Good morning. Thank you for standing by. Welcome to the TTM Technologies Fourth Quarter and Full Year 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, February 7, 2024. Sameer Desai, TTM's Vice President of Corporate Development and Investor Relations will now review TTM's disclosure statement.

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 one or more risks and uncertainties, including the risk factors we will 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. 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. Please go ahead, Tom.

Thank you, Sameer. Good morning, and thank you for joining us for our fourth quarter and full year 2023 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. Dan Boehle, 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. 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 fourth quarter 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. 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, fourth-quarter operating margins were actually up year-on-year despite the revenue headwinds. Full year cash flow from operations was $187.3 million, enabling us to strengthen our balance sheet while returning some of the capital…

Thanks, Tom, and good morning, everyone. I will review our financial results for the fourth quarter that were included in the press release distributed today, as well as on Slide 6 of the earnings presentation posted on our website. For the fourth quarter, net sales were $569 million compared to $617.2 million in the fourth quarter 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. For the full year, net sales were $2.2 billion compared to $2.5 billion in 2022, a 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 Telephonics acquisition. The sale of the BPA 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 fourth quarter of 2023 was $34.6 million. GAAP operating income for the fourth quarter of 2022 was $97.6 million and included a gain of $51.8 million in December 2022 from the sale of the property occupied from our former Shanghai E-MS entity. On a GAAP basis, net income in the fourth quarter of 2023 was $17.3 million, or $0.17 per diluted share. This compares to GAAP net income of $6 million, or 6% per diluted share in the fourth quarter of last year. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A related costs, restructuring costs, certain non-cash expense items such…

[Operator Instructions] Our first question today will come from Jim Ricchiuti of Needham & Company. Your line is open.

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 ones? And to what extent are you seeing some weakness also just on some of the softness on the EV side in the U.S. and Europe? Are you seeing any signs of that?

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 as 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, if you will, in China. So I think they are feeling the impact there on - 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 softness and ongoing inventory controls as customers adjust their forecast. So hopefully, that gives you an answer there, Jim.

Yes. That's helpful. And Dan, maybe a question for you as my follow-up, and I apologize if 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?

Sure. Thanks. Good question. We did see - so historically, we were - in 2023, mentioning about 30 to 50 basis points headwind on Penang, and that is pretty much what we experienced through the end of the year, going into the year in 2024. It's got 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. We think we'll breakeven towards Q4, although that might slip into Q1 of next year. But we do see a headwind for 50 to 70 basis points for the first half of the year and then easing in the second half.

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

Thank you.

Thank 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.

Thank you. And your data center end market, how much of that vertical revenue would you attribute to generative AI? And who are your customers there?

Yes. So we don't talk about specific customers, but let me answer your general question there. The generative AI continues to be - 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. 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.

Okay. Thanks, Tom. And then shifting gears, I know I like to talk about customers by name, but in the recent blog post, you 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 of engagements like that where you're really getting in early with the customer to help not only win business but designing product before you win that business?

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, is 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. 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, yes, also really critical as a differentiator for TTM. We like to engage with the engineers, 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, 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. So we are very involved now with the engineers at our customers. That's a critical part of our commercial strategy as well.

Okay, thank you. And then a 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?

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 closing - 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 fourth quarter, that was about $25 million, right? In the first quarter, we're looking at a combined impact of about $27 million. 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. 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 of 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?

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. Some of that was deliveries in our IE area and A&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 days to the extent we can as well. So we're really working that hard this year. I believe, like I said, it will normally will 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.

Great. Thank you very much.

Thank you.

Thank you.

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

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 two areas. First, 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?

Yes. Sure. Thank you for the question, Will. The - so I think, first of all, recognizing that, of course, A&D 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&D market. So that - let's just say that that - there 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. 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. So that's - and remember there that our North America footprint has played 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, 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, and 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.

As a follow-up, I'd like to ask about the margin improvement that we're seeing, you beat in Q4. You're guiding, you know, nicely above consensus in Q1. Can you talk about the margin improvement? If I were to split it bluntly into two categories, one 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. Can you potentially divide it into those two buckets? Which one is having a greater impact on your business?

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

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

I think, well, In North America A&D, the integrated electronics business has expanded their margins quite a bit. You know, this is the first full year that we've had Telephonics 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. 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 efficiencies that way. And then on - we probably had - so those are probably the two largest drivers. 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. But I'd say net-net, you know, 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 three plants that we closed down that did improve this year in Q1 going to Q1 versus last year, probably about 5 million of improvements just from that.

Thank you.

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 as we ramp Penang and take on additional headwinds.

Great. Thank you.

Thank you. One moment for the next question. And our next question will be coming from Matt Sheerin of Stifel. Your line is open.

Yes, thank you. Question regarding the expansion in Malaysia. Could you remind us what the revenue capacity will be as you ramp and then what look like fully ramped? And is that - or how much of that is incremental revenue versus some production shifting from China or other areas?

Sure. So we're looking at full capacity, which we won't reach until next year. We're looking at somewhere between 180 million and 200 million. That depends on product mix, of course, in the facility. So of that, think about, you know, 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. 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 to make sure that - ensure that we have the right kind of quality performance and the right quality systems in place as we go through that ramp. But that's roughly the order of magnitude, Matt. 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.

Okay, I'm sorry. Was That 15% or 50%?

15%

15%. So there's the rest would be new program wins?

That's correct. Yes. So remember, the facility as designed, is targeted at 16 to 18 layers. That's - 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. 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 held to help with startup, that's where that 15% piece comes in. 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 may be that our customers are looking to move out of China into a non-China production facility.

Got it. Okay. Thank you for that. And then regarding the plans to expand in Syracuse, you said that some of the expansion plans is contingent on stakeholders sort of buying in. And I'm not sure exactly what you mean by that. Does that mean that we need to have certain purchasing commitments or any co-investments? What do you mean by that?

So really, we're looking - since 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 at potential government funding, we need to make sure that our time line is in sync with the potential for government funding. And that - 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.

Got it. Okay. All right, thanks very much.

Thank you.

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

Hi Tom, you referenced, I think, a sizable booking on the defense side. And I think you said it was really 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?

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

Got it. I understand. Moving to the MII business, a 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?

Yes, sure. And I did want to just to complete the thought on A&D, I just - I did want to highlight, we are down slightly on program backlog. So we're at $1.33 billion to be exact in terms of program backlog. That's down from $1.35 billion 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&D. 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 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 instrumentation piece. 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. And we're again seeing some activity there that are good indicators. And I agree with how you characterized it. I expect that there would be more momentum towards the back half of the year. And certainly, as we look at the larger 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, tend 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.

Got it. And if I could slip one quick one in, you've been providing the last couple of quarters some breakdown on the A&D business, commercial aerospace, 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 or is there anything that we should be paying attention to in that part of that A&D business?

Actually, commercial air for us is still strong. And if you - if we - roughly up about 7%-ish year-on-year. That's a year-on-year and also up slightly quarter-on-quarter in commercial aerospace. So we - 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, and still as a percentage of A&D revenue remains about five percentage-ish. So not a large part, but nice to see the ongoing growth there. And just a reminder for everyone, our largest content here tends to be on the 787 and - so that's where we see the largest content. Of course, we're across platforms, but that's the major content for us.

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

Thanks, Jim.

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

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. Second, 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 our investors, for your continued support. Thank you very much.

This concludes today's conference call. You may all disconnect.