TTM Technologies, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the TTM Technologies third quarter 2021 financial results conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. To ask a question, you may press star 1 on your telephone keypad. As a reminder, this conference is being recorded today, October 27, 2021. Samir Desai, TTM's Vice President of Corporate Development and Investor Relations, will now review TTM's disclosure statement.

Thanks, James. 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 Litigation Reform Act of 1995, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including factors explaining 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 may affect TTM, which may be found in the reports on Form 10-K, 10-Q, 8-K, the registration statement on 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 is available on TTM's website at www.ttm.com. We have also posted on our website a slide deck which we will refer to during our 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 third quarter for 2021 conference call. I'll begin with a review of our business strategy, followed by highlights from the quarter and a discussion of our third quarter results. Todd Schill, our CFO, will follow with an overview of our Q3 2021 financial performance and our Q4 2021 guidance. We will then open the call to your questions. In the third quarter of 2021, TGM generated revenues and non-GAAP EPS within the guided range, despite a challenging supply chain and labor environment. Year-on-year growth was led by strong demand in automotive, data center computing, and medical, industrial, and instrumentation end markets. These results were achieved despite an unprecedented number of operational headwinds, including supply chain constraints for ourselves and our customers, inflationary pressures, and the labor and logistic challenges in North America resulting in production inefficiencies, and power restrictions in China. Our global operations teams have responded to these immense challenges with a remarkable focus on delivering the customer commitments while flexibly responding to frequent surprises. We have been actively managing supply constraints and the higher raw material costs through such measures as supplier diversification, ongoing operational efficiency efforts, and quotation adjustments to mitigate the impact. The overall impact to our cost of goods sold was larger in Q3 than Q2 and continues to be elevated in Q4, since higher laminate and other raw material prices in the first half of the year take some time to work through our suppliers and our inventory. Furthermore, raw material prices continued to rise in Q3, although at a diminished rate of increase. Production inefficiencies in North America further exacerbated our costs and output challenges in the third quarter and will continue to do so in the fourth quarter. Power restrictions in China did not have a material effect on the third quarter as these impacts came late in the quarter, right before the planned October holidays. Coming out of the holidays, we have not experienced restrictions, but we are continuing to closely monitor the situation as we approach the winter season in China. 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 that over time, investors will be rewarded with more stable growth, strong cash flow performance, and improving margins. As part of this strategic transition, we sold our mobility business last year. We are now able to generate more consistent cash flow with our strong set of technologies and broad exposure to longer cycle end markets. A key part of our ongoing strategy will be to add capabilities and products that are complementary to our current offerings, both internally and through acquisitions. As such, we continue to invest organically in differentiated product technology solutions from our advanced technology center, RF&S business unit, and microelectronics businesses. 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. The vaccine rollout in the United States had initially resulted in a decline in new COVID cases. the Delta variant created another surge in late summer and early fall. In addition, many parts of the world have much lower vaccination rates, and the rise of the Delta variant led to significantly increasing case counts, resulting in a number of countries imposing lockdowns during the summer. More recently, case counts in the U.S. and Asia are declining, and lockdowns in Asia are being lifted. At TTM, we are seeing similar trends. and are using a data-driven process, monitoring vaccination rates and local case counts to determine safety precautions at our facilities. Our global manufacturing facilities have been operating throughout the pandemic, but in Q3, we dealt with a rising number of cases and resulting quarantines, which along with the general labor shortages contributed to production inefficiencies and capacity constraints in North America. We are presently adjusting to the next normal in which we learn to live with COVID-19 while continuing to support our customers and keeping our employees safe. Like many other companies, we continue to see more challenges in attracting and retaining labor. Our employees are paramount to the success of TTM, and we actively endeavor to demonstrate their value to our company through a combination of financial and non-financial methods. We continue to be hopeful that the expiration of elevated unemployment benefits in the US, increased vaccination rates, and our strong company culture will encourage potential employees to join TTM as we work to support our customers. Now I'd like to review our end markets. All historical end market disclosures exclude the divested mobility business unit and the two EMS plants which halted production in December of 2020. For more details on end market disclosures, please refer to page four of our earnings presentation, which is posted on our website. The aerospace and defense end market represented 31 percent total third quarter sales compared to 37 percent of Q3 2020 sales and 33% of sales in Q2 2021. We continue to experience a positive defense climate with our A&D program backlog at $723 million compared to $625 million a year ago. The solid demand 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 the AN-SPY-6 AESA radar program, and our overall book to bill for A&D was 1.32. On a year-on-year basis, A&D revenues declined due to commercial aerospace weakness, defense program timing, and production inefficiencies in North America. We expect sales in Q4 from this end market to rebound, and represent about 32 percent of our total sales. Given the year-over-year weakness in commercial aerospace, as well as the labor challenges in North America, we do not expect to meet this year's growth target of 2 to 4 percent. The medical industrial instrumentation end market contributed 20 percent of our total sales in the third quarter, compared to 19 percent in the year-ago quarter, and 19% in the second quarter of 2021. The MI&I market exceeded $100 million in Q3 revenue and performed much better than expectations as medical and industrial customers continued to rebound. For the fourth quarter, we expect MI&I to be 18% of revenues with continued strong orders from the medical and industrial markets. However, revenue will be limited by capacity constraints and component shortages. Given the strength in this end market in the first nine months of the year and the fourth quarter forecast, we expect to exceed the 2% to 4% growth target for 2021. Automotive sales represented 18% of total sales during the third quarter of 2021 compared to 13% in the year-ago quarter and 18% during the second quarter of 2021. Automotive grew 57% year over year. We are aware that the shortage of semiconductors has been limiting automotive production, but this phenomenon has not directly affected our business since we do not purchase semiconductors. However, we are monitoring this situation closely and are starting to see a modest reduction in our PCB demand as more automotive OEMs are reducing production plans due to the semiconductor shortage. We expect automotive to contribute 18% of total sales in Q4. Networking communications accounted for 16% of revenue during the third quarter of 2021. This compares to 17% in the third quarter of 2020 and 15% of revenue in the second quarter of 2021. We saw relative strength on a year-on-year basis in networking compared to telecom as the 5G build-out in China continues to be weak. In Q4, we expect this end market to be 15% of revenue as telecom demand continues to be soft. Sales in the data center computing end market represented 14% of total sales in the third quarter compared to 13% in Q3 of 2020 and 14% in the second quarter of 2021. This end market was up 29% year on year due primarily to growth from our data center customers. We expect revenues in this end market to represent approximately 15 percent of fourth quarter sales as strong data center demand continues to drive year-on-year growth. Next, I'll cover some details from the third quarter. All of the following operations metrics exclude the Mobility Business Unit and the two EMS plants that we close. This information is also available on page five of our earnings presentation. During the quarter, Our advanced technology business, which includes HDI, RigidFlex, and RF subsystems and components, accounted for approximately 29% of our revenue. This compares to approximately 29% in the year-ago quarter and 31% in Q2. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities in new programs and new markets. Capacity utilization in Asia Pacific was 91 percent in Q3 compared to 63 percent in the year-ago quarter and 88 percent in Q2. Our overall capacity utilization in North America was 50 percent in Q3 compared to 61 percent in the year-ago quarter and 49 percent in Q2. Our top five customers contributed 28% of total sales in the third quarter of 2021 compared to 29% in the second quarter of 2021. We did not have any customers above 10% in the quarter. At the end of Q3, our 90-day backlog, which is subject to cancellations, was $594.8 million compared to $437.8 million at the end of the third quarter last year and $553.1 million at the end of Q2. Our PCB book-to-bill ratio was 1.29 for the three months ending September 27th. Our backlog is higher than our revenue forecast due to uncertainty around both labor and supply chain challenges for our customers and ourselves. 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. Despite the raw materials and labor related challenges we are facing, our business performed in line with what we expected as a direct result of our employees and our supply chain partners concerted efforts to support TTM and our customers. Now, Todd will review our financial performance for the third quarter. Todd?