TTM Technologies Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 9 speakers on the call.

Operator

Good morning. Thank you for standing by. Welcome to the TTN Technologies 4th Quarter and Full Year 2023 Financial Results Conference Call. During today's presentation, all parties will be in a listen only mode. As a reminder, this conference is being recorded today, February 7, 2024.

Operator

Samir Dazai, TTN's Vice President of Corporate Development and Investor Relations will now review TTN's disclosure statement.

Speaker 1

Thank you. Before we get started, I would like to remind everyone that today's call contains forward looking statements, including statements related to TTM's future business outlook. Actual results could differ materially from these forward looking statements due to 1 or more risks and uncertainties, including the risk factors we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward looking statements represent management's expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward looking statements, whether as a result of new information, future events or other circumstances, except as required by law.

Speaker 1

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 measures prepared and presented in accordance with GAAP, and we direct you to the reconciliations between GAAP and non GAAP measures included in the company's earnings release, which is available on the Investor Relations section of TTM's website at investors. Ttm.com. We also have posted on that website a slide deck, which we will refer to during our call. I will now turn the call over to Tom Edman, TTM's Chief Executive Officer.

Speaker 1

Please go ahead, Tom.

Speaker 2

Thank you, Sameer. Good morning and thank you for joining us for our Q4 and full year 2023 conference call. I'll begin with a review of our business highlights from the quarter and a discussion of our 4th quarter results, followed by a summary of our business strategy. Dan Bailey, our CFO, will follow with an overview of our Q4 2023 financial performance and our Q1 2024 guidance. We will then open the call to your questions.

Speaker 2

The quarter's results are also shown on Slide 4 of the investor presentation posted on TTM's website. We delivered a strong finish to the year despite the current uncertain macroeconomic environment And I would like to thank our employees for their hard work and contribution to generating these results. In the Q4 of 2023, Non GAAP earnings per share were above the high end of the guided range due to excellent operating performance and favorable product mix. Revenues were within the previously guided range due to better than expected results from our Aerospace and Defense and Data Center Computing end markets, which was offset by lower than expected results from our medical, industrial and instrumentation and automotive end markets. Demand in our aerospace and defense market which was 46% of revenues for the quarter continues to be solid with continued strong backlog offset by weaker demand in some of our commercial end markets.

Speaker 2

For the full year 2023, Revenues declined 11% driven by the downturn in commercial end markets offset by growth in the aerospace and defense end market. While full year non GAAP operating margins were down year on year driven by the revenue decline, 4th quarter operating margins were actually up year on year despite the revenue headwinds. Full year cash flow from operations was $187,300,000 enabling us to strengthen our balance sheet while returning some of the capital to shareholders. In addition, we refinanced our term loan and asset based loan improving the tenor with the 1st maturity date out to 2028. I would now like to provide a strategic update.

Speaker 2

TTM is on a journey to transform our business to be less cyclical and more differentiated. Over the past several years, TTM has consistently emphasized that a key part of our strategy is to add value to the product solutions that we deliver to our customers, particularly in the aerospace and defense market. As a result of strategic moves with the A and D acquisitions of Anaren and Telephonics Since 2018, over 50% of our A and D revenues are now being generated from engineered and integrated electronic products with PCBs being less than 50% of the overall contribution. Another important element of our differentiation strategy is our investment in a new state of the art highly automated PCB manufacturing facility in Penang, Malaysia. The decision to build this new factory is a direct response to our customers' increasing concerns about supply chain resiliency and regional diversification.

Speaker 2

And in particular, the need for advanced multilayer PCB manufacturing options in locations outside the Greater China region. The new facility in Malaysia will support customers in our commercial markets such as networking, data center computing and medical, industrial and instrumentation. We continue to make progress on the Malaysian facility with all major processes now running And we are currently sampling product to customers for qualifications. I'd also like to update you on the consolidation of our manufacturing footprint. We previously announced our plan to close 3 small manufacturing facilities in order to improve total plant utilization, operational performance, customer focus and profitability.

Speaker 2

During the course of 2023, PCB Manufacturing operations in Anaheim and Santa Clara, California and Hong Kong were closed and consolidated into TTM remaining facilities. We seized production at our Hong Kong manufacturing facility during the 2nd quarter, Anaheim in the Q3 and Santa Clara at the end of 2023. We are presently ramping production for the transferred parts at receiving facilities throughout our North America footprint. Finally, I would like to update you on the previous announcement of our intent to our advanced technology capability for the aerospace and defense market through the construction of a new facility immediately adjacent to our Syracuse, New York campus. Our proposed new facility will bring disruptive domestic production of high technology ultra HDI PCBs in support of national security requirements.

Speaker 2

This new facility is expected to focus on high technology PCB production in North America, providing customers with reduced lead times and a significant increase in domestic capacity for Ultra HDI PCBs. Provided we are able to complete discussions with various stakeholders regarding their support for this facility, We anticipate that we will be prepared to break ground in the first half of twenty twenty four with initial production within 18 months after groundbreaking. Phase 1 of the proposed project, including capital for campus wide improvements, is estimated to be $100,000,000 to $130,000,000 and is anticipated to run through 2026 with TTM's final capital investment commitments determined after finalizing terms with various stakeholders. Now I'd like to review our end markets, which are referenced on Page 4 of the earnings presentation on our website. The aerospace and defense end market represented 46% of total 4th quarter sales compared to 40% of Q4 2022 sales and 45% of sales in Q3 2023.

Speaker 2

The solid demand in the defense market is a result of a positive tailwind in previous defense budgets, our strong strategic program alignment and key bookings for ongoing franchise programs. At the end of the Q4, our A and D program backlog was $1,300,000,000 During the quarter, we saw significant bookings for a key restricted program. We expect sales in Q1 from this end market to also represent about 46% of our total sales coming off a seasonally high Q4. For the full year, Aerospace and Defense revenues grew 17%, primarily due to a full year of telephonics in 2023 compared to 6 months in 2022. Excluding that impact, organic growth was 6%.

Speaker 2

In 2024, we expect end market growth to be above longer term market projections of 3% to 5%. Sales in the data center computing end market represented 17% of total sales in the 4th quarter compared to 14% in Q4 of 2022 17% in the Q3 of 2023. This end market performed better than we expected and saw 15% year on year growth due to strength in our data center customers building products for generative AI applications. We expect revenues in this end market to represent approximately 17% of 1st quarter sales. For the full year, data center computing declined 16% Due to inventory corrections for semiconductor and data center customers early in the year following 17% growth in 2022, 25% growth in 2021% in 2020.

Speaker 2

In 2024, we expect be above the longer term end market growth of 4% to 7%, driven primarily by generative AI applications. The medical industrial instrumentation end market contributed 16% of our total sales in the 4th quarter compared to 17% in the year ago quarter and 16% in the Q3 of 2023. The year over year decline was caused primarily by inventory reductions at a number of our customers, particularly in the industrial and instrumentation areas. For the Q1, we expect MI and I to be 16% of revenues. For the full year, Mi and I declined 25% due to the inventory correction at many customers and weak demand from semiconductor test companies following 16.7% growth in 2022, 11.5% growth in 2021 and 12.4% growth in 2020, well above industry forecast 3 years in a row as we took advantage of megatrends in faster growing sub segments of this end market.

Speaker 2

In 2024, we expect growth to be in line with the 2% to 4% longer term industry forecast for this end market. Automotive sales represented 15% total sales during the Q4 of 2023 compared to 16% in the year ago quarter and 15% during the Q3 of 2023. The year over year decline for automotive was due primarily to continued inventory adjustments at several customers. We expect our automotive business to contribute 14% of total sales in Q1 due to typical seasonality in the first quarter from the Lunar New Year and ongoing demand softness. For the full year, automotive decreased 16% due to the inventory correction at automotive customers.

Speaker 2

In 2023, advanced technology was 36% of our automotive end market compared to 31% in 2022 due to strong growth in our HDI and radar product areas. In 2023, we won new designs with a lifetime value of $608,000,000 compared to $530,000,000 in 20 22. Designs that we are winning this year will contribute to revenues in future years. We expect this market in 2024 to be below longer term forecasts of 3% to 5% as customers continue to adjust inventories in light of ongoing demand softness. Networking accounted for 6% of revenue during the Q4 of 2023.

Speaker 2

This compares to 13% in the Q4 of 2022 and 7% of revenue in the Q3 of 2023. Demand was softer as customers continue to focus on inventory digestion as well as weak end market demand. As a reminder, the Shanghai backplane business, which we sold in our Q2, contributed approximately $12,000,000 sales in this segment in the Q4 of 2022. In Q1, we expect this end market to be 7% of revenues. For the full year, networking declined 46% due to inventory correction at both networking and telecom customers as well as weak demand at telecom customers.

Speaker 2

In addition, we sold the Shanghai BPA facility in Q2 of 2023 that had $45,000,000 revenues in 2022 compared to $8,000,000 in 2023. We expect this market to be below longer term forecasts of 2% to 5% growth in 2024 due to the softer start of the year. Next, I'll cover some details from the Q4. This information is also available on Page 5 of our earnings presentation. During the quarter, Our Advanced Technology and Engineered Products business which includes HDI, Rigid Flex, RF subsystems and components and engineered systems accounted for approximately 47% of our revenue.

Speaker 2

This compares to approximately 39% in the year ago quarter and 47% in Q3. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology and engineered products capabilities in new programs and new markets. PCB capacity utilization in Asia Pacific was 51% in Q4 compared to 69% in the year ago quarter and 46% in Q3. Our overall PCB capacity utilization in North America was 35% in Q4 compared to 41% in the year ago quarter and 38% in Q3. The lower year over year rate in Asia Pacific was caused by a decline in production volumes, while the lower year over year rate in North America was due to additional plating capacity added as well as a greater mix of higher technology product that requires less finished plating.

Speaker 2

As a reminder, North America utilization figures are not as meaningful as Asia Pacific Because bottlenecks in these volume facilities tend to occur in areas outside of plating, which is the core process that we use in calculating utilization rates. Our top five customers contributed 44% of total sales in the Q4 of 2023 compared to 43% in the Q3 of 2023. We had 2 customers over 10% of our total sales in the quarter. At the end of Q4, our 90 day backlog, which is subject to cancellations, was $575,900,000 compared to $603,100,000 at the end of the Q4 last year. Our book to bill ratio was 0.88 for the 3 months ended January 1.

Speaker 2

Now Dan will review our financial performance for the Q4. Dan?

Speaker 3

Thanks, Tom, and good morning, everyone. I will review our financial results for the 4th quarter were included in the press release distributed today as well as on Slide 6 of the earnings presentation posted on our website. For the 4th quarter, Net sales were $569,000,000 compared to $617,200,000 in the Q4 of 2022. The year over year decrease was due to declines in our automotive, medical, industrial and instrumentation and networking end markets, partially offset by growth in our data center computing and aerospace and defense end markets. The sale of our BPA facility in Q2 2023 as well as the previously announced PCB plant consolidation also contributed to the decline in net sales.

Speaker 3

For the full year, net sales were $2,200,000,000 compared to $2,500,000,000 in 2022. The 11% decline was driven by declines in our commercial markets, partially offset by growth in our aerospace and defense end market and a full year of the Telefonix acquisition. The sale of the WPA facility in Q2 2023 as well as the previously announced PCB plant consolidations also contributed to the decline in net sales. GAAP operating income for the Q4 of 2023 was $34,600,000 GAAP operating income for the Q4 of 2022 was $97,600,000 and included a gain of $51,800,000 in December 2022 from the sale of the property occupied from our former Shanghai EMS entity. On a GAAP basis, net income in the Q4 of 2023 was $17,300,000 or $0.17 per diluted share.

Speaker 3

This compares to GAAP net income of $6,000,000 or 6% per diluted share in the Q4 of last year. The remainder of my comments will focus on our non GAAP financial performance. Our non GAAP performance excludes M and A related costs, restructuring costs, certain non cash expense items such as amortization of intangibles, impairment of goodwill and stock compensation, gains on the sale of property and other unusual or infrequent items. We present non GAAP financial information enable investors to see the company through the eyes of management and to facilitate comparisons with expectations in prior periods. Gross margin in the 4th quarter was 21.3% and compares to 19.8% in the Q4 of 2022.

Speaker 3

The year on year increase was due to a more favorable product mix and improved execution in the North America region, partially offset by lower sales volume and less premium in our commercial markets. Selling and marketing expense was $17,800,000 in the 4th quarter or 3.1% of net sales versus $18,800,000 or 3.0 percent of net sales a year ago. 4th quarter G and A expense was $34,900,000 or 6.1 percent of net sales compared to $37,400,000 or 6.1% of net sales in the same quarter a year ago. In Q4 2023, research and development was 7,300,000 or 1.3% of net sales compared to $6,400,000 1% in the year ago quarter. Our operating margin in Q4 was 10.7%, which compares to 9.7% in the same quarter last year.

Speaker 3

Interest expense was $12,900,000 in the 4th quarter compared to $12,000,000 in the same quarter last year. During the quarter, was a negative $7,000,000 foreign exchange impact below the operating income line. Government incentives and interest income of $3,600,000 resulted in a net $3,400,000 loss or a $0.03 negative impact to EPS. This compares to a net loss of $2,000,000 or a $0.02 impact on EPS in Q4 last year. Our effective tax rate was 4.1% in the 4th quarter, resulting in tax expense of $1,900,000 This compares to a tax rate of 6.5 percent or tax expense of $2,900,000 in the prior year.

Speaker 3

4th quarter net income was $43,000,000 or $0.41 per diluted share. This compares to 4th quarter 2022 net income $42,700,000 or $0.41 per diluted share. Adjusted EBITDA for the 4th quarter was 80,900,000 or 14.2 percent of net sales compared with Q4 2022 adjusted EBITDA of $81,600,000 or 13.2 percent of net sales. Depreciation for the Q4 was $25,100,000 Net capital spending for the quarter was $46,000,000 Cash flow from operations in the Q4 of 2023 was $47,500,000 We repurchased 784,000 shares of common stock for 9,800,000 at an average price of $12.52 per share. Cash and cash equivalents at the end of 2023 totaled 450,000,000 Our net debt divided by last 12 months EBITDA was 1.6x, at the low end of our targeted range of 1.5x to 2x.

Speaker 3

For the full year, cash flow from operations was $187,300,000 or 8.4 percent of net sales. Free cash flow for the full year was $27,500,000 or 1.2 percent of net sales as we invested in our Penang facility. Now I will turn to our guidance for the Q1 of 2024. We project net sales for the Q1 of 2024 to be in the range of 530 to $570,000,000 and non GAAP earnings to be in the range of $0.24 to $0.30 per diluted share, which is inclusive of costs associated with starting up of the NAND facility. The EPS forecast is based on diluted share count of approximately 104,000,000 shares, which includes the dilutive effect of outstanding stock options and other stock awards.

Speaker 3

We expect SG and A expense to be about 9.9% of net sales in the quarter and R and D to be about 1.2 percent of net sales. We expect interest expense of approximately $12,300,000 and interest income of approximately 2 $1,000,000 Finally, we estimate our effective tax rate to be between 12% 16%. Further, we expect to record depreciation in approximately $25,000,000 amortization of approximately $14,000,000 stock based compensation expense of approximately 5,000,000 and non cash interest expense of approximately $500,000 And finally, I'd like to announce that we were participating in the Cowen Aerospace and Defense Conference in Washington DC on February 13, the JPMorgan Global High Yield and Leveraged Finance Conference in Miami on February 27, and the JPMorgan Industrials Conference in New York on March 12. That concludes our prepared remarks. Now, we'd like to open up the line for questions.

Operator

Our first question for the day will come from Jim Ricchiuti of Needham and Company. Your line is open.

Speaker 4

Hi, thank you. Good morning. On the automotive side, Tom, any sense as to the duration of this inventory drawdown that you're seeing with the Tier 1s? And to what extent are you seeing some weakness also Just on some of the softness on the EV side in the U. S.

Speaker 4

And Europe, are you seeing any signs of that?

Speaker 5

Yes. Thanks, Jim. So overall, on automotive, this is one of the markets that I think is relatively soft. We are seeing year on year Declines in all three major regions, particularly in Asia. And just a reminder, we tend to in China, our volume tends to go to joint ventures that are joint ventures of Tier 1s, Western World Tier 1s, you will, in China.

Speaker 5

So I think they are feeling the impact there of EVs. If you look into the Americas and Europe, Less so, I think we're still seeing better demand climate there, though it is still down year on year. So certainly a combination of ongoing demand some demand softness and ongoing inventory controls as customers adjust their forecasts. So hopefully that gives you an answer there, Jim.

Speaker 4

Yes, that's helpful. And Dan, maybe a question for you as my follow-up. And I apologize, you may have referenced it, but can as we think about the scale up in Penang, how much of a headwind Is that in Q1 to gross margins and maybe how does that how do you see that easing as we go through the year?

Speaker 3

Sure. Thanks. Good question. We did see so historically, we were in 2023 mentioned about 30 basis points to 50 basis points headwind on Penang, and that is pretty much what we experienced through the end of the year. Going into the new year in 2024, it's gotten a little bit Higher than that, it's probably going to be about 50 to 75 basis points for the first half of the year and then easing towards the end.

Speaker 3

We think we'll breakeven towards Q4, although that might slip into Q1 of next year, but we do see headwind for 50 basis points to 70 basis points for the first half of the year and then easing in the second half.

Speaker 4

Got it. Thank you. I'll get back in the queue.

Speaker 3

Thank you. Thank

Operator

you. One moment for our next question. And our next question will be coming from Mike Crawford of B. Riley Securities. Your line is open.

Speaker 6

Thank you. In your data center end market, how much of that Vertical revenue, what do you attribute to generative AI and who are your customers there?

Speaker 5

Yes. So we don't talk about specific customers. But let me answer your general question there. The generative AI continues to grow as a portion of the data center computing end market. So you can probably remember that Traditionally, we've looked at this end market as being slightly over 50% data center, slightly less than 50% semiconductor.

Speaker 5

Today, with the semiconductor softness combined with the strength we're seeing in data center, You're looking at really close to 75% data center demand, 25% semiconductor. And of that data center, we're well over now 50% of that data center being generative AI driven. And that's I think a function of really strong demand for generative AI as well as perhaps some shift in capital expenditures away from traditional data center to more generative AI. So we're just seeing a combination there, but Certainly, terrific strength, ongoing strength in that generative AI portion of the data center computing end market for us.

Speaker 6

Okay. Thanks, Tom. And then shifting gears, I know like to talk about customers by name, but in a recent Blog post you've referenced the radar scene emulator that's a product of Keysight Technologies that you worked with them to design and supply and I'm just wondering how many other types engagements like that where you're really getting in early with a customer to help not only win business, but design product before you win that business?

Speaker 5

Yes. Thank you, Mike. It's really it's absolutely a critical part of our strategy. And if you look at how we've deliberately built our defense product portfolio, It really is all about that early engagement, and working with our customers on the defense side of our business, which now of course close to 50% of the business, working very closely with the customers as they start to develop specifications for programs. And that involvement critical to us as we look at radar systems for sure.

Speaker 5

But as we've gotten more involved with customers At the engineering level, as they look at specifications, that engagement, of course, crosses into other programs as well. So, really pleased with how that strategy is developing on the aerospace and defense side of the business. On the commercial side of the business, As you highlighted there, also really critical as a differentiator for TTM. We like to engage with the engineers as they're developing their requirements And that's becoming more and more critical, right? As they start to drive speeds, right.

Speaker 5

They're driving higher and higher speeds. That is in turn. And they're also looking at shrinking real estate, Right, in terms of lines and spacing, density becoming critical to them in order to populate more and more components onto the printed circuit board. As they drive those elements of the technology, they're also starting to see that there are potential limitations on the printed circuit board side that they need to work very closely with a supplier such as TTM around that combination of lines and spacing material choices that they make and then the ability to provide the kind of durability in product architecture that most of our applications require. And so that combination requires intimacy, right, from a customer standpoint.

Speaker 5

So we are very involved now with the engineers and our customers. That's a critical part of our commercial strategy as well.

Speaker 6

Okay. Thank you. And then Final question, I know you've just provided 1Q guidance, but if for the year, TTMI grows the top line low single digits. And I know there's a lot of moving parts with Penang and Syracuse. But would you expect working capital to be A drag on free cash flow or to what extent?

Speaker 5

So I'll have Dan answer the specific Working capital question. I just wanted to highlight, if you look at revenues And starting with Q4, remember that we were close we've been closing plants and shifting production, right. And also that we sold our Shanghai BPA Assembly Facility. So if you look at the combined impact of the closed plants and the BPA facility in the Q4, that was about $25,000,000 right? In the Q1, we're looking at a combined impact of about $27,000,000 So if you Look at our guidance, pick the midpoint, you would see that we're growing about 5% year on year if you exclude those factors.

Speaker 5

So that's really a critical point here. Now we are in the process of ramping the receiving plants, but that takes time as we finish qualifications and begin ramp. So in the meantime, there's a little bit of trough on revenue there. And then through the course of the year, As we have moved equipment and are ramping at the receiving facilities, we'll be really removing that slight revenue drag. So I just wanted to highlight that on the revenue side, Dan, the working capital.

Speaker 3

Sure. Thank you. Obviously with revenue increasing, You should have a relative increase in working capital. However, we have challenged ourselves a bit to reduce our overall working capital as we go into the next year as we budgeted this current year. Basically AR kind of went up quite a bit at year end.

Speaker 3

Some of that was deliveries in our IE area and A and D. So AR went up quite a bit. So we meet monthly to kind of manage that, and we're really pushing hard to reduce where we can, our AR balance, manage our inventory appropriately and then push out, our average payable to the extent we can as well. So we're really working that hard this year. I believe, like I said, it'll Normally, we'll go up with revenue increases, but I think we're a little high now and we're going to challenge ourselves to bring working capital down a bit and increase our cash flow to get back to the target of 10% cash, 10% of revenues in our cash.

Speaker 6

Great. Thank you very much.

Speaker 3

Thank you. Thank you.

Operator

Thank you. One moment for our next question. And our next question will be coming from William Stein of Chua Securities. Your line is open.

Speaker 7

Great. Thanks for taking my questions. First, I just want to recognize, you already answered the question on inventory where I Mistakenly had too high inventory days calculation on my note. Apologies for that. The questions relate to 2 areas.

Speaker 7

1st, You're guiding overall revenue for the business above seasonal. You gave the details by end market, but it's still Fairly remarkable to me considering what everyone else in the tech supply chain, especially in semis is doing now. Any insight as to how you're able to be guiding like this given the way everyone else is still seeing a pretty significant correction?

Speaker 5

Sure. Thank you for the question, Will. So I think first of all, recognizing that, of course, A and B is roughly 46%, 47% of revenue. And so there if you're looking sequential, we're down slightly. That's mainly just as we Q4 tends to be a seasonally high quarter for us in that A and D market.

Speaker 5

So that let's just Say that, that there that let's set that one aside. So now we're really talking about the commercial markets. Certainly with TTM As we look at data center, that continues to be a big driver, that generative AI demand. So that's very helpful. We do have Chinese New Year, as you know.

Speaker 5

And so sequentially, we're always going to be down in commercial Q4 to Q1 as plants as we shut down plants on Chinese New Year. In that generative AI area, of course, we're trying to operate as much as we can during Chinese New Year. So that accounts for a little bit certainly from a TTM perspective of why that drop might not be as great Q4 to Q1. Automotive, I think you're seeing that with others as well, is down sequentially a little bit more than just the Chinese New Year factor. And then if you look at medical industrial instrumentation, we're just seeing Medical holding up pretty well in Q1 and portions of instrumentation getting a bit better as well.

Speaker 5

So that's and remember there that our North America footprint does play an important role. So while we're shutting down in China, we are operating in our North America facilities and so able to mitigate again a little bit of that sequential decline. And then finally, in the networking area, we're relatively flattish. Glad to see that. I think for us, that's a function of Some of our networking customers now still dealing with inventories.

Speaker 5

We expect that to continue through the first half, But at least they sort of hit bottom and starting to see a little bit better demand there. So Again, hard for me to comment on others, Will, but hopefully that gives you a flavor of what we're seeing.

Speaker 7

And then a follow-up, I'd like to ask about the margin improvement that we're seeing. You beat in Q4, you're guiding nicely above consensus in Q1. Can you talk about the margin improvement if I were to split it bluntly into 2 categories. 1 is sort of the product mix and the growth in AI applications, which I'm sure is helping. But I know there's a lot of self help going on as well, restructuring and such.

Speaker 7

Can you potentially divide it into those 2 buckets, which one is having a greater impact on your business?

Speaker 6

So between

Speaker 3

the data center generative AI improvements versus closure of last year's closure of the facilities, is that what you asked?

Speaker 7

Yes. And any other changes that are more company specific or operations specific as opposed to mix?

Speaker 3

Well, I think, Well, in North America, A and D, the integrated electronics business, has expanded their margins quite a bit. This is the 1st full year that we've had Telefonics in our business. We've worked hard on the supply chain there. We've also increased and improved our pricing on those products to get much better margins in the integrated electronics business. And that's obviously a strategic focus to us as Tom mentioned.

Speaker 3

And the earlier we can get involved and engaged in engineering and helping our customers, that's more value added work, right? So that's been strong. I'd say we had across North America in our PCB business also just very good productivity this year, better productivity than we had last year. So keeping good flow through the factories and getting good getting efficiencies that way. And then on we probably had so those are probably the 2 largest drivers.

Speaker 3

So it's more operational. We did have in the AP region, as you mentioned, good improvement from the generative AI product mix. But that and that more than offset some of the softness in those commercial markets, the other commercial markets. I'd say net net, that wasn't the largest driver, but certainly a continued strength going forward. And then probably and then The last bit of that was just the drag that we had from the 3 plants that we closed down That did improve this year in Q1 going into Q1 versus last year, probably about $5,000,000 of improvements just from that,

Speaker 7

Thank you.

Speaker 5

And just one additional highlight, you remember That Dan's earlier answer to Jim's question regarding Penang. So that so we are seeing those improvements in as we ramp and take on additional headwinds. Great.

Speaker 7

Thank you.

Speaker 3

Thank you.

Operator

And our next question will be coming from Matt Sheerin

Speaker 8

A question regarding the expansion in Malaysia. Could you remind us What the revenue capacity will be as you ramp and then what it would look fully ramped. And is that or how much of that is incremental revenue versus some production shifting from China or other areas?

Speaker 5

Sure. So we're looking at full capacity, which we won't reach until next year. We're looking at it's somewhere between $180,000,000 $200,000,000 that depends on product mix, of course, in the facility. So of that, think about Roughly 15% or so being at least as we plan this coming from a shift out of China into Penang. I would like to highlight that Our China facilities are where we do the most advanced technology work.

Speaker 5

So the sooner we can get Penang up and running and shift that production, the better it is for us from the standpoint of serving that generative AI demand. So we certainly are driving to get Penang up as soon as we can. But we have make sure that we ensure that we have the right kind of quality performance and the right quality systems in place as we go through that ramp. That's roughly the order of magnitude net. And again, hitting full capacity, We're going to be continuing that ramp as we go through the course of next year, but hitting that full capacity level by the end of next year.

Speaker 8

Okay. I'm sorry, was that 1.5% or 5.0 percent? 1.5%. 1.5%. So the rest would be New program wins?

Speaker 5

That's correct. Yes. So remember the facility is As designed is targeted at 16 to 18 layers. That layer count is what we think of as standard technology. We don't do all that much standard technology now in our China plant.

Speaker 5

So that's what we're opening up is a supply chain resiliency opportunity for our customers to move that product from other suppliers to our Penang facility. That's the major goal. Now to help with startup, that's where that 15% piece comes in. We are They're allowing us to move some product out of China into Penang. But it's the bulk of this is a combination of new programs and existing programs that maybe that our customers are looking to move out of China into a non China production facility.

Speaker 8

Got it. Okay. Thank you for that. And then regarding the plans to expand In the Syracuse, you said that some of the expansion plans is contingent on stakeholders sort of buying in. I'm not sure exactly what you mean by that.

Speaker 8

Does that mean that we need to have certain purchasing commitments or any co investments? What do you

Speaker 3

mean by that? So

Speaker 5

really we're looking primarily For us, the customer is very supportive based on long term agreements. We're in good shape there. We just as we look at that CapEx requirement, particularly as we look potential government funding, we need to make sure that our timeline is in sync with the potential for government funding and also that we make sure that we're in sync with customer requirements in terms of ramp schedule. So that's really what we're talking about, Matt.

Speaker 8

Got it. Okay. All right. Thanks very much.

Speaker 3

Thank you.

Operator

Thank you. And we have a follow-up question coming in. There will be a follow-up question from Jim Ricchiuti of Needham and Company. Your line is open.

Speaker 4

Hey, Tom. You referenced, I think a sizable booking on the defense side. And I think you said it was related to a restricted program. But I'm wondering, can you say or did you say whether that relates to the legacy TTM defense business or was that in relation to the telephonics business? Can you say that?

Speaker 5

I really can't, Jim. So you're correct. I did not say that. But yes, at a large booking, unfortunately, we just can't Disclose the product type or the exact program that we're involved in there.

Speaker 4

Got it. I understand. Moving to the MII business, follow-up question is, you're clearly seeing some weakness, you've been seeing weakness in the instrumentation side of that business related to semi. Is that business kind of at a trough level, do you think? Because we are I think many of us are anticipating an upturn In the semi cap side of the business over the next couple of quarters, I'm wondering what your take is on that?

Speaker 5

Yes, sure. And I did want to just to complete the thought on A and D, I just I did want to highlight, We are down slightly on program backlog. So we're at $1,330,000,000 to be exact in terms of program backlog. That's down from $1,350,000,000 at the end of last quarter. So still holding up very well and we're looking at what should be a pretty strong first half year as we look at program booking opportunities in A and D.

Speaker 5

On the MII side, yes, so what I'm seeing, Jim, and remember, we're looking at test and burn in board requirements. So slightly different in different cycle than traditional large semiconductor capital equipment requirements. Of course, we service those equipment companies as well, but it's a smaller portion of that So we tend to be a little bit front end there as customers start to invest in new generation of capability. They need that test and burn in board base for their equipment. So what I can tell you, Jim, is certainly I think we've hit trough there.

Speaker 5

We're again seeing some activity there that are good indicators and I agree with how you characterize I expect that there would be more momentum towards the back half of the year. And certainly, as we look at the large Process equipment requirements, which right now are in that trough, I wouldn't expect to see that until that kind of demand until Q4 ish. But in the meantime, test and burn in board requirements, which go into the test and measurement area tends at least for us to come in a bit earlier than that. So Yes, I think again, trough for sure is starting to see a bit of activity that are good indicators that the back half should improve.

Speaker 4

Got it. And if I could slip one quick one in. You've been providing the last couple of quarters some breakdown on the BAND Business, Commercial Air, Space and Defense, which I think we all appreciate. I was curious on Commercial Air, it looked like it was down sequentially. Is that just kind of lumpy business?

Speaker 4

Or is there anything that we should be paying attention to in that part of that A and D business?

Speaker 5

Actually commercial air for us is still strong. And if we so roughly 3 up about 7 percentage 7 percentage ish year on year, that's a year on year and also up slightly quarter on quarter Commercial Aerospace. So yes, the growth rate, which was remarkable, right, as Commercial Aerospace recovered, that growth rate has slowed down, But we did still see growth in the quarter. It still as a percentage of A and D revenue remains about 5 percentage So not a large part, but nice to see ongoing growth there. And just a reminder for everyone, our largest content here tends to be on the 787.

Speaker 5

And So that's where we see the largest content. Of course, we're across platforms, but that's the major content for us.

Speaker 4

Got it. Thanks for clarifying and congrats on the quarter.

Speaker 3

Thanks Jim. Thanks Jim.

Operator

Thank you. That concludes our Q and A session for today. I would now like to turn the call over to Tom Evans for closing remarks. Please go ahead.

Speaker 5

Thank you. I'll just close by summarizing some of the points I made earlier. First, we delivered non GAAP EPS that was above the high end of the guided range, with revenues in line with the guided range, really excellent operational performance and favorable product mix. 2nd, we generated a healthy cash flow from operations at 8.3% of revenue That did allow us to repurchase stock, maintain a solid balance sheet. And finally, in closing, I would like to thank our employees again for their efforts in this past year, our customers as well and certainly you are investors for your continued support.

Speaker 5

Thank you very much.

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Key Takeaways

  • Non-GAAP EPS for Q4 topped the guided range while revenues matched guidance, powered by strong execution and a favorable product mix led by Aerospace & Defense and Data Center Computing.
  • Full-year 2023 revenues fell 11% due to commercial market weakness but were offset by Aerospace & Defense growth; Q4 operating margins rose year-over-year despite lower volumes, and operating cash flow reached $187.3 million with net debt/EBITDA at 1.6x.
  • Key strategic investments include a new automated PCB plant in Penang to diversify supply chains for 16–18 layer boards, consolidation of three small facilities, and a proposed $100–130 million Ultra HDI PCB campus in Syracuse pending stakeholder support.
  • Aerospace & Defense accounted for 46% of Q4 sales with a $1.3 billion backlog and 2024 growth above long-term forecasts; Data Center Computing (17% of sales) grew 15% YoY on generative AI demand, while Medical & Industrial Instrumentation and Automotive saw inventory-driven declines but expect normalization.
  • Advanced Technology and Engineered Products now represent 47% of revenue (up from 39% a year ago) driven by HDI, Rigid Flex and RF subsystems, though overall PCB capacity utilization remains at 51% in APAC and 35% in North America as new capacity ramps.
AI Generated. May Contain Errors.
Earnings Conference Call
TTM Technologies Q4 2023
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