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

This is the 2023 BofA Leveraged Finance Conference. I'm Ana Goshko. I cover technology and telecom credits. And I'm thrilled to have TTM Technologies with us and Dan Boehle, the company's Executive Vice President and Chief Financial Officer. So Dan, thank you so much for being with us.

Appreciate it. Thank you, Ana. It's nice to be here.

Great. So I have a couple of introductory questions for you, but even as a pre-introduction, I don't know if you had any opening comments you wanted to make.

No, no. We can just jump right in but just happy to be here. This is my first BofA Leveraged Finance Conference and my first time representing the company. I've been with them for 3 months now, so the new CFO. And so I may have refer to Sameer to help me out but -- or my notes, but we'll get through it.

Okay. Okay, great. Okay. So just in case we have anyone in the audience that's new to the TTM story, if you want to just start with a brief introduction, a few comments on the company's key products. So I think most people do know that you're a -- the history as a printed circuit board, or PCB, designer and producer. If you could just talk about what the company's current PCB market share is and then also the scale of the non-PCB business.

Sure, and I'll give a little bit of an overview. We are a global -- leading global manufacturer of technology solutions, which include mission systems, RF components, RF microwave and microelectronics products as well as quick turn and/or high-technology PCBs. The name TTM means time-to-market, so that reflects our cost-critical approach to partnering with our customers to reduce the time to develop and bring a product to market. We have been through, over the last several years, working through a transition from just a traditional PCB business to higher up the food chain a bit, I guess, to more engineered products. And we're also focused on growing our longer-cycle business and focused on aerospace and defense, both commercial and aerospace and defense -- commercial aero and aerospace and defense. So we've done that through some acquisitions. In 2018, we bought Anaren. In 2021 -- or 2022, we closed a deal on Telephonics. So we've been integrating those businesses and growing that engineered product base for our business. So ultimately hoping to -- that will stabilize the business. The PCB, the commercial PCB market can be volatile. And so we want to stabilize that business through the aerospace and the electronics or -- integrated electronics side of our business. We have about -- I mean, I guess, if you wanted to know scale a little bit, we probably are the dominant PCB manufacturer in the U.S. But we don't go after the lower-end consumer electronics. Our, what we call commercial, is still high-end, highly complex differentiated circuit boards. So the majority of probably 80% of our U.S.-based PCB products -- or sorry, of our U.S.-based business is for the aerospace and defense group. Asia, we do the more commercial PCBs but they're still higher end. If you look at the PCB market, maybe it's about $70 billion but we don't do the lower end. We probably only have 2% to 3% of that market share. But the work that we do is much more high end.

Okay, great. That's a great introduction. So also, you're new to the company. I think you joined in the summer of this year, and you said, I think you just hit your 3-month mark. So we'd love to hear your first impressions and what the opportunities and key challenges are.

Sure. I appreciate that. I did join in August. I had been -- prior to that, I was with Aerojet Rocketdyne for 6 years, served as CFO for 3 of those years and have been in the aerospace and defense market for the last 21 years of my career. So joined here after Aerojet Rocketdyne was sold to L3Harris in July. Took 3 weeks off and then jumped over to TTM. So wanted to keep working. The business was appealing to me for a number of reasons. I do like the strategy to grow in the aerospace and defense market. I think that they have a very good foothold, especially on the PCB side, a very good majority share of the PCB market in the U.S. And they're well positioned because of their differentiated strategy, their ability and their desire to help engineer, not just build to print but also work with the customer to be at the customer. We have field application engineers who are working with the customers to help develop and design their project or their product so they could be most efficient. And then as we climb the food chain, we can integrate our PCBs into more subassemblies and subsystems or what have you. So I see that as the opportunity to grow in that aerospace and defense market, which is my background. The challenges we have is integration, right? So we've grown through acquisition. So integrating those companies and getting -- building the synergies, building the processes and getting the systems and understanding of that business integrated with the rest of our PCB business, that's a bit of a challenge. The culture is a little bit different. The business model is a little bit different and so we're working through that. The interrelationships with the supply chain has been a bit of a challenge with us. Aerospace and defense had some challenging years with supply chain, with labor shortages, with longer lead times that were -- came about through COVID and what have you. So we're still feeling some of that, but we're trying to -- we're working through that pretty well and then building a structure around how we manage those relationships.

Okay, interesting. Okay, great. So I think the best way to approach this is to really kind of dig deeper into the company is to go by your end market segment. So if we start with -- I think your largest is aerospace and defense. So roughly, it's about 45% of the revenue. So the outlook, as the company has last presented it, was stable to growing for the foreseeable future. And is that accurate, first of all?

Yes, that is still accurate and frankly, in 2023, one of the ones that did grow probably beyond what our third-party -- we use Prismark to kind of give us our benchmarking, and so we disclose these in our investor presentations. But yes, aerospace and defense was expected to grow 3% to 5% over the next several years. We are in line with that in 2023 and we do continue to grow in line with that growth. As I mentioned, it's an area where the company is trying to strategically move towards. The U.S. defense budget is increasing. There are good, stable platforms that we're on. We are -- most of our business in defense is in the radar business, radar and communications, and those came through those acquisitions of Anaren and Telephonics so we have very strong footholds there. And then our #1 customers are the big primes that we all have heard of, Lockheed Martin, Raytheon, Northrop Grumman. Our challenge or our opportunity is to become one of their suppliers of preference and continue to stay on their large platforms, and then that will carry us through these long cycles.

Okay, so a follow-up on that. But let me follow up on that. So when you say supplier of preference, what do you think you need to do to get there?

Reliability. The biggest thing, I think, for aerospace and defense is reliability, right? And so we need to be -- and also on-time delivery. And so we need to be able to do what we say we will do, deliver on time and on schedule and on cost. And then -- and build reliable products. I think our printed circuit boards are highly reliable. As I mentioned, we compete at the higher, more complex technology on PCBs and that's why we want to do business with aerospace and defense. We announced a few weeks back the expansion of our Syracuse facility, and that's mostly focused on doing -- it is focused on doing ultra-HDI PCBs that are strictly for aerospace and defense products.

Okay, got it. Great. And then if you can talk about the commercial end market and how those trends and outlook may differ.

Sure. And so we've got -- we break down 3 of those, right? So I'll go from the top. The largest one is automotive. It's about...

I was talking about commercial within the aerospace and defense sector. Yes, sorry, yes.

Oh, commercial and aerospace. Well, I would say we -- commercial aerospace is starting to come back. So I know myself, I've been flying more than I did in the last couple of years, so commercial aerospace is a strong growth for us. Boeing is one of our largest customers there. We have another of others but that is a strong growth area. And probably, again, depending upon the year because it's commercial, it's a little bit more volatile, but you could see growth higher than that 3% to 5% in particular years. But we're starting to see the inventory buildup that has happened across most commercial businesses over the last few years because of inventory or because of material shortages, people started buying up, buying up and started building up inventory and then waiting for the demand to come. We're starting to see that demand come, but there's still a high buildup of inventory on the commercial side. And so as that inventory burns down, then we'll start seeing increases. But yes, commercial aerospace, we're starting to see the increases building into next year.

Okay, great. Okay. So then I was going to go in order of descending order. So I think that your next end market and there's 5. So the next end market is data center and computing. So again, aerospace and defense, 45% of revenue. So now we drop down to about 17% of revenue for data center and computing. So for the very near term, for the fourth quarter, I think you've guided it down sequentially, though still up about 8% year-over-year. So I guess, what are the drivers here? And how much of that segment is the data center versus the computing?

So traditionally, it probably may have been closer to 50-50. It's now currently more like 80%, 85% data center versus computing. And mostly, that's because in the last couple of quarters, we've had explosive growth in generative AI in the data center area. So probably even more than we expected, especially into Q3. So when you say sequentially in Q4, we do see that going down a little bit. The indicators are that Q4 will be a little bit down from Q3. But a lot of that's because we just pulled -- some of that got pulled forward from Q4 into Q3 because the demand has been so high. But we are seeing that continue to be strong and we see that continuing to be strong into next year. The benchmark growth expectations for data center and computing is 6% to 8%. We were down below that this year but we do see that growing into next year. And we've all heard the story of NVIDIA. We do supply to them but we're also looking for -- to broaden our customer base within data center.

Okay, okay. Then next one down is medical, industrial and instrumentation, so that's 16% of revenue so right now, roughly the same size. And in fact, all of your other segments are kind of roughly in the same size. So that one, it's been down at least year-over-year for, I think, 5 consecutive quarters. It will be the fifth one in 4Q, and that's going to be down about 15% year-over-year if your guidance holds. So are we at the trough for that segment? And if you can just talk about like what's been happening there?

Right. So it's a bit of a mixed story on these commercial areas, but I think a lot of -- as I mentioned, a lot of the decrease has been not because -- well, there's twofold. Either end demand has not been there or it slowed and/or inventory has been built up and that needs to be burned down. So I think in medical and -- well, let's do medical, right? That particular -- the end market, the demand kind of decreased during COVID. A lot of people weren't going to do elective medical surgeries and things like that. So people are starting to go back to that, right? But again, inventory was probably built up so that's now burning down, and you'll start to see growth there. So medical, you're starting to see growth. You're also seeing more electronics being used in medical, so remote sensing devices for like diabetes monitoring, what have you. Also using robotic surgeries and things like that. So that increased technology within medical is good for us, good for our business. The industrial group has been pretty stable. Industrial is pretty stable, but it's a slow growth area. But that is -- we're starting to see an increase there, again, coming off of inventory build-ups. On the industrial side, we tend to do, let's see, what we do there? More robotics being used for industrial manufacturing, what have you. So as robotics and automation increases, that's good for our business. And then instrumentation, we do test equipment for semiconductors, and so semiconductors is kind of a cyclical business. That cycle is kind of down right now so we're seeing decrease there. So when you look at MI&I in total, I'd say a bit of a mix. I think medical is probably growing a little bit and starting to grow a little bit. Semiconductors are still down. Industrialization is still -- is kind of slow growth. So it's kind of mixed but I think steady overall at probably at that 2% to 4%.

Okay. And then auto. So it's also still been down year-over-year. Do you expect it to be able to ramp from here?

Yes. We are starting to see that even in this fourth quarter of this year. Automotive is one of those where the inventory was highly built up and overproduced. We are starting to see the demand exceed those inventory burn-down levels. And into Q4 of this year, even we're seeing some good automotive growth that's driving some of our -- driving the majority of our top line growth into Q4 other than data center is coming from automotive. So we are starting to see that strengthen. But it's -- the messages seem to be mixed in the past few quarters. But everyone keeps saying you're going to turn the corner. I think we are starting to turn the corner. We really are seeing the numbers come in Q4 now. So automotive is ticking up. And just to touch a little bit on automotive too. As there's more -- as we move more from internal combustion to EVs, there's higher content of electronics, which means there's higher content of our products, our PCBs. Ours are mostly in sensors and safety devices and like ADAS, the assisted driver security systems that are now in your car that won't let you hit anything and jolt you when you get too close. I've had that happen. So the content -- the electronic content of these cars, especially with the EVs, is increasing. And so cost per car used to be -- or probably generally in the $80 to $90 range now. It's going to increase 30% to 40% into like $120 or more. And that's on average. The EV cars are probably in the $200 to $300 per car. So as we get more EVs, you're going to see more and more of our product. So the demand plus the content will give us more.

Okay. And then I guess to finish this part of the conversation on sort of a tougher note. So networking and communications, it's about 15% of revenue now, but it's really down. So for the fourth quarter, the revenue outlook is down 15% sequentially but 56% year-over-year. So what is happening to drive this deep decline?

Yes. I mean, this has been a very challenged area and challenged meaning that this is an area where there's been a lot of inventory buildup, right? So on the networking side, our major customers are Cisco and Juniper. Cisco is continuing to show slow growth, and they've just got a lot of inventory buildup that they're still burning down. So that's going to take a little while to continue to get down. On the infrastructure -- or sorry, on the communications side, our customers, our biggest customers are like Ericsson and Nokia, the telecommunications. There's not a lot of money being spent on the 5G network or anything in the U.S. We are seeing some overseas. We're seeing growth in India there. But the U.S., I mean, none of us have 5G phones that really do any 5G. We're just not investing. The capital investment has not been made by the telecom companies, so that continues to just be flat to reduced. And so we're not seeing a good turnaround there, not in the U.S. But year-over-year, we will see growth, and a lot of that is coming from cross-selling those products into different markets and/or as I said, the India market is showing some vitalization and mostly because they're rolling out their 5G network.

Okay, great. Okay, so shifting to now sort of some manufacturing topics. So all around your manufacturing footprint strategy but I think there's kind of 3 things. So I think there's a shift from Greater China to your new Malaysia facility. You're shutting down production in a couple of places, I think Anaheim, Santa Clara and Hong Kong. And then as you already touched upon, you have this new build in Syracuse. So if we start with the first one, so the shift from Greater China to the new Malaysia facility, what's the magnitude of that shift? And if you just may touch on your overall China exposure, both from a revenue and maybe manufacturing kind of percentage of footprint standpoint?

Yes. So from a revenue standpoint, China, we don't have a lot of Chinese customers. Our revenue is probably only 2% coming from there. Most of our customers are actually U.S.-based or elsewhere. So from a revenue standpoint, not a lot of exposure. But from a manufacturing standpoint, we've got about 40%, 42% of our products are made in China, and that's all of our commercial products. And so you mentioned the building in Malaysia, how much will shift? Maybe some of it will shift. The Malaysian factory, when it's up and running, will be probably the size -- we'll have the opportunity to do about $200 million of sales, which is about the size of our other large China factories. So it will be able to match them but it's also -- we'll be more productive because it will be more automated. So we'll be able to match them with lower cost and with lower labor. But most of the work that's going to be filling in the Malaysian factory will be new work, new products for existing and/or new customers. It's hard to recall product lines from one place to another, so very little, we'll do that because it's costly. So most of the business that's going to go to Malaysia will be new product or next generation of existing products. So they will be qualified in Malaysia, not moved from where they are.

Okay. And was this initiative in response to customer demand to kind of due to risk from China presence?

Some of it, yes, we certainly have been hearing that. Yes. And there's different views on how hard a decoupling could happen or if and when it would happen. Certainly, our customers have asked us to have a presence. There's that old concept of China Plus One, but in its name, it doesn't say get out of China. It just says have another alternative, right? China is still less expensive to -- Malaysia will be a little bit more expensive to produce there. China is still the less cost and most effective location to manufacture. But now that we have this -- we've always had a global footprint. It's always been part of our strategy. Having the Malaysia site, we're one of the first ones that's kind of opening up there. There are some others that are following. Our customers have been very positive on it, and we've got a number of our key customers that are anchor customers that are helping us invest and open that factory.

Okay. And then on the 3 facilities being shut now, the production there is really just being transferred for the most part?

Being transferred, for the most part. Probably 80%, 90% of it is being transferred over to other existing facilities within the U.S.

Okay, great. Okay. And then labor supply constraints. Has that improved for you?

It has. I mean, we don't see much constraints at all on the PCB side. The labor constraints and supply chain constraints were more on the A&D side as I was speaking to a little bit earlier. I think that was industry-wide. It's just we're kind of newer in that A&D space. We're building up a supply chain team that understands those relationships and understands the complexity and the intertwines between being a subcontractor within the chain of command within an aerospace and defense industry. So there's low volume, high complexity. So the relationships are very important. So you need a partner, you need to help them make sure that their design works well with your design and then integrating into the ultimate subassembly or assembly.

Okay, great. And then so let's shift to some financial performance topics. So among the goals, so the company has set a goal to be less cyclical, which I think you touched upon more differentiated with stable growth, improved margins, strong free cash flow. And then in your recent -- in the company's Investor Day, there's some operating targets included organic revenue growth of 4% to 6% and adjusted EBITDA margin of 15% to 17%. So those are some very specific targets. But where are you in, I think, on the path of achieving this kind of stable free cash flow and organic growth and margin targets?

Right. I think free cash flow, we're doing pretty well. I think we generate a good strong cash flow. Our target is 10% of revenue, and we've been, year-to-date, we're above that. On our margin, you refer to the bridge that we had in our investor deck showing that we could get from our single-digit 9.4% up to ultimately to 13%. We've talked about some of the things that will get us there. We closed some facilities. We're opening the Penang facility. So the drag that comes from closing -- the cost of closing down while you're running out of revenue, you're getting rid of revenue, and then ramping up in any way, you don't have revenue yet. As that all goes away, that's, I think, 50 to 70 basis points as well -- or 50 basis points for our Penang plant, 100 basis points for the plant closures in the U.S. So we're well along on those 2. As I said, both the plants will be closed and then Penang will be opened by the end of this year. The incremental revenue, that will drive another 70 basis points there in our bridge. That will come as these commercial markets start coming back. So we just talked about there's some mix there. The data center and automotive are going to be driving some growth. Aerospace and defense will be driving growth. And as we see that revenue growth pulling in strong margins, we need to continue to manage our costs. We've done that very well in the last couple of quarters. If you look at the margins that we had in Q3, we're back to our double digits, right? Historically, our North American PCB factories did mid- to high double digits. We have lost some of that productivity and we're heading back towards that. So this quarter, all of our factories are firing on all their cylinders. And so we're doing well. I think we're heading in the right direction and we're on track to get to that number now. We didn't put a time frame on it. We said kind of 2 to 3 years but we are heading in that direction. I think we feel strongly about that.

Okay. And then the company has had a net leverage target of under 2x. And by my math, you're actually there. So as the new CFO coming in, looking at the debt structure, are you comfortable with it or anything you'd want to...

Very comfortable. I mean, so my predecessor did me right by refinancing last year. And we're in a good position in our debt structure and our current leverage. We do like to have a -- keep a pretty conservative balance sheet to allow for expansion if we have grown through acquisition. So if there's acquisition targets out there, we're always looking. But we want to just have enough dry powder to be able to do that. But yes, I mean, we don't have a maturity in our debt until 2028 and then a couple of years beyond that. So we're in good position there. And as I say, we're generating good cash. So we've announced another $100 million buyback in Q2 of this year, and we've been doing some buybacks in Q3 and Q4 to return some of that cash to our stockholder base.

Okay. And then how do you characterize the current M&A environment? And are you sort of active or...

I wouldn't say active. We're certainly always watching. And as I said, we're doing a share buyback, so obviously, we're not hoarding our cash to make a big acquisition right now. With our strategy of trying to grow more towards the integrated electronics and the engineered products in the aerospace and defense area, those would be the targets we're looking at, and they tend to still be pretty expensive. So the M&A market is -- it's always active. But I think that with the debt rates going up, the sellers haven't really adjusted their expectations of price yet. And especially that A&D business, there's been a few local -- a few recent deals that are in the 14 to 15x and that's still pretty rich.

Okay. What about -- anything else that you might still be able to divest or are you happy with your current footprint?

We're always looking at opportunities to improve our cost structure. And so we don't have any current plans to divest anything else or close any factories. I think we've done what made the most sense right now. We're focused on the growth in Malaysia and the Syracuse building. So obviously, we've got those capacity needs. And so I don't think we're looking at closing anything immediately.

Okay, great. Okay. We've got a few seconds left. Any closing comments or anything, any kind of final thoughts you want to leave us with?

I just -- I think that we are well along our stated path of growing into expanding our product base into those engineered products. We want to be more of the higher-end, high-technology integrated electronics business and catering to the aerospace and defense business within the U.S. because of the stable growth that it has. That stable growth will generate less volatility, should hopefully, as we continue to manage the supply chain, expand the margins in that area and hopefully lead to increased valuation in the long run.

Okay, great. Okay. Dan, thank you so much for being with us.

You're welcome. Thank you. Thanks for having me. Thanks for coming.