Thank you for standing by. Welcome to the TTM Technologies First Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded on May 1, 2024. I would now like to turn the conference over to your host, Mr. 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 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 the measures prepared and presented in accordance with GAAP, and we direct you to the reconcilers 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 have also posted on that website a slide deck that 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 afternoon, and thank you for joining us for our first quarter 2024 conference call. I'll begin with a review of our business highlights from the quarter and a discussion of our first quarter results, followed by a summary of our business strategy. Dan Boehle, our CFO, will follow with an overview of our Q1 2024 financial performance and our Q2 2024 guidance. We will then open the call to your questions. Highlights of the quarter's financial results are summarized on Slide 3 of the earnings presentation posted on TTM's website. We delivered a solid quarter, and I would like to thank our employees for their hard work and contributions in support of these results. In the first quarter of 2024, non-GAAP earnings per share were above the high end of the guided range and demonstrated solid year-on-year growth due to improved operating performance and favorable product mix. Revenues were at the high end of the previously guided range and returned to year-on-year growth due to demand strength from our aerospace and defense and data center computing end markets, which was partially 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 as we registered a positive book-to-bill in the quarter and now have a program backlog of approximately $1.38 billion. I would now like to provide a strategic update. 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…

Thanks, Tom, and good afternoon, everyone. I will review our financial results for the first quarter that were included in the press release distributed today and are summarized on Slide 6 of the earnings presentation posted on our website. For the first quarter, net sales were $57.1 million compared to $544.4 million in the first quarter of 2023. The year-over-year increase was due to growth in our data center computing and aerospace and defense end markets, partially offset by declines in our automotive, medical, industrial and instrumentation and networking end markets. GAAP operating income for the first quarter of 2024 was $17.1 million as compared with a GAAP operating loss of $3.5 million for the first quarter of 2023. On a GAAP basis, net income in the first quarter of 2024 was $10.5 million or $0.10 per diluted share. This compares to GAAP net loss of $5.8 million or $0.06 per diluted share in the first 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 noncash 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 to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations in prior periods. Gross margin in the first quarter was 18.8% and compares to 17.1% in the first quarter of 2023. 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 sales in some commercial markets. Selling and marketing expense was $19.4 million in the first quarter or 3.4% of net sales…

[Operator Instructions] And our first question will come from the line of Matt Sheerin with Stifel.

Just a first question just regarding your guidance, it implies that gross margin will be up over 19% sequentially. So good sequential growth there off of just modest revenue growth. So I'm wondering if is that related to mix at all? Or are you also seeing some benefits from the closures of some of those facilities in the U.S. and in Hong Kong?

Thanks for your question. I would say it's a combination of a few things. So there's a little bit of mix. We are seeing some -- the 2 that you mentioned, we are seeing some benefits of the closures of the Clover, the 3 plants from last year. There's just -- between Q1 and Q2, you got more efficiencies in the factory. Q1 has the impact of the Chinese New Year. And so with lower volume in AP, we tend to get lower efficiencies, obviously, in the factories there, just with the -- covering the operating leverage. So that is a natural improvement from Q1 to Q2, which is another part of that.

Are you still -- and does that also factor in the headwinds that you're seeing from the factory expansion in Penang. And what's the headwind there?

There's significant headwind there, about 180 basis points for the first half of the year, and then we come back to in the second half of the year, we'll ramp pretty quickly in the second half of the year to get to about 100 basis points impact on the full year from the Penang headwind, which is kind of what we've expected.

And then regarding some of the end markets, Tom, could you elaborate more on the significant growth you're seeing in the datacom area with the hyperscale customers. Could you talk about customer concentration, where you're seeing that in your visibility? It looks like you're going to be down a little bit sequentially. But could you talk about the visibility that you're seeing for the rest of the year?

So sure. In terms of sequential, it's really flat sequentially in data center computing. And what we're seeing, absolutely, as you pointed out, is strength in generative AI continues to, at this point, be about 50% of that data center demand a little bit higher than that actually and still remains relatively concentrated, but certainly better than where we were last year when the growth started. So high level of growth, I think as we start to look at the second half of the year, we're going to continue to look at adding incremental capacity there, both in our major facility that services that area as well as another facility that we're qualifying for some more AI and hyperscale work. So we'll look to meet what we expect to be scaling demand there in the second half of the year. So really, really strong environment there. I also expect that we're going to see semiconductor or the computing part of that data center computing end market start to improve here as we go forward through the course of the year as well.

And is there an OEM server market that you also serve as well where you talked about like enterprise adoption, and that sort of thing, that will maybe come at some point?

So that's also a part of the market that we serve there. We put that in broadly into that data center area. But yes, that is an area that we serve as well.

One moment for our next question, and that will come from the line of Jim Ricchiuti with Needham & Co.

Maybe just following up on the last question. If I look at the midpoint of your revenue guidance and the way you're characterizing the vertical market contributions, it seems like you're assuming a nice sequential step-up in a couple of markets that were down sequentially in Q1, notably all auto and MII. And maybe, Dan, you may have touched on this. Is auto, is seasonality coming out of the Q1 Chinese New Year or are you seeing some improvement in the outlook there? Same question on MII. Tom, you alluded to semi-test a potential bright spot, but what are you seeing in those markets?

A couple of things going on there. You're absolutely right. In terms of Chinese New Year impact, there is a positive. So think about it as a little bit more than a week of production that we bring back into Q2 that helps with those end markets. Of course, you have to see the demand to absorb that production capacity. In auto, we are looking at being sequentially up. I'm not going to read too much into that at this point. I think it's certainly encouraging to see some of the booking trends improve there as well as the overall -- if you look at the overall commercial market to have a solid positive book-to-bill. In the medical industrial instrumentation area, you pointed out the area where we are seeing now some incremental return of growth, which is in that instrumentation category. That's primarily semiconductor capital equipment. We're seeing demand, particularly in the test side of that come back. And so that is helping on the sequential demand side. Expecting that kind of momentum to continue as we go into the back half of the year. And I would add networking as well. We're finally seeing customers work through inventory and several customers have worked through their inventory challenges, and we're starting to see some incremental improvement in that end market.

That actually brings me to the next question to round out that discussion around the verticals. It looks like you're, again, at the midpoint, assuming -- anticipating a sequential decline in A&D. And I'm wondering if you could provide some color on that. Just given the backlog, given the growth you're seeing, how are you thinking about the A&D business looking out over the remainder of the year?

Yes. I would not read too much into that. The Q1, A&D end market outperformed our expectations. That was mainly the fact that, as you remember Q4 -- generally the strongest quarter that we have in A&D as we finish out the year. Q1, usually we have a drop off. We really didn't have a significant drop off here. And that was just because we actually -- I wouldn't say overproduced, but we certainly were able to maximize production in the A&D area. As we look at Q2, we're sort of expecting more of a normal quarter there in A&D. And then as we look towards the, again, Q3, Q4, we're expecting that Clover or what we call Project love the facilities that we shut down, we're expecting that the tailwind there as we bring up the receiving facilities to help to improve the A&D revenues as we go into Q3 and Q4. So again, Q2, you're absolutely right, sort of flattish to slightly down, but expecting Q3, Q4 that capacity to kick in with the receiving facilities.

One moment for our next question, and that will come from the line of William Stein with Truist Securities.

First, congrats on the good progress this quarter. I wanted to actually hit some overlapping topics for the last question. And that was that your guidance in aerospace and defense for the sub seasonal. I think you sort of just explained it, but I just am reminded of what has happened historically when we see book-to-bill very strong in aerospace and defense and the backlog go up, but we know it's sort of long-duration backlog. When there are quarters when you have these -- have lack of growth where we anticipate more growth because of the good bookings. In the past, it's been related to labor shortages. And I wonder if that's still dogging the company in any way or if this is something different.

Labor is always a factor, Will. That is certainly an area of focus in several of our facilities. I would say that the headwind we have in A&D continues to be concentrated in supply chain. We're still looking at a headwind of about $8 million quarterly. That's less than half of where we were a year ago, but we still do have that headwind to overcome each quarter. But really, with our businesses as we stand today, it's about production volumes, how we can get those out. And then as you remember, with the addition of Telephonics, we have a percent complete accounting recognition there with Mission Systems. So that can get a little bit lumpy depending on where we are in the percent complete process. So those are factors that go beyond sort of where we were traditionally in that business. So from a labor perspective, absolutely ongoing challenge, but really, it's much more of that supply chain situation. And then just a little bit of lumpiness as we ship out on particular programs.

The book-to-bill in the commercial markets was really stronger than it's been in many quarters by my math, but I think you just answered that, it sounds like you're expecting revenue to continue to accelerate there in the back half. So let me instead focus on OpEx. This is an area -- I guess I was a little surprised that OpEx is up year-over-year and I wonder what we should expect going forward? Is there any activity to try to constrain that going forward? Or are there any unusual things that drove the increase year-over-year?

There were a few one-off items in Q1. There were some personnel related and health care-related true-ups in Q1 that were year-end accruals that our estimates, we had a little bit higher Q1 true-ups than we had expected. And then with regards to the Syracuse expansion, we had about $1.5 million of application fees that we paid in Q1 that were budgeted for later in the year. And so the conglomerate of those in the first quarter was about $8.5 million of additional OpEx expense that will not recur. Those are one-offs. But even with that and the headwind from Penang, we're still up 100 basis points operating margin year-over-year. We're forecasting increasing that up to other -- another almost 190 basis points into Q2. So yes, you'll see that come back in the second half of the year, continue to grow.

One moment for our next question, and that will come from the line of Mike Crawford with B. Riley Securities.

Could you provide the lifetime value of the automotive program wins you secured in the quarter?

So not a great quarter in regards to automotive. We had about $20 million in wins in terms of program wins in Q1. If you look a year ago, we were at $267 million. So that's quite a difference, Mike. And as we look at what to attribute that to, it appears that our customers -- and remember, most of our customers are the Tier 1 part suppliers that they're dealing with market turbulence as they look at program shifts with EV coming on with some of the changes in terms of their global marketplace. And for the second quarter in a row there, withholding packages as they try to get more certainty about production starts. And again, they're trying to anticipate production starts that would begin a year from now. So you can imagine how challenging it is in the environment out there to anticipate those production starts. So we're just not seeing the volume of package opportunities that we saw last year this year. So that's what appears to be going on in auto.

And then just regarding the new facility in Syracuse. It looks like you've already received some $16 million in local tax rates, but you're hoping to get some federal equipment purchase breaks as well? And did I hear you say you're still helping to break down within the next 2 months.

So you're right. The state has been very forthcoming and really thrilled with that. And we're just -- yes, we're just looking to finalize the federal side. And that takes a bit more time. So we're working our way through that. And I'd also say that in the quarter, we were able to firm up our agreements with customers as well. So it hasn't changed our overall schedule in terms of breaking ground in the first half of the year but just working through sort of the final stages here of preparation as we get ready to break ground.

I'll end just with a kind of a minor question. But with the buyback that again was active in Q1 and you're relatively restock based comp, I was a little surprised, but you're guiding to higher diet share count in 2Q. Is that just being conservative? Or is there something else happening?

Yes, I would say it's a bit conservative with the shares that will be issued in Q2 that -- from vesting of our stock plan. There will be some more buyback probably that will likely bring that down a little bit more than the $1.05 that we've got there. But that's what we used for the guidance.

[Operator Instructions] I'm showing no further questions in the queue at this time. I would like to turn the call over to Mr. Tom Edman for closing remarks.

Thank you. Yes, I'd just like to close by summarizing a few of the points that I made earlier. First, we delivered non-GAAP EPS above the high end of guided range. Revenues at the high end of the guided range, with improved operational performance and favorable product mix on a year-on-year basis. Second, we generated a healthy cash flow from operations at 7.7% of revenues. That did enable us to repurchase stock and maintain a solid balance sheet with a net EBITDA leverage of about 1.5x at the low end of our target range. And in closing, I would just like to thank our employees, our customers and you, our investors, for your continued support. Thank you very much.

This concludes today's program. Thank you for participating. You may now disconnect.