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

All right. Good morning all. I'm Alex Bilichenko, Executive Director in the Technology group. And with me today is Tom Edman, President and Chief Executive Officer of TTM Technologies. TTM Technologies is a leading PCB, specialty components and technology solutions provider. The company is a critical supplier of today's fastest-growing technologies such as advanced defense radar, cloud infrastructure, automobile technology, semiconductor capital equipment and robotics.

So Tom, can you provide a brief overview of where TTM Technologies is today? Where -- what its business is, end markets, key customers and footprint?

Sure. So good morning, everyone. Good to be here. TTM Technologies is, as Alex mentioned, we are a major printed circuit board manufacturer globally. We also provide RF and microwave components into the commercial side of our business. In aerospace and defense, we are much deeper than that. We provide not only printed circuit boards, we have microwave and microelectronic assemblies, subassembly capabilities as well as integration capabilities, and then the ability to simulate RF performance for a full RF stack for our customers. So depth in the product line in aerospace and defense, a very broad technology capability on the commercial side. From an end market standpoint, about 1/3 of our business is in aerospace and defense. The balance is pretty well split between several end markets. Networking communications, computing and data center needs, automotive, and then medical/industrial/instrumentation. So a broad set of diverse end markets that we service as a company. From a customer standpoint, major customers, of course, in the aerospace and defense side, Those you would think of such as Northrop, Raytheon, Lockheed Martin. The commercial side, we service the Tier 1s in automotive, and then a really broad set of customers in the other commercial markets that we're involved in.

Great. This is where you are today. But can you talk a little bit about what is your long-term strategy? Where are you going? And what actions have you taken to execute on that strategy?

Sure. So when we talk about our strategy, we think about it in really 3 categories. If you look first at the differentiation in the end markets that we service, that's one. The diversification of those end markets, and then discipline around how we focus on cash flow, cash flow management and how we integrate acquisitions. The real focus for TTM going forward is on that differentiation aspect. We've continued to build the company through acquisition over the years, each one -- each acquisition adding to that theme around differentiation. If you think about our commercial markets, that has been primarily in terms of the footprint in which we operate. Most recently, we announced our intent to build a greenfield facility in Penang, Malaysia. That's a critical initiative for us on the commercial side of our business. If you cross over to aerospace and defense, we've continued to build on that stack, really above that component and printed circuit board capability, continuing to build a more complete capability to carry to our customers. That includes the most recent announcement that we made on the Telephonics acquisition, which will bring to us, really, Tier 1 and 2 capabilities, complementing what we have on 3 and 4. So really bringing the ability to, for us, to bring an even more complete capability to our customers in supplying their needs. So that's the direction, continuing to add value on aerospace and defense, continuing to broaden that footprint capability that we have in the commercial side of our business.

Glad you mentioned the Malaysian facility. Can you talk about how it adds to your strategic -- what is the strategic rationale and how it differentiates you from competitors?

Sure. So if you start -- if you look at the broader printed circuit board industry, you're looking at an industry that has about 60% of capacity in China. And as we looked at our customers and had discussions with management and our customers, we saw an increasing need from the customer base for supply chain resiliency. That major theme, for us, translates into long-term agreements, customer commitment upfront to a Malaysia facility. And so this has been an initiative that we really have been working on for about 3 years. A lot of that involvement was with our customer base, making sure that they were coming along with TTM as we invested in Malaysia. Really happy to say that those commitments came together. We're investing -- we will be investing, over 3 years, about $130 million in this facility. Highly automated capability for a high layer count production in printed circuit boards. Those boards are used primarily in data center computing requirements, networking communications and then medical/industrial/automation. And we have a nice set of core customers that have committed to the facility that cross those application areas. So again, a nice step for us in terms of how we differentiate our printed circuit board capabilities from the rest of the competition.

We actually have one online question, so let me pose that one. Have supply chain shortages deteriorated materially as a result of the Shanghai lockdowns began?

Yes. Yes. So interesting, we -- from a direct impact standpoint, we do have a small backplane facility in Shanghai. Immaterial in terms of financial impact, more important to us in terms of customer impact. And we've, of course, been trying to mitigate the impacts on our customers. That's the only direct effect of the Shanghai situation on TTM. Indirectly, we have been more carefully working or watching the customer situation around automotive. So far, there hasn't been an impact there. As we start looking into the third and fourth quarter, we'll see how that situation develops as those facilities start to come back onstream. But that's an area that we've been watching. From a raw material standpoint, really very little impact on TTM from that particular situation.

Let's get back to the Telephonics acquisition. Because that actually, if I remember, brought your aerospace defense exposure from about 1/3 to over 40%. So can you talk about the strategic rationale and how it fits with your existing products, customers and programs?

Sure. So you're absolutely right. it should bring us up to about 40%. We are hoping to close the transaction this quarter. That's the goal. We continue to work towards that goal. If you look at how we fit together, Telephonics has tremendous system integration capabilities and engineering depth there. We -- TTM's strength that really complements Telephonics is in terms of our RF capability and simulation capability. About 50% of Telephonics' business is in radar. They are going through a transition as are others into active electronically scanned array, or AESA radar. That's an area of expertise for us in our Syracuse facility and our engineering abilities out of Syracuse. So as we come together, 50% of their business will be very complementary to what we do at TTM, and we're hoping to help speed their time to market there with that new capability. If you look at the balance of their business, primarily communications and surveillance, and there, we're looking at just a complementary customer set and an operations focus that we hope to help support Telephonics with in delivering the needs -- their -- the requirements of the customers in those areas. So excited to see the 2 companies coming together. Of course, after we close, we'll be able to speak more specifically about our plans with Telephonics. But we are really excited about the combination of the 2 companies.

Great. And since you've mentioned that it's -- will close soon, can you talk about what is the integration plan for Telephonics? And how do you expect the cost synergies? And if there are, what are the revenue synergies for that deal?

Sure. So coming together, so 40% of TTM's business, as mentioned, would be aerospace and defense. That's going to be $1 billion. That is of significance to our customers, and so we will be a major supplier to those customers. We've always been on this mission, if you will, to make sure that we are as indispensable as possible to our aerospace and defense customer base. This reinforces that direction for TTM, so very important to us there. We expect that revenue opportunities will come accordingly. And I talked about AESA. Another area of opportunity is in the service and aftermarket support area where, again, Telephonics has a position. We hope we can support that position. And then as you cross into synergies, we can call it a cost synergy. We've identified $12 million of cost synergies that we will be pushing to realize in the first 2 years after close. But a critical part of the cost synergies is, really, lies in the capabilities that TTM brings to Telephonics as a supplier. We've been a small supplier of assemblies and printed circuit boards to Telephonics in the past. We have an opportunity now as we come together to explore areas where we can help enable their products coming to market more quickly. And clearly, like others, they've had supply chain challenges. We hope that we can be part of the solution to Telephonics in regards to those supply chain challenges. So that's an area of opportunity. And then along with that, of course, this -- I would call a standard duplicative areas that we'll be looking at in terms of cost synergies. But really, most excited about what we can bring to help enhance Telephonics' capabilities as they bring product to market.

Excellent. And let's talk about your recent quarter and the recent results. It felt that -- you reported pretty good numbers and you've been managing pretty well in this challenging environment, in particular with the inflationary pressure and better than some other companies. Can you talk about why then and how it came together?

Yes. So I think we did -- if you look at our last quarter, we are pleased with the results. We were -- we came out at the high end of guidance on revenues, above the midpoint in terms of earnings per share. Inflation, of course, continues to be a challenge. When we look at our business right now, it's -- the biggest two challenges, inflation and direct labor shortage. Not a surprise, I'm sure, to all of you. On the material side, we've been able to deal or to take the impact of the raw materials and mitigate that with price increases with our customers. Never easy in our environment, but necessary as we looked at our COGS and material costs escalating. Also last December, we anticipated that we would have to make an adjustment in our North American labor costing, and we went ahead and implemented those cost adjustments in the first quarter. That was a critical move for us. We did anticipate that in our discussions with customers back in December and price increases that we had to announce to our customer base at that time. Those increases will come to bear as we go through the course of this year, primarily because of the large backlog that we came out of the fourth quarter last year with. And so as we clear that backlog, the new pricing is taking effect and will continue to take effect through the course of the year. So we -- at this point, based on what we see in the marketplace, we had anticipated properly both the labor adjustments and the material cost changes that we were expecting to hit us this year. Now we'll see if anything else materializes. It does seem like every quarter brings some kind of surprise out there, but so far, so good. I think the team has been very -- has managed this very well on the TTM side.

Let's talk about geopolitical situation. In terms of Russia-Ukraine conflict, has it impacted your business? And if yes, how?

I think it's hard to say that, that situation hasn't impacted every business. We haven't felt direct impacts from the Ukraine-Russia situation. What we -- but indirectly, we saw a spike in metal costs, copper and palladium initially. Copper is a critical piece of the laminate that we purchase, and so we watch copper very carefully. Now that spike then started to come down again, so we'll see what the longer-term impacts are on laminate. But as I said earlier, we had anticipated some of that. We anticipated ongoing inflation as we looked at our cost structures. So while the -- geopolitically, this was certainly a surprise, fortunately, we'd anticipated that, again, we would be dealing with inflationary pressures. So from that standpoint, I think we've been able to mitigate. Now the other impact here is on our customers. And again, probably the market that we're watching most closely is automotive, with the wire and harness production disruptions and with Ukraine, the movement of that production back to Africa and some of the other areas of production. We've been watching that, discussing that situation with our customers. I think they've been handling it well, but that is an impact that is of more concern for us longer term is how this translates into end market demand for TTM.

Great. And since you mentioned the end market, can you probably go through each of your key end markets and talk about expectations for this year?

Sure. So yes, let's start with the largest, aerospace and defense. We have a terrific situation in terms of backlog, program backlog, about $768 million. We continue to be at record levels in terms of program backlog. That's a great backdrop to be in, in defense. And certainly, budgetarily, there's some great tailwind there in the defense market. The challenge for us has frankly been labor and production output. So North America production for us in the last several quarters has been about 43% of revenue. That should be closer to about 50% of revenue. So we have opportunity to bring up the revenue in North America from a capacity standpoint. And the challenge has been bringing in that labor, making sure that we can maximize output. But a solid backdrop in terms of the end market and a challenge that we are working to address in North America. If you look at where we anticipate being this year, looking at an end market that grows about 2% to 4% each year, and we should be in line with that growth as we go through the course of the year. Automotive, end market that has grown tremendously for TTM over the last year. If you look at our most recent quarter, we were up about 21% in the first quarter year-on-year. If you look at how we're forecasting the second quarter, we're, again, looking at being up year-on-year about 6%. And we're in an end market there and that is anticipated to grow according to the market forecasters, about 3% to 6%. So we do expect to be over those forecasts again this year after an incredibly strong growth year last year. And we are benefiting, of course, from electrification of the automobile, the incorporation of RF sensors, in particular, as the OEMs incorporate sensors for ADAS requirements into the vehicles. So tremendous ongoing growth there and opportunity for TTM. Data center. So this is a market that, broadly, that's defined as computing, and so that incorporates laptops and other computer applications that we do not address as TTM. And so the growth rates from the forecasters are generally around 1% to 3% for that broader market. Our focus is on data center requirements for our customers, complex server requirements. Generally, those are proprietary designs, and therefore, deliver better value to TTM, along with some of the computing requirements for test in burn-in boards. So that market, we anticipate -- and we have been growing very -- again, very strongly there. Last quarter, about 27% year-on-year growth, and we anticipate being well above that 1% to 3% this year. Medical/industrial/instrumentation, for us, is a wonderful end market. Very strong, diverse customer base there for us, and they value our footprint capabilities, the ability to service their early-stage needs, particularly in medical in North America, and then to take that to volume as required in China. So really nice fit for our customers. We were up about 33% year-on-year in the first quarter. The forecast here generally in the 4% to 5% year-on-year kind of growth rate, we anticipate. Right now, we're saying in line, but certainly, we've had a strong start to the year, which just reinforces some of our messages around differentiation. And then finally, networking/communications. So traditionally, about 1/3 of our business there has been in telecom. That percentage is coming down. So as we take capacity for high layer count boards and have been shifting that capacity primarily in the data center computing and then in the networking requirements, and so that's impacted our growth in that end market. It's a market that's anticipated to grow about 3% to 6% year-on-year. We were relatively flat, basically flat in the first quarter, and anticipate that we'll be flattish for the course of the year, so probably below that market forecast. So that's how our markets shape up. We like -- we have strong growth trends in all of these end markets, and have been really benefiting from a nice demand profile in those end markets.

That's great to hear. We already talked about lockdowns, but let's talk about generally, the supply chain. And from the supply chain standpoint, both your own and your customers, how things are now? [ Where does it snap ]?

I mean one of the bigger challenges, right? Supply chain, I think everyone is very concerned. I talked about supply chain resiliency needs from our customers. We are looking at those same kind of requirements from our suppliers. And traditionally, again, if you look at the printed circuit board piece of our business, that supply has shifted largely into China. And so there's now an effort underway to diversify that supply base and ask. As we move into other regions, we need our suppliers to move as well. And so that's one piece of the longer-term solution here. Short term, our laminate providers, again, major suppliers for us are in laminate. Secondarily, chemistry. They are dealing with certainly inflationary trends there, and we are intending to continue to work closely with our suppliers to mitigate those impacts to our suppliers, continue to support their moves as they move their manufacturing facilities to be close to TTM. And in the meantime, as we deal with it, we all deal with inflationary pressures, making sure that our customers understand the nature of those impacts. So that's always critical to us. So generally, I'm expecting this is going to be a situation that continues certainly through the course of this year. We will see, of course, with the broader economy, what that impact has on our customer demand and therefore, eventually, the impact into our supply chain. But for now, things could remain tight but manageable from a TTM perspective.

And another big theme in the economy is, how is your labor availability, retention and attraction?

Very good question. That's job #1 right now. We are well situated in our Asia facilities. North America continues to be a bigger challenge for us. We made the adjustment that I referred to in the first quarter. That adjustment was critical for us. It has certainly helped with retention, both in terms of our engineering, technical talent retention as well as our general direct labor retention. And it's had some impact in terms of our ability to find labor in certain of the geographies in which we operate. Now that -- when I say certain, there are areas in North America where we're still challenged, primarily in the Midwest. But in our other facilities we have, the adjustments we made have helped in terms of finding direct labor. Not a panacea by any means. We still are challenged like others finding that labor, but the adjustments have helped. So what I'll say in addition to that is we spend a lot of time, and it's necessary time in terms of our talent management process, how we look at succession, how we provide opportunity for our technical talent and ensure that we are working with our technical talent on their individual development plans and their ambitions to move around. And what's exciting about TTM is a -- as an employer is that we are able to provide all kinds of opportunities for our technical talent. And so big -- a lot of time has been spent historically, and we're doubling down in terms of thinking creatively on how we provide opportunities to our technical teams.

Great. And circling back to the M&A topic, given the Telephonics acquisition, what are your future M&A plans? Are there any topics of interest, end markets? And also, given the current valuation environment, how does it impact your thinking?

Yes. We have a very active M&A pipeline, and the focus for us is -- I've sort of already addressed. One, the footprint side on the commercial, on our -- for our commercial printed circuit board production. We've done -- we're addressing that with a greenfield facility in Malaysia. There may be smaller opportunities down the road. We don't have a capability for a quick turn facility in Europe. That's one area we'll continue to look at, but that's relatively minor. The real focus for us on the M&A side is strengthening that RF/microwave depth. With the acquisition of Telephonics, we'll have an opportunity now to really look at that gap between the Telephonics capabilities and our own ability to support Telephonics. There certainly will be RF and some microelectronics opportunities there to strengthen that product portfolio. So we are going to continue in that direction. We'll continue to work on how we can enhance that stack that we provide to our customers in the defense space. So those are the primary areas of focus for us on M&A.

Great. Let me pause here. Are there any questions from the audience, just to make sure we'll address any? All right, then I have a couple more for you. Thinking about the overall capital allocation and the priorities, how do you prioritize between stock buybacks, M&A, repayment of debt? Because you have a pretty good cash flow generation.

Sure. We have just completed a program, a stock buyback program. It was a $100 million stock buyback program, just completed that program. And as we look forward with the Telephonics acquisition, we will be using our cash for that acquisition. That will bring our leverage ratio up to about 2.5x. As many of you know, our goal has been to operate in the 1.5x to 2x area. We have a strong historical track record of using our cash flow. Generating cash flow, paying down debt, getting down to that 1.5 to 2x area, and that allows us then to pursue our acquisition strategy with the right balance sheet strength. So that will continue to be our strategy going forward. We will pursue acquisitions when the opportunity -- again, when the pipeline comes to fruition and we're able to execute on those acquisitions. And stock buybacks for us will be a lever that we certainly look to as we bring our leverage ratio down into that 1.5 to 2x area. So short term, we'll be focused on using that cash flow generation, making sure we pay down the debt, get down to the right area of operation.

And talking about M&A as a priority, what would be the strategy? Would you think about a more larger acquisitions, transformational ones? Or more string of pearls, buying smaller targets?

Yes. And we've done both, and we'll continue to do both. Really, for TTM, it's just looking at that capability and what the capability delivers to TTM versus the size of the acquisition. So when we look at size, it's really, again, looking at the balance sheet, the balance sheet ability to handle acquisitions of size. So if you look today, we're going to be careful about doing an acquisition of size given our balance sheet, where we anticipate our balance sheet being. But longer term, it's much less about size than it is about capability.

Makes sense. And in terms of operating in the inflationary environment, is there a shift? Or how easy is it to pass through the cost to your customers and the price increases?

Yes. And as I mentioned earlier, it's not -- it's never easy, and it's always -- these are crucial relationships for TTM. But what I can say is that if you look at our structure, about half of our business roughly is based on quote model-type transaction. So we can adjust our quote models in line with material costs, in line with anticipated labor costs as we transact that business. The balance of 50% is generally contractual. Those contracts on the commercial side of our business tend to be about half a year to a year in duration. And so we have standard negotiating periods, and that's when we would make adjustments. And then on the aerospace and defense side, they tend to be longer-term agreements. So as you parse this out, you can look at roughly 50% quote model-based, relatively easy to pass through price increases there. And dependent on backlog, right, so we have to work through the backlog, but those adjustments can be made. The balance, we really negotiate on the commercial side as we come to -- through a contractual period, but those contractual periods are relatively short. The defense side, really in December, that's when we started to address customers with our situation. Active negotiations have been continuing with defense customers, and it's really program-dependent in terms of when the increases can be passed through. But I will say our customers understand the situation. And I would also point out that we have been able to mitigate, do a pretty good job of mitigating to date. And we're anticipating, of course, as we've worked through our backlog that we'll see additional relief as we work our way through the course of this year.

And the last question for me, just circling back to the original topic where we started. In a couple of words, how do you think -- how do you want investors to think about TTM in 3, 4 years? What's the end goal?

Sure. I think the -- as you think about TTM, I think the -- certainly, as it aligns with our strategy, think about TTM as certainly a company with a strong manufacturing, operational foundation, but a company that's adding engineering capability and depth to what we do and really differentiating in terms of our space and what we bring, deliver to our customers in terms of capabilities. And that's the goal for us is to deliver that differentiated capability, product capability to our customers going forward that delivers value for them. And that value is -- certainly accrues to TTM as well.

Thank you, Tom. We'll conclude here.

Thank you. Thank you.