of UBS, we just want to thank you for participating in the conference and for sharing this presentation. And for all the audience, appreciate you guys tuning in. We will wrap it there. Again, appreciate your time. Thank you for tuning in.

Thank you very much, Keats. Thank you, everyone. Bye.