Q1 2021 TTM Technologies Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, thank you for standing by welcome to the TTM technologies first quarter 2021 financial results conference call.
During todays presentation, all parties will be in a listen only mode. Following the presentation. The conference will open for questions.
As a reminder, this conference is being recorded today April 28 2021.
I would now like to turn the conference over to Samir Desai, Ttm's, Vice President of corporate development and Investor Relations for in our view the TTM disclosure statement.
Thanks, Casey 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 and litigation Reform Act of 1995, including statements related to Ttm's future business outlook actual results could differ materially from these forward.
Looking statements due to one or more risks and uncertainties, including factors explained in our most 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.
As of the date of this presentation TTM does not take 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 risks that may affect TTM, which may be found.
And in the reports on form 10-K, 10-Q 8-K, the registration statement on form S. Four and the company's other SEC filings.
We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA such measures should not be considered as a substitute for measures prepared and presented in accordance with GAAP and we direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release, which was filed with the SEC and is available on.
<unk> website at Www Dot TTM dot 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 Edman, Ttm's Chief Executive Officer. Please go ahead Tom.
Thank you from here good afternoon, and thank you for joining us for our first quarter 2021 conference call.
I'll begin with a review of our business strategy, then an update on how COVID-19 has impacted our business followed by highlights from the quarter and a discussion of our first quarter results.
Todd Schull, our CFO will follow with an overview of our Q1 2021 financial performance and our Q2 2021 guidance. We will then open the call to your questions.
I am pleased to report that in the first quarter of 2021 P. T M generated revenues and non-GAAP EPS above the midpoint of the guided range.
All end markets performed better than guidance, while year on year growth was led by strength in the automotive and data center computing end markets.
These results were achieved despite higher raw material costs and production inefficiencies due to COVID-19.
The pandemic continues to create operational difficulties macroeconomic uncertainty and employee concerns.
These challenges are currently being compounded by increasing prices and lead times of copper clad laminates or C. C L.
A key raw material for the manufacturer of printed circuit boards P.
D C L a or made from epoxy resin glass cloth and copper foil all of which are seeing limited supply and price increases.
In addition, metals such as copper gold and Palladium are also used in our manufacturing process.
We are actively managing higher raw material costs through such measures as supplier diversification.
Ongoing operational efficiency efforts and quotation adjustments to mitigate the impact to TTM.
I am extremely proud of how TTM employees have worked to deliver excellent performance. Despite the formidable challenges of this environment.
I would also like to highlight that in Q1, we generated solid cash flow from operations.
Our leverage remains at a comfortable 1.4 times.
Looking into Q2, I am optimistic that we are seeing healthy demand trends across virtually all of our end markets, which is supported by a stronger than normal backlog coverage.
Next I would like to provide an update on our long term strategy.
D T Amazon a journey to transform our business to be less cyclical and more differentiated.
We believe that over time investors will be rewarded with more stable growth strong cash flow performance and improving margins.
As part of this strategic transition, we sold our mobility business last year.
As a reminder, our operating margins with mobility as part of our business in Q1 of 'twenty 'twenty were 5.8 per cent and non-GAAP EPS was 18 cents, which was greatly impacted by the seasonality of that business among other factors.
We are now able to generate more consistent cash flow and earnings 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.
Looking forward our balance sheet is in a strong position to pursue further acquisitions as well as to support our organic investment needs.
I would also like to update you on the COVID-19 situation.
At the time of last quarter's conference call in February we were seeing a surge of North America COVID-19 cases, following the winter holidays, which we expected to have some impact on production.
Since then cases in North America have dropped off and as a result, we have seen a significant reduction of new cases in our sites as well.
We are hopeful that the vaccine rollout will further reduce new cases, and we are looking forward to being able to welcome customers and other important visitors back into our plants in the not so distant future.
In the meantime, we will continue ttm's protective measures such as masking temperature checks and proper distancing across our facilities worldwide, along with routine internal communications to keep our employees informed.
Because of the stringent preventative measures in place and our culture of transparency and communications COVID-19 has had less impact on our operations than might've been the case without these precautions.
Now I'd like to review our end markets.
All historical end market disclosures exclude the mobility business unit and the two E M S plants, which halted production in December of 'twenty 'twenty.
For more details on end market disclosures. Please refer to page four of our earnings presentation, which is posted on our website.
The aerospace and defense end market represented 36 per cent of total first quarter sales compared to 38 per cent of Q1, 'twenty 'twenty sales and 38% of sales in Q4, 2020.
We continued to experience a positive defense climate with our A&D program backlog, increasing to a record $694 million compared to $687 million in Q4.
Q1 revenues were up 1% year on year and solid growth in defense more than offset sharp year on year declines in commercial aerospace.
Growth in the defense market as a result of our strong strategic program alignment and key bookings for ongoing franchise programs.
We saw a significant bookings in the quarter for Northrop Grumman's I use a radar systems for the F 35 program.
We expect sales in Q2 from this end market to represent about 34 per cent of our total sales.
Automotive sales represented 17% of total sales during the first quarter of 2021 compared to 13% in the year ago quarter and 17% during the fourth quarter of 2020.
Automotive grew almost 50% year over year and continued to grow sequentially. Despite a normally slow seasonal slower period for Chinese new year.
We are aware that the storage of semiconductors is currently limiting automotive production.
But this situation is not directly affected our business since we do not purchase semiconductors.
While we are monitoring the situation closely to date. It is at a very limited indirect impact on our P. C B the man.
We expect automotive to contribute 17% of total sales in Q2.
The medical industrial instrumentation end market contributed 17% of our total sales in the first quarter compared to 19% in the year ago quarter and 16% in the fourth quarter of 2020.
In Q1 instrument instrumentation customers in the semiconductor capital equipment end market were stronger than expected.
For the second quarter, we expect EM, I and I to be 17% of revenues.
Networking communications accounted for 15% of revenue during the first quarter of 2021.
This compares to 16% in the first quarter of 2020, and 16% of revenue in the fourth quarter of 2020.
We saw relative strength on a year on year basis in the networking segment compared to the telecom segment as the five G build out has been slower to ramp in.
In Q2, we expect this segment to be 16% of revenue.
Sales in the data center computing end market represented 14% of total sales in the first quarter compared to 12 per cent in Q1 of 2020 and 13% in the fourth quarter of 2020.
This end market was up 24% year on year due primarily to growth from our data center customers.
We expect revenues in this end market to represent approximately 14% of second quarter sales as data center continues to drive year on year growth.
Please note that we have renamed this segment to better represent our customer mix and the growth opportunities.
Next I'll cover some details from the first quarter.
All of the following operations metrics exclude the mobility business unit and the two E. M. S plants that were closed.
This information is also available on page five of our earnings presentation.
During the quarter, our advanced technology business, which includes HDI rigid flex and RF subsystems and components accounted for approximately <unk> 31 per cent of our revenue.
This compares to approximately 28 per cent and a year ago quarter and 31% in Q4.
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 80% in Q1 compared to 52 per cent and the year ago quarter, and 63 per cent and Q4.
Our overall capacity utilization in North America was 55 per cent in Q1 compared to 67% in the year ago quarter and 58 per cent in Q4.
Our top five customers contributed 33 per cent of total sales in the first quarter of 2021 compared to 34 per cent in the fourth quarter of 2020.
Our largest customer accounted for 13% of sales in the first quarter.
At the end of Q1, our 90 day backlog, which is subject to cancellations was $545 million compared to $478 million at the end of the first quarter of last year and $483 $9 million at the end of Q4.
Our PCB book to Bill ratio was 1.2 for the three months ending March 29.
I'd like to conclude by again thanking our employees for their content for continuing to contribute to the P. T M and our critical mission of inspiring innovation with our customers.
Despite the COVID-19, and raw materials related challenges, we faced in Q1, our business performed better than we expected as a direct result of our employees concerted efforts to engage and support our customers.
We've also taken positive strategic moves that will strengthen TTM for the long term.
Now Todd will review, our financial performance for the first quarter Todd.
Thanks, Tom and good afternoon, everyone.
I'll be reviewing our financial results for the first quarter, which are also shown in the press release distributed today as well as on page six of our earnings presentation, which is posted on our website.
For the first quarter net sales were $526 $4 million.
Per to $497 $6 million from continuing operations in the first quarter of 2020.
The year over year increase in revenue was due to growth in our automotive.
Center computing, and aerospace and defense end markets.
So the offset by declines in our medical industrial and instrumentation and networking telecom end markets a portion of which was due to the closure of two plants last year.
GAAP operating income for the first quarter of 2021 was $19 8 million compared to GAAP operating income from continuing operations of $16 $2 million in the first quarter of 2020.
On a GAAP basis the net.
Loss in the first quarter of 2021, which included $15 $2 million of expense associated with the refinancing of our high yield bonds with.
It was $3.2 million or <unk> <unk> per diluted share.
This compares to a net loss from continuing operations of $3 2 million or three cents per diluted share in the first quarter of last year.
The remainder of my comments will focus on our non-GAAP financial performance.
Non-GAAP financial performance excludes our divested mobility business unit.
Non routine tax items M&A related costs restructuring costs, certain non cash expenses 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 comparison with expectations in prior periods.
Gross margin in the first quarter was 16%.
Paired to 16, 8% in the first quarter of 2020, but gross profit was higher by zero point $8 million.
These results reflect approximately $13 million of headwinds.
Related to stronger Chinese currency.
Higher raw material costs due to increased commodity prices, primarily copper and.
And continued expenses related to the COVID-19 pandemic.
We were able to mitigate most of these headwinds through higher revenue and production and spending efficiencies.
Selling and marketing expense was $15 $6 million in the first quarter or 3% of net sales versus $15 $7 million or three 2% of net sales a year ago.
First quarter G&A expense was $26 6 million or five per cent of net sales.
Compared to $29 6 million or five 9% of net sales in the same quarter last year.
In the first quarter R&D expense was $4 $4 million or 0.8 per cent of revenues compared to $4 $8 million or 1% of revenue in the year ago quarter.
Our operating margin in Q1 was seven 2%.
This compares to six 7% in the same quarter last year.
Interest expense was $10 $9 million in the first quarter, a decrease of $5 $4 million from the same quarter last year due to lower levels of debt as we repaid $400 million of our term loan and our $250 million convertible bonds.
During the quarter, there was minimal foreign exchange impact.
Below the operating line government incentives and interest income resulted in a positive $1.8 million or approximately one set of E. P. S.
This compares to a gain of $2 $4 million or approximately two cents of EPS in Q1 last year.
Our effective tax rate was 12% in the first quarter.
First quarter net income was $25 $3 million or 23 per diluted share.
This compares to first quarter 2020, net income of $16 7 million or 16 cents per diluted share.
Adjusted EBITDA for the first quarter was $61 million or 11, 6% of net sales.
Compared with first quarter 2020, adjusted EBITDA of $62 million or $12 one per cent of net sales.
Depreciation for the first quarter was $21 $5 million net.
Net capital spending for the quarter was $21 million.
Our balance sheet and liquidity positions remain very strong.
We completed the offering of $500 million of senior notes at 4% interest due 2029.
We used the proceeds from that issuance to redeem $375 million.
A senior notes with a coupon of five and five eights due in 2025 and to repay $40 million of our U S. ABL.
In addition, cash flow from operations was $41 $1 million in the first quarter or seven 8% of revenue.
Cash and cash equivalents at the end of the first quarter of 2021 were $539 $6 million at the end of the first quarter. Our net debt divided by last 12 months EBITDA was one four times.
Given this financial strength during the first quarter, we announced a $100 million stock buyback program.
However, due to market blackout restrictions, we weren't able to implement the program until late in the quarter. After we completed the offering of our senior notes.
As a result, we had no buyback activity during the first quarter.
We also have approximately $25 9 million warrants outstanding related to our redeemed convertible bond, which allow for holders to acquire TTM stock at $14 26 per share.
These warrants expire ratably between March 15th 'twenty, 'twenty, one and January 25th 2022.
During the first quarter, we renegotiated or negotiated an amendment.
Allows TTM to settle 60% of these warrants in cash rather than issuing shares.
TTM is exercise that option for warrants expiring through the second quarter.
This will help reduce the potential dilution of the warrants to our stockholders and effectively acts like a stock buyback program.
We will determine whether to exercise that cash settlement option for future quarters at a later date.
Now I'd like to turn to our guidance for the second quarter.
We expect total revenue for the second quarter of 2021 to be in the range of $525 million to $565 million.
We expect non-GAAP earnings to be in the range of 27% to 33 cents per diluted share.
EPS forecast is based on a diluted share count of approximately 109 million shares.
Our share count guidance includes dilutive securities such as options and our issues, but no shares associated with our warrants.
For every dollar increase in the average share price above $14.26 during the quarter our shares outstanding would increase by approximately 1 million shares.
We expect this impact however will decline through the year as we settled the horse.
We estimate that SG&A expense will be about eight 2% of revenue in the second quarter and R&D to be about 0.8 per cent of revenue.
We expect interest expense to total approximately $10 million.
Finally, we estimate our effective tax rate to be between 10 and 15 per cent.
To assist you in developing your financial models, we offer the following additional information.
During the second quarter, we expect to record amortization of intangibles of about $10 4 million stock based compensation expense of about $3 $5 million.
Non cash interest expense of approximately a half a million dollars.
And we estimate depreciation expense will be approximately $21 $4 million.
Finally, I'd like to announce that we'll be participating virtually in several conferences this quarter, including the Goldman Sachs leveraged finance and credit conference on May 17th.
The Needham Technology and media conference on May 18.
The Barclays high yield and syndicated loans conference on May 25th.
The Craig Hallum Institutional Investor Conference on June 2nd.
The UBS global Industrials and Transportation conference on June eight.
The Baird Global consumer Technology and services conference on June nine.
And the Stifel Cross sector insight conference on June 10th.
That concludes our prepared remarks, and now we'd like to open the line for questions Casey.
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I'll take our first question from William Stein of Trust Securities.
Great. Thanks for taking my question apologize for any background noise here, we're still working from home.
I wanted to ask about long term operating margin trends just delivered I think it was seven 2% op margin at the last analyst day, we established a goal of 12 to 14 per cent quite a bit higher than where we are.
You've sold one business day.
I don't know if it was lower on average, but certainly much more volatile and I think lower than most of my.
Recollection.
And you also.
Cut down most of your business.
Both of which certainly have a stabilizing effect and probably net.
Hum.
Higher taxes on the operating margin, so I understand you're probably not going to set a new target for us today.
But I wonder what investors can expect from apparel to be whether we should still expect the path to significantly higher operating margins from here and what it will take to achieve that thank you.
Well thank you for the question.
I think that's a pretty practical question given the performance of the quarter, we did pretty well on the top line and we're seeing some growth there and that growth is delivering incremental margin that we would expect kind of in that neighborhood of 25 per cent.
But it was unfortunately.
Offset if you if you will from these issues that we're facing in terms of significant challenges on foreign exchange.
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Commodity pricing and still some residual challenges with COVID-19 as we try to wind down or the impact of this virus on our operations.
I highlighted the fact that we had about $13 million of headwind in the quarter and those are things that are we don't view as permanent we are in some cases the correct themselves.
Others, we are taking steps and measures to mitigate the impact of that of some of that $13 million. My point in highlighting that is that if you. If you looked outside that $13 million or operating margins would have been quite strong.
And that's really what we're looking at on a long term basis. We have these challenges short term and when you have steep.
Adjustments in foreign exchange rates or commodity pricing, but particular, if those changes happened very rapidly.
It will negatively impact our operating margins temporarily while we work through a period of digestion.
And how do we work on these things well, obviously in the case of commodity pricing, we're working to diversify that come out of the supply base and we're also working on making sure that we're adjusting our pricing models so that.
You know, we're passing these costs onto our customers.
So with that in money back.
Back to the original statement you made about our target margins.
We're still believers of those we just have to get through this issue short term with the with the market that we're dealing with both in terms of the virus that's out there as well as commodity pricing that we're dealing with.
And then.
Continued growth in the revenue, which we are starting to see now.
So hopefully that gives you some kind of context and some confidence that we have in the business model itself.
Thank you.
Thank you and we will take our next question from Mike Crawford of B Riley Securities.
Thanks are there any changes in the conversations you're having with your defense customers give them, a new administration and or the reopening of the Pentagon with a less severe travel restrictions.
Yeah. So this is Tom I'll answer that one Mike. Thanks for the question are they the.
What what I would say at this point you know first of all encouraging news on the budget side sort of what we commented on last last quarter has been coming to pass I think the by the administration.
Cognize is.
That Oh, how important defense is there've been some shifts in strategy, but in terms of overall budget looking at a relatively a flat budget, which is great news for us.
Because we're in the and the programs that are that are still benefiting from that budget. So.
<unk> I think that's that's continued to be a you know a positive trend for US as you mentioned things you know things gradually opening up there's a couple of developments here right.
The government certainly defense pardon department looking at strategically how can we continue to to two or how can we return to building of our manufacturing infrastructure.
Both for defense and also for dual use kind of a requirement that while theres nothing short term to report there I think that's an encouraging trend certainly for a company such as T. T M with with a with such a strong footprint in North America.
And then as you mentioned that yeah. There's a there's an opening up in terms of the ability to have dialogue with the defense Department and and that again are not our direct customer or our customer's customer in most cases, but being able to have that that dialogue as needed.
Allows us to to learn more about the strategic priorities make sure that we are in turn are meeting those requirements from a technology development standpoint, and also that our footprint continues to meet those requirements from a production ongoing production standpoint, so all all positive.
Elements I would say.
Okay. Thank you and just one follow up just on the footprint. In addition to the strong North American footprint is there any updates on the aspiration to get anything in Europe and Southeast Asia.
Continuing to actively look I think I think nothing has changed in terms of the knee, let's put it that way.
From our customers the desire to see that our support in Europe is still there. We're doing I think our team does a great job of meeting requirements out of North America, but there are opportunities in Europe as well.
And then southeast Asia from a volume standpoint, with the shift in administrations are really.
There hasnt been there there may be a shift in tone in terms of the absolute urgency.
To move the footprint, but no shift in tone in terms of the long term need to move that footprint. So our dialogues with our customers continues around how do we ensure that the that we have the right footprint for for their long term needs. So continuing to look at that Mike.
Okay excellent. Thank you.
Thank you.
And we will take our next question from Christian Schwab of Craig Hallum.
Hi, this is kind of around on behalf of Christian thanks for letting us after from questions here.
First question I wanted to revisit these headwinds you're seeing are you quantify them a $60 million in Q1.
So the foreign exchange and raw raw commodity price increases and some residual COVID-19 impacts I was just wondering if you could maybe give a little more color on.
Timeline, you expected these to ease and maybe how much costs are you assuming continues in Q2, because you know your guidance does imply a relatively nice step up in margins, so any color that'd be great.
Tyler Thanks again for asking the question because I think this is it really the key topic that we're dealing with them. So if you take them take the three pieces right.
COVID-19, we're certainly seeing some progress here in North America, where we're most impacted the last several quarters.
In the general population and what's happening with.
The decline now since the year end or at the beginning of the year and COVID-19 cases, the increasing rate of vaccinations for people. These are all favorable you know our employees live in the general population. So they're subject to those same challenges as the average person is in America.
So that progress is encouraging we will we still expect to see some challenge in Q2 as we begin to come out of you know we weren't were spread across the country in different states and regions have different protocols and as we worked through those issues, Inc, and able to.
Support our business and get our people back to work more consistently.
We will see some effect in Q2, but that should start to wane pretty consistently with what youre looking at in terms of vaccination rates in general virus, New virus cases in the general population. So I think that's something you can monitor and kind of have a sense of direction from.
You know as you watch the news in the case of raw material pricing.
That continues to be a challenge and typically we adjusted quotations going forward, but obviously you have product that's already in the pipeline with fixed pricing.
And so theres challenges as to how you can adjust.
Adjust pricing to mitigate those cost increases.
Which tend to it tends to lag pricing changes tend to lag the actual cost changes and so we continue to see pressure. There. So I think we will continue to face some challenges with that as we go into the second quarter certainly.
How much beyond that it's difficult to say.
But certainly the second quarter will continue to feel some pressure from that.
Foreign exchange.
The look a little bit better during Q1, but then since the start in April we've seen it strengthen the Chinese currency strengthened again, which puts a little more pressure on us.
Year over year. It continues to be a challenge, but that's something that we built into the cost structure and we work on in terms of pricing and particularly we work on in terms of cost management.
Our team does a great job of trying to get more efficient all the time and we saw some of the benefits of that in Q1, even though we had $13 million of headwind.
We are our margins came down a little bit, but not $13 million worth we mitigated some of that with revenue increase but a big chunk of that was through production and any other spending efficiencies, which is a reflection of the efforts of the team to improve yields of products and to.
Just manage cost very carefully.
And becoming more productive. So we just we do that all the time, we need to keep doing that to help offset some of these challenges over a longer term. So we will continue to face some pressure on net in Q2, we've tried to reflect that in our forecast.
But also noting some improvement.
As we continue to make progress on these things and well just have to watch and see what happens in the market on commodities and whatnot as we go through the second quarter to have a better sense of what's going to what it's going to look like when we get to the third quarter. So I hope that helps a little bit.
That was great that was all that was great color I appreciate that.
Second question, if you could.
I was hoping to maybe get an update on your kind of outlook on the telecom market in particular.
You know progress or timeline to begin their phase II 50 rollout any update or your outlook from conversations with customers there would be would be great.
Sure Yeah, I think if you look at.
At the telecom situation.
The the the critical point in terms of China is is when does the phase three investment cycle.
Start it sounds like that's going to be versus sort of being a you know.
A single auction it looks like it's going to be more phased in.
Here as we as we go through Q2 and into Q3.
Which is a new development. So so more of a phased in approach I don't I haven't seen any change in terms of certainly the official.
Forecast I think the official forecast are still somewhere around 600000 base stations up from about 580000 last year.
Required so that that number hasnt changed.
Where we are seeing seeing activity in and as we had forecast last quarter.
Is in the non China.
Piece of telecom and and a strong activity in North America certainly.
Certainly activity and in Japan, South Korea, Southeast Asia, starting to get to warm up.
The balance of the World are slow so you know you use flow.
Certainly Latin and South America are slow.
But a pick up in the rest of world that is that it's pretty much as we had forecast last quarter so with.
With P. P. M of course, you see you tend to see our revenues are pretty well balanced, but if anything a little bit weighted towards China on the revenue side. If you start thinking about our component business more weighted for rest of world.
So we're still agnostic, we'd love to see all of our customers succeed here.
And certainly look forward to to China, the demand coming out of China is that is that phase III.
It starts to kick off.
Yeah.
That's great. Thank you that's all for us.
Thank you.
Thank you and we'll take our next question from Alvin pack of Stifel.
Hi, Thank you for taking the question filling in on behalf of Mackie sharing.
To follow up on the book to Bill you mentioned that at one point to which is relatively elevated and you did mention for auto that the current semi shortages supply shortages is not having a direct impact to your overall bookings volume, but in terms of that elevated bookings level. How much of that do you think is involved with.
Inventory builds versus true demand follow through and.
Looking further into the year, how do you think the those order trends might progress given what's going on with the general industry and our supply chain.
Sure Yeah, I think the you know certainly the comment overall on the bookings level on the commercial side.
Very you know very very strong that's reflected in that backlog number.
Glad to see that the commercial bookings really moved now across our footprint not just Asia Pacific, but benefiting our North America.
Footprint as well, which is a great development.
Development.
And then if you start looking.
Specifically.
Where are you know the inventory concerns have been raised as predominantly around around the automotive side, what we're hearing from customers at this point as I as I mentioned earlier is that they continue to want to see a ship.
And and in discussions with those customers, they're saying look the demand is still there.
They that they need us to.
Ship part of that is frankly inventory replenishment.
From last year. So there is a little bit of inventory replenishment I'd say are there but in terms of.
A potential inventory adjustments.
We certainly haven't seen that and then the demand has continued to remain there remains strong.
For us here and certainly that's what we're seeing in the second quarter as well.
What we're looking to particularly in automotive is what does the end market look like here as we head into the second half of the year. We've been encouraged encouraging trends in Asia, North America, encouraging as well, but I think the the only question out there right now as we look at our business.
This is Europe, and and when when do we see a stronger recovery out of Europe, and and how does that impact the second half of the year. So.
So still I would say second half of the year, we're not yet sure yet.
But certainly through the first half it looks strong.
Like the the end market demand really across the commercial sector is holding up very well.
So very pleased to see that.
Okay. Thank you if I may for a follow up.
You clearly detailed the causing a gross profit margin and the associated commodities headwinds in FX headwinds and the likes.
But could we get more color on how you're looking at the Opex later into the year and beyond once a.
Hopefully.
The world gets back into post pandemic recovery and and things go back to normal I mean, and I believe for the Opex guidance, including R&D. The guide was around 10 per cent of revenue versus last quarter Guide, which was at 9.6 and that has been trickling up slightly could we be looking at opex coming up or down.
Moving to increase their travel, but Kobe concert decreasing but with all the puts and takes how should we be looking at that going forward.
I'll try to respond to that Tom.
Alvin you're correct in observing that last years Opex numbers were probably well certainly suppressed because of the virus right. We curtailed all travel.
We also took aggressive actions proactively to be very cautious.
We ran as lean as we possibly could in terms of head count and managing the business.
And so we were below average or below what we've what I would call. It a normal sustainable run rate. When you look at the 2020 kind of Opex numbers.
As you go into this coming year and you start to look at.
You know what we've given guidance on in terms of Q2, and how that compares to Q1.
You know, we're gradually starting to ramp up travel is still relatively muted.
But will increase as the virus gets under better control here throughout the throughout the year that would probably be one of the biggest factors influencing some of our spending and we're not talking you know $5 million worth of Opex here, we're really focusing on on modest growth as we deal with some of the.
One off.
Travel being one.
Also you get fluctuations quarter to quarter, depending on what happens sometimes with like accounts receivable with bad debt reserves and things like that we did have a little bit of a recovery in Q1 that probably.
Well suppressed our results or our G&A expense by about a million Bucks.
No that's not likely to repeat next quarter. So you've got to take out some of those one off anomalies. When you look at our overall run rate on Opex.
Number up in that $50 million range is not unreasonable for kind of a normal number.
So that's probably something you should look at longer term.
And in terms of our expectations as we go through the year.
I see thank you so very much.
Thank you.
Thank you and we will take our next question from Tyler Bailey of Needham.
Hi, Yeah. Thanks for taking my question I'm filling in for Jim Ricchiuti.
You mentioned again that you guys are continuing to build a strong balance sheet.
So just wondering if you could maybe provide some insight into your M&A pipeline.
More on and which part of course, you might be targeting.
Sure.
Yeah. So so.
Theme for us and really strategically.
The direction for TTM is to continue to focus on.
Differentiation.
That differentiation comes in a couple of forms that tie directly to our M&A strategy.
One is in terms of really how we build on top of our printed circuit board and that that's really oriented around the RF are building on.
On the Anaren acquisition several years ago, continuing to add our ethics expertise in the component area for our commercial business.
And in the end with RF engineering strength for our aerospace and defense business. So so that's the primary thrust of our M&A.
Direction from a secondary area of differentiation for us is in our footprint capability.
Our North America.
Strength and backed up by volume production in Asia.
As we see customer needs a shift in terms of requirements. We'll we'll continue to look at M&A opportunities as related to our footprint.
Expansion as well.
So those are the really the two primary.
Areas.
I would comment that the the market or the the valuation expectations out there.
I'm still a little bit of a disconnect in terms of.
Where were we believed when we look at cash flow analysis, which is critical for us when we look at our cash flow base valuations still a little bit of GAAP, there in between expectations and and and what we would look at it as really a discounted cash flow based valuation.
But that will that changes overtime hasnt hasnt shifted.
Strategic direction here as we look at M&A so hopefully.
Hopefully that helps you with the with that question.
Yeah, Yeah I appreciate that.
Congrats on the strong quarter. Thank you. Thank you very much.
Thank you and as a reminder, if you would like to ask a question. Please press star one now.
We'll take our next question from Paul Coster of JP Morgan.
Hi, This is Paul Chung on for Coster, Thanks for taking our questions.
So just on seasonality today now with cellular gone.
You know that kind of lessen the volatility of <unk>, but how do we.
Trying to think about sequential channel trends throughout the year <unk> you got a bump from from your guidance, but should we still expect you know kind of a larger second half relative to the first half any comments there would be helpful.
Maybe I can start Todd and you can jump in if I Miss anything I think the you know from from you're absolutely right Paul from from a seasonality standpoint really the seasonality that's left in our in our business model is mainly just around Chinese new year.
And that's and that's based on our customers' production schedules are being impacted by Chinese new year, as well as as well as our own factories and.
Production being limited so that that that's the seasonality that we have left most of now we're looking at markets that that work on different cycles.
And so it's very much end market specific now as we started looking at the second half of this year and certainly.
As we've indicated in the second quarter, we're seeing.
You know commercial market strength generally are if you look at our Starwood.
Starting with just running quickly through the businesses. If you look at the AD automotive.
Certainly you know automotive continuing continuing to rebound I covered the second half I do think we're going to get to a steady state here, but still you know good solid strength there driven by the end market data center continuing to.
To grow we had a very good year last year in data center computing and and it looks again this year a lot of design activity with our customers and very encouraging environment.
M I I am if you look at medical industrial instrumentation I highlighted in semiconductor capital equipment, everyone knows that's been a strong area certainly has impacted our business. What I'm excited about is we're now seeing medical a lot you know really really the elective surgery related.
Medical business start to come back.
Last year, we were dealing with with with urgent requirements for ventilator and patient monitoring systems now we're back to just seeing that mix shift towards towards more steady solid growth in that medical business.
I'm really excited to see that coming coming into our mix now.
And industrial.
For us the industrial a lot of a lot of our industrial work as automation robotics related.
Starting to really come back now so our M. Ay ay areas now looking to be much better balanced and that certainly bodes well here as we as we go through the course of the year and I commented on our network and communications.
And that telecom piece again from a revenue standpoint, I would expect China to to reemerge on on that side as we go through the Q2 and Q3 and complemented by rest of world demand networking continues to look solid.
So overall commercial business looks it looks very good here as we go through the course of the year and as the economies overall recover post COVID-19 aerospace and defense defense remains solid.
And what again slight encouragement here and in terms of commercial aerospace.
And what you know has been really a business bumping along the bottom we're starting to see a little bit of a positive movement there.
It's encouraging to see we will see if it holds up.
But certainly.
You know a better situation than other than a quarter ago are those still still subdued on a year on year basis.
So hopefully that gives you a quick.
But much more related to these end markets and their demand trends now.
Any any particular consumer big seasonality.
Got you. Thank you that's very helpful. And then on your capital structure. It's in very good shape and you know you mentioned share buybacks may become a priority, which you really havent been active on in years. So are you kind of signaling a pause on M&A and maybe focus more on increasing margins organically and then.
More share buybacks.
What.
Maybe I can I I'll start out and Todd you jump in I'd be we we view this as complementary.
We have a as you know we've always had a structure a balance sheet goal of being in that one five to two times, we're very comfortable operating in that neighborhood as we saw ourselves coming down below that one five times, that's when it starts making sense to to look at returning a rich.
Turning money capital to shareholders as part of the overall capital allocation strategy.
But that by no means reduces the priority around M&A, what it really just says look we've got another tool in the toolbox here as we manage our overall.
Balance sheet.
So so think about it that way in terms of.
Certainly the TTM orientation, but Todd any any other comments there.
So I think I'd just highlight you know we've reached a point where it kind of ties to your seasonality question. Paul the absence of seasonality, we have much more consistent performance and we're much more predictable in that way and so it has increased our confidence level in the ability of the business in terms of the cash generation capability and as Tom highlighted we.
We are moving forward on both fronts. We believe that we can do both they're not mutually exclusive now there may be a time, if we do a big deal or something like that that we might have to throttle back on the stock buyback for a period of time, but.
Over the longer haul, we see room for both.
Both actions are bulls opportunities in terms of helping our shareholders increase their value.
Okay, Great. Thanks, and then last question you know free cash flow I'm, if I listen to what you're saying about the steadiness of the quarters on a seasonal basis does that kind of apply to your free cash flow as well and flow through and what's kind of your outlook on on working cap.
You had a pretty big benefit in 'twenty, there's some noise with the sale of the cellular but how should we think about overall free cash flow for the year and conversion. Thanks.
Yeah.
So I would just kind of go out the answer kind of backwards, let me do the capex part of it first because we are we manage that pretty carefully.
But as we noted I think last quarter Q1, our cash Capex was 20 or $21 million I think.
We're expecting cash capex for the year to be you know $80 million plus or minus.
And that's kind of that's in the four to five per cent of revenue range, which we talk about is kind of our long term swim lane for Capex, making sure that we continue to invest in technology as well as capacity challenges and being a good corporate citizen relative to environmental safety and whatnot.
So that's pretty consistent and we can we can you know turn.
<unk> turned that down if we need to if the economy softens, but that's certainly not the situation that we're looking at this year.
In terms of cash flow from operations.
Generally speaking, where we expect to be relatively consistent but Q1 always has a little softer than the rest of the quarters. If you look year over year, our Q1 cash flow from operations is up significantly compared to last year.
And then we tend to do better as we go through the year.
You know, we're targeting we'd like to be around 10% of revenue in terms of our cash flow from operations.
But that's subject to a lot of different variables.
<unk>, obviously is a key piece of that as well as managing working capital and we are in a week, we have programs in place internally, where we're working to make sure that we're managing both of those aspects.
Aspects appropriately.
So I think we're looking for good consistency, yes, we had some potential.
With the sales of mobility business and winding down net working capital helped us a little bit last year, but we will still be producing some pretty strong numbers in the you know I think it would be very proud of them by the end of the year here.
Thanks, so much.
Thank you Paul.
Thank you and this concludes our question and answer a question for todays teleconference. I would now like to turn it back over to Tom.
Thank you.
I'd I'd just like to close by summarizing some of the critical points are first we delivered revenues and earnings above the midpoint of guidance.
That's despite some other challenges we had from COVID-19 currency and supply chain.
Second our second or our end market diversification really enabled solid year on year growth in the mid single digits.
And third we generated strong cash flow and we issued new bonds at a lower rate than the ones we redeemed.
So in closing I'd like to thank our employees again for all of their efforts our customers our investors our bed as well for your continued support as we navigate our.
Our business challenges and we continue on our long term strategic direction. Thank you very much and thank you for the questions take care.
Thank you, ladies and gentlemen for participation in todays teleconference. You may now disconnect.
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