TTM Technologies, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the TTM Technologies Fourth Quarter 2020 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. You may press star 1 if you have a question. As a reminder, this conference is being recorded today, February 3, 2021. Samir Desai, TTM's Senior Director of Corporate Development and Investor Relations, will now review TTM's disclosure statement.

All right, thank you. Before we get started, I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995, including statements related to PTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the factors explained in our most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission. These forward-looking statements are based on management's expectations and assumptions as of the date of this presentation. TTM does not undertake any obligation to publicly update or revise any of these statements, whether as a result of new information, future events, or other circumstances, except as required by law. Please refer to the disclosures regarding the risk that it may affect TTM, which may be found in reports on Form 10-K, 10-Q, 8 , the registration statement of Form S-4, and the company's other SEC filings. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA. Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release which was filed with the SEC as available on TTM's website at www.ttm.com. We have also posted on this website a slide deck which we will refer to during the call. I will now turn the call over to Tom Edmond, TTM's Chief Executive Officer. Please go ahead, Tom.

Thank you, Samir. Good afternoon and thank you for joining us for our fourth quarter 2020 conference call. These continue to be challenging times, and I hope that all of you and your families are safe and healthy. I'll begin with a review of our business strategy, then an update on how COVID-19 has impacted our business, followed by highlights from the quarter and a discussion of our fourth quarter results. Todd Scholl, our CFO, will follow with an overview of our Q4 2020 financial performance, and our Q1 2020 guidance. We will then open the call to your questions. I'm pleased to report that in the fourth quarter of 2020, TTM generated revenues above the midpoint of guidance and non-GAAP EPS above the guided range. All end markets performed better than guidance while year-on-year growth in the automotive and defense end markets was offset by weakness in the medical, industrial and instrumentation and networking and telecom and markets. In addition, continued strong operational execution overcame production of inefficiencies and extra costs due to COVID-19. The COVID-19 pandemic has created operational difficulties, macroeconomic uncertainty and employee concerns. I am extremely proud of how TPM employees have worked to deliver excellent performance, despite the formidable and unprecedented challenges of this environment. I'd also like to highlight that in Q4, we repaid and settled our $250 million convertible bond with no dilution to shareholders, solid cash flow from operations, drove our net debt to EBITDA ratio to 1.4 at the end of Q4. Finally, we announced a $100 million share repurchase program as an additional tool to increase shareholder value following the strengthening of our balance sheet. For the full year 2020, excluding divested and closed businesses, TPM grew 3% with solid profitability, despite headwinds from COVID-19 and the strengthening Chinese currency. Full year cash flow from operations was $287.2 million, and along with the sale of the mobility business, enabled us to repay debt and reduce leverage, putting us in a strong position for the future. Next, I would like to provide an update on our long-term strategy. TTM is on a journey to transform our business to be less cyclical and more differentiated. We believe over time, investors will be rewarded with more stable growth, strong cash flow performance, and improving margins. A key part of that strategy will be to add capabilities and products that are complementary to our current offerings, both internally and through acquisitions. Looking forward, our balance sheet is in a strong position to pursue further acquisitions as well as to support our organic investment needs. I would also like to update you on the COVID situation. For the majority of 2020, we managed through COVID-19 with relatively minor impact to our production. Currently, the combination of colder weather in North America and the recent holiday season has created a surge of COVID cases. Since many of these infections are occurring in regions where our manufacturing locations or plants are located, we have also seen an increase of COVID cases within our employee population in North America, and we expect this condition to continue into 2021. While many of those that were infected returned to work after being cleared following testing, and quarantine protocols. We still have a number of employees in quarantine, which is causing some production inefficiencies. We continue to conduct rapid testing, contact tracing, and to quarantine individuals who are in close contact with infected team members, in addition to deep cleaning affected work areas. We also continue other measures, such as extensive internal communications, masking, temperature checks, and proper distancing in our facilities worldwide. Because of the stringent preventative measures in place and our culture of transparency in communications, these events have had less impact on our operations than might have been the case without these precautions. Now I'd like to review our end markets. All historical end market disclosures exclude the mobility business unit and the two EMS plants which halted production in December. For more details on end market disclosures, please refer to our fourth quarter earnings press release and pages four and five of our earnings presentation, both of which are posted on our website. The aerospace and defense end market represented 38% of total fourth quarter sales compared to 37% of Q4 2019 sales and 37% of sales in Q3 2020. We expect sales in Q1 from this end market to represent about 36% of our total sales. We saw solid growth in our A&D segment with Q4 revenues up 2% year on year to a record high and an A&D record program backlog of $687 million compared to $600 million in the year-ago quarter. Strength in defense more than offset weakness in the commercial aerospace end market. Growth in the defense market is a result of our strong strategic program alignment and key bookings for ongoing franchise programs. We saw significant bookings in the quarter for AESA radar systems, for Raytheon's Army, Navy, transportable surveillance radar to protect against ballistic missiles, Lockheed's SPY-7, a variant of the U.S. LRDR program for the F-110 Spanish frigate, as well as Northrop's upgrade of F-16 fighter jets with scalable agile beam radar. For the full year, Aerospace and Defense increased 7% and reached a record high as CPM benefited from increased defense spending and demand for multiple new programs. We were pleased to see the 2021 NDAA pass into law with bipartisan support, which suggests that defense budgets could stay stable at a high level going forward. Given our solid program alignment, we would expect to outperform broader defense budget growth. In 2021, we expect growth to be in line with market projections of 2% to 4%, driven by the defense side of our business. We expect the commercial aerospace portion, which was 16% of our A&D market in 2020, to be down in 2021. Automotive sales represented 17% of total sales during the fourth quarter of 2020, compared to 15% in the year-ago quarter and 13% during the third quarter of 2020. Automotive grew almost 40% sequentially, following the growth in Q3 and returned to year-on-year growth of 14%. We expect automotive to contribute 18% of total sales in Q1. For the full year, automotive declined 11%, as both demand and supply were affected by COVID-19 in the first half of the year, followed by a recovery in the second half of the year. In 2020, advanced technology was 26% of our automotive end market, compared to 20% in 2019. For the full year, we won design wins with a lifetime value of $629 million compared to $475 million in 2019. In 2021, due to the anticipated stronger start, we expect the market to be above longer-term forecasts of 3 to 6 percent. The medical industrial instrumentation end market contributed 16 percent of our total sales in the fourth quarter, compared to 17 percent in the year-ago quarter and 19% in the third quarter of 2020. For the first quarter, we expect this market to be 16% of revenues. For the full year, MI&I grew 12%, well above the trend line due to strengthen our instrumentation customers, specifically automated test equipment, and strengthen our medical customers, particularly for emergency requirements of printed circuit boards used in ventilators, and patient monitoring systems applied to the treatment of COVID-19. In 2021, we expect growth to be below the 2% to 4% forecast as these segments see moderated demand following the extraordinary strength of 2020. Networking communications accounted for 16% of revenue during the fourth quarter of 2020. This compares to 17% in the fourth quarter of 2019 and 17% of revenue in the third quarter of 2020. We saw relative strength in the networking segment compared to the telecom segment as 5G builds paused temporarily. In Q1, we expect this end market to be 15% of revenue due primarily to uncertainty around the timing and ramp of phase three builds for 5G in China. For the full year, networking communications declined 4%. We expect this market to grow, but be below the longer-term forecast of 5% to 8% growth in 2021 due to the anticipated soft start in the early part of the year, followed by a ramp of 5G infrastructure needs in the back half of the year, complemented by growth in networking. Sales in the computing storage peripherals end market represented 13% of total sales in the fourth quarter compared to 13% in Q4 of 2019 and in the third quarter of 2020. This end market was up 2% year-on-year as growth in our semiconductor customers offset modest year-on-year declines from our data center customers. We expect revenues in this end market to represent approximately 14% of first quarter sales For the full year, computing grew 9% as we saw growth across our data center and semiconductor customers. In 2021, we expect to be above the forecasted end market growth of 1% to 3%, driven primarily by data center growth. Next, I'll cover some details from the fourth quarter. Note that all of the following operations metrics exclude the mobility business unit and the two EMS plants that we closed. This information is also available on page six of our earnings presentation. During the quarter, our advanced technology business, which includes HDI, RigidFlex, and RF subsystems and components, accounted for approximately 31% of our revenues. This compares to approximately 27% in the year-ago quarter and 29% in Q3. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities in new markets. Capacity utilization in Asia Pacific was 63% in Q4 compared to 61% in the year-ago quarter and 63% in Q3. Our overall capacity utilization in North America was 58% in Q3 compared to 58% in the year-ago quarter and 61% in Q3. Our top five customers contributed 34% of total sales in the fourth quarter of 2020 compared to 36% in the third quarter of 2020. Our largest customer accounted for 14% of sales in the fourth quarter. At the end of Q4, our 90-day backlog, which is subject to cancellations, was $483.9 million compared to $402.8 million at the end of the fourth quarter last year and $437.8 million at the end of Q3. Our PCB book-to-bill ratio was 1.19 for the three months ending December 28th. I'd like to conclude by again thanking our employees for continuing to contribute to TTM and our critical mission of inspiring innovation with our customers. Their efforts are particularly appreciated during these times by our customers in critical central areas like defense and the medical industries. Despite the COVID-19, and currency-related challenges we faced in 2020. Our business performed better than we expected as a direct result of operational excellence and market diversification, and our employees' concerted efforts to engage and support our customers. We've also taken positive strategic moves that will strengthen PPM for the long term. Now, Todd will review our financial performance for the fourth quarter. Todd? Thanks Tom and good afternoon everyone. As Tom mentioned earlier, in 2020 TPM announced the closing of the sale of its Mobility Business Unit. As such, the disclosure of TPM's GAAP results reflects the Mobility Business Unit as a discontinued operation. During this call, I will discuss non-GAAP financial information which excludes the results of the Mobility Business Unit. The EMS Business Unit is still included in both the GAAP and non-GAAP results we have reported. Please refer to the earnings schedule for additional details on exited businesses and continuing operations. Page 7 of our earnings presentation and the appendix of our investor presentation also contain this information. For the fourth quarter, net sales from continuing operations were $523.8 million. compared to $535.7 million in the fourth quarter of 2019. The year-over-year decrease in revenue was due to declines in our medical, industrial instrumentation, and networking telecom end markets, with roughly a third of the decline coming from the EMS plant, which we have closed. This was particularly, or excuse me, this was partially offset by growth in our automotive, aerospace and defense, and computing end markets. Excluding the impact of the two EMS plants being shut down, our revenues were down 1.1% year on year. GAAP operating income from continuing operations for the fourth quarter of 2020 was $29.2 million, compared to GAAP operating income of $29.4 million in the fourth quarter of last year. On a GAAP basis, net income from continuing operations in the fourth quarter of 2020 was $39 million, or 34 cents per diluted share. This compares to a net income of $10.8 million, or 10 cents per diluted share, in the fourth quarter of 2019. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes our divested mobility business unit, non-routine tax items, M&A related and restructuring costs, certain non-cash expense items, and other unusual or infrequent items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparison with expectations and prior periods. Gross margin in the fourth quarter was 17.5% compared to 19.1% in the fourth quarter of 2019. The year-over-year decrease in gross margin was due to lower revenue, COVID-19-related costs and associated labor inefficiencies, and foreign exchange headwinds which increased our China-based costs. Selling and marketing expense was $15.2 million in the fourth quarter, or 2.9 percent of net sales, versus $17 million, or 3.2 percent of net sales, a year ago. Fourth quarter G&A expense was $24.4 million, or 4.7 percent of net sales, compared to $29.8 million, or 5.6 percent of net sales, in the same quarter a year ago. In Q4 next 2020, R&B was $4.6 million or 0.87% of revenues. This compares to $4.3 million or 0.81% in the year-ago quarter. Our operating margin in Q4 was 9%. This compares to 9.6% in the same quarter last year. Interest expense was $11.6 million in the fourth quarter. a decrease of $4.8 million from the same quarter last year to the lower interest rate and the term loan repayment of $400 million. During the quarter, we recorded $5.3 million of foreign exchange losses. Government incentives reduced the net loss to $1.9 million, or approximately two cents of EPS. This compares to a loss of $1.8 million, or approximately one cent of EPS, in Q4 of last year. Our effective tax rate was a negative 19% in the fourth quarter due to a change in the non-GAAP full year tax rate from 15% to 6%. Fourth quarter net income was $40.2 million or 37 cents per diluted share. This compares the fourth quarter 2019 net income of $27.5 million or 26 cents per diluted share. Adjusted EBITDA for the fourth quarter was $68.2 million, or 13% of net sales, compared with fourth quarter 2019 adjusted EBITDA of $72.8 million, or 13.6% of net sales. Depreciation for the fourth quarter was $22.7 million. Net capital spending for the quarter was $18.7 million. Our balance sheet and liquidity positions remain very strong. Cash flow from operations was $55.5 million in the fourth quarter or 10.6% of revenue. Cash and cash equivalents at the end of the fourth quarter 2020 were $451.2 million. This cash number is after we paid $250 million to settle our convertible bond on December 15th. This cash number, excuse me, At the end of the fourth quarter, our net debt divided by last 12 months EBITDA was 1.4 times. During the quarter, we also received a two-notch upgrade from Moody's to BA II. As Tom mentioned in his comments, today we announced a two-year, $100 million share repurchase program. As we continue to transform our company, we have modified our capital allocation strategy. M&A will still be our priority for increasing shareholder value, but as the company becomes more consistent in its cash generating performance, we believe that we can utilize both tools to increase shareholder value. Now I'd like to turn to our guidance for the first quarter. Looking ahead, we believe that COVID-19 may continue to cause end market demand disruption, supply chain challenges, as well as inefficiencies with our own production. With this in mind, we estimate total revenue for the first quarter of 2021 to be in the range of $490 to $530 million. We expect non-GAAP earnings to be in the range of $0.19 to $0.25 per diluted share. The EPS forecast is based on a diluted share count of approximately 109 million shares. Our share count guidance includes diluted securities, such as options and RSUs, but no shares associated with our warrants. We believe we expect that SG&A expense will be about 8.4% of revenue in the first quarter and R&D to be about 1% of revenue. We expect interest expense to total approximately $11 million. And finally, we estimate our effective tax rate to be between 10% and 15%. To assist you in developing your financial models, we offer the following additional information. During the first quarter, we expect to record amortization of intangibles of about $10.9 million, stock-based compensation expense of $4.7 million, non-cash interest expense of approximately $0.5 million, and we estimate depreciation expense will be approximately $22 million. Finally, I'd like to announce that we'll be participating virtually in the Cowan Aerospace and Defense and Industrial Conference on February 9th. the J.P. Morgan Leverage Finance and High Yield Conference on March 1st, and the Truist Technology Networking and Services Conference on March 9th. That concludes the prepared remarks, and now I'd like to open the line for questions. Tulare?