TTM Technologies, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to TTM Technologies' fourth quarter 2021 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 ask a question by pressing star 1 on your touchtone telephone. Star 1 for questions. As a reminder, this call is being recorded today, February 9, 2021. Sameer Desai, TTM's Vice President of Corporate Development and Investor Relations, will now review TTM's disclosure statement. Please go ahead.

Thanks, Keith. 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 the factors explained in a more recent annual report on Form 10-K and our other filings with the Securities and Exchange Commission. These forward-looking statements are based on management's expectations and assumptions of the date of this presentation. PTM 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 in 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 FCC and is available on TTM's website, 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 fourth quarter and fiscal year 2021 conference call. I'll begin with a review of our business highlights from the quarter. and a discussion of our fourth quarter results, followed by a summary of our business strategy. Todd Schill, our CFO, will follow with an overview of our Q4 2021 financial performance and our Q1 2022 guidance. We will then open the call to your questions. In the fourth quarter of 2021, TTM delivered revenues above the guided range and non-GAAP EPS at the high end of guidance. despite a challenging supply chain and labor environment and the impact of the Omicron variant of COVID-19. All end markets performed better than we expected, with strong year-on-year growth led by our commercial end markets. These results were achieved despite ongoing operational headwinds, including supply chain constraints for ourselves and our customers, inflationary pressures, and continued labor and logistics challenges in North America, resulting in production inefficiencies. Given the time that raw material prices take to work through our inventory, the impact to our cost of goods sold was larger in Q4 than in Q3, but is stabilizing at an elevated level in Q1. During 2021, we mitigated virtually all of the material price increases through additional cost savings adjustment in mix, and product price adjustments. However, production inefficiencies and labor challenges in North America further exacerbated our costs and output challenges in the fourth quarter and will continue to do so in the first quarter. Looking into the first quarter, we are expecting a sequential decline in revenues and profits due to seasonality associated with Chinese New Year, having one less week in the quarter, and continued labor shortages in North America. For the full year 2021, excluding divested and closed businesses, TTM grew 10.9% with solid profitability despite all the challenges we previously mentioned. Full year cash flow from operations was $176.6 million, and we used part of our cash flow to return capital to shareholders, as Todd will discuss later. This has been and continues to be one of the most difficult manufacturing environments we have ever experienced, and I am proud of what our employees have accomplished in the face of these challenges. I would also like to update you on the COVID situation. As you are aware, the Omicron variant has created another surge of positive cases during the winter in North America. as well as other parts of the world. At TTM, our employee population was similarly impacted with positive COVID cases that continue into Q1, resulting in employee quarantines, which, along with the general labor shortages, contributed to production inefficiencies and capacity constraints in North America. In some facilities, our absentee rate climbed to as much as 20%. In late January, we started to see relief as cases began to subside and our absentee rate started to decline. All of our manufacturing facilities have been and continue to be operational. Like many other companies, we continue to see challenges in attracting and retaining labor, particularly in North America. 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 have done a thorough review of our compensation practices and have embarked on a significant initiative to realign our compensation in North America with a goal of being competitive in the labor markets in which we operate. These changes will increase our cost structure in the first half of the year while improving our labor positioning. In the fourth quarter, as it became clear that we needed to make these adjustments, we announced another round of price increases to our customers. Given our extensive backlog and contractual commitments, we do not expect the full impact of the new pricing to take effect until the second half of the year. As a result, we expect profitability to improve in the second half over the first half. Our long-term strategy remains unchanged. 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 the strategic transition, we sold our mobility business in 2020. 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. 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 pages four and five of our earnings presentation, which is posted on our website. The aerospace and defense end market represented 30 percent of total fourth quarter sales compared to 38 percent of Q4 2020 sales and 31 percent of sales in Q3 2021. We continue to experience a positive defense climate. with our A&D program backlog at $768 million, a new record compared to $687 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 SPY-6 AESA radar program. and our overall book to bill for A&D was 1.25. We expect sales in Q1 from this end market to represent about 33% of our total sales. For the full year, aerospace and defense decreased 2.3% due to significant declines in commercial aerospace and ongoing production inefficiencies in North America. We were happy to see the National Defense Authorization Act or NDAA, for fiscal 2022 signed into law last December, providing a roughly 5% increase in top-line defense spending. In addition, the new Section 851 of the 2022 NDAA requires that the Department of Defense purchase products that contain printed circuit boards manufactured by U.S. suppliers or from U.S. allied countries that are part of the weapon systems, and other telecom and datacom or other critical commercial applications used by the Department of Defense starting in January 2027. This should provide long-term benefits to TTM due to our strong North America footprint. In 2022, we expect growth to be in line with market projections of two to 4% driven by the defense side of our business as we expect a slow recovery in our commercial aerospace segment. Automotive sales represented 19% of total sales during the fourth quarter of 2021 compared to 17% in the year-ago quarter and 18% during the third quarter of 2021. Automotive grew 30% 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 will continue to monitor this situation closely. We expect automotive to contribute 20% of total sales in the first quarter. For the full year, automotive increased 51% as supply and demand rebounded after COVID impacts in 2020. In 2021, advanced technology was 24% of our automotive end market compared to 26% in 2020. While our advanced technology revenues grew 41% year-on-year, our standard technologies grew even faster. In Q1, despite Chinese New Year, we are starting the year with solid year-on-year growth and we expect the market in 2022 to be above longer-term forecasts of 3% to 6%. The medical industrial instrumentation end market contributed 19% of our total sales in the fourth quarter, compared to 16% in the year-ago quarter and 20% in the third quarter of 2021. The MI&I market exceeded $100 million in Q4 revenue and performed much better than expectations. as we saw broad-based strength across all segments. For the first quarter, we expect MI&I to be 18% of revenues with a continued strong demand environment. For the full year, MI&I grew 11% following 12% growth the previous year, well above trend line for two years in a row due to strength in our industrial customers in particular. In 2022, we expect growth to be in line with the 2% to 4% forecast as these segments see moderated demand following the extraordinary strength of the past two years. Networking communications accounted for 16% of revenue during the fourth quarter of 2021. This compares to 16% in the fourth quarter of 2020 and 16% of revenue in the third 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 and as we made several strategic decisions to use our higher layer count capacity for data center and key networking customers. In Q1, we expect this end market to be 13% of revenue as telecom demand continues to be soft and due to supply constraints in networking. For the full year, networking communications declined 0.3%, with strength in networking offset by weakness in telecom. We expect this market to grow, but be below the longer-term forecast of 5% to 8% growth in 2022 due to the anticipated soft start in the early part of the year. Sales in the data center computing end market represented 15% of total sales in the fourth quarter. compared to 13% in Q4 of 2020 and 14% in the third quarter of 2021. This end market was up 34% year on year due primarily to growth from our data center customers. We expect revenues in this end market to represent approximately 15% of first quarter sales as strong data center demand continues to drive year on year growth. For the full year, data center computing grew 25% as we saw growth across our data center customers. In 2022, 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 of the details of the fourth quarter. 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 five of our earnings presentation. During the quarter, our advanced technology business, which includes HDI, RigidFlex, microelectronics, and RF subsystems and components, accounted for approximately 31% of our revenue. This compares to approximately 31% 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 programs and new markets. Capacity utilization in Asia Pacific was 88% in Q4 compared to 63% in the year-ago quarter and 91% in Q3. Our overall capacity utilization in North America was 50% in Q4 compared to 58% in the year-ago quarter and 50% in Q3. Our top five customers contributed 32% of total sales in the fourth quarter of 2021 compared to 28% in the third quarter of 2021. We had one customer above 10% in the quarter. At the end of Q4, our 90-day backlog, which is subject to cancellations, was $597.2 million compared to $483.9 million at the end of the fourth quarter last year and $594.8 million at the end of Q3. Our PCB book-to-bill ratio was 1.20 for the three months ending January 3rd. 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 and our critical mission of inspiring innovation with our customers. Despite the raw materials and labor-related challenges we are facing, our business performed better than 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 fourth quarter. Todd?