Q2 2021 TTM Technologies Inc Earnings Call
Okay.
[music].
Good afternoon, ladies and gentlemen.
Thank you for standing by and welcome to the TTM technologies second.
Quarter 2021 financial results conference call.
During todays presentation, all parties will be in a listen only mode. Following the presentation. The conference will be opened for questions. If you would like to ask a question. Please press star 1 as a reminder, this conference is being recorded today July 28.2021.
Sameer Desai Ttm's, Vice President of corporate development and Investor Relations will now review Ttm's disclosure statement. Please go ahead Sir.
Thank you Travis before we get started I would like to remind everyone that today's call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Including statements related to Ttm's future business outlook actual results could differ materially from these forward looking statements due to 1 of more risks and uncertainties, including the factors explained in our most recent annual report on form 10-K, and other filings with the Securities and Exchange Commission.
These forward looking statements are based.
On the management's expectations and assumptions at the date of this presentation TTM does not undertake any obligation to publicly update or revise any of these statements whether 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.
Tam, which can be found in the reports on form 10-K, 10-Q 8-K, the registration statement on form S..4 and the company's other SEC filings.
We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA, such measures should not be considered as a substitute for the.
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 Ttm's website at Www Dot TTM Dot com we.
We have also posted on our website, a slide deck, which 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 Samir good afternoon, and thank you for joining us for our second quarter 2021of the conference call.
I'll begin with a review of our business strategy followed by highlights.
From the quarter and a discussion of our second quarter results.
Todd Schull, our CFO will follow with an overview of our Q2.2021 financial performance and our Q3.2021guidance.
We'll then open the call for your questions.
I am pleased to report that in the second quarter of 2020.
TTM generated revenues and non-GAAP EPS above the high end of the guided range of.
Of the commercial end markets were better than guidance and year on year growth was led by strength in the automotive and data center computing markets.
These results were achieved despite supply.
The 1 constraint inflationary challenges and foreign exchange headwinds.
Last quarter I discussed with you the increasing prices and lead times of laminates, the key raw material for the manufacturer of printed circuit boards.
We have been actively managing both supply constraints and higher raw material.
Hi chain through such measures and supplier of diversification ongoing operational efficiency efforts and quotation adjustments to mitigate the impact of the TTM the man.
<unk> of the impact of our cost of goods sold will be larger in Q3 and Q4 since higher laminate prices in.
Sun in queue to take some time to work through our suppliers and inventory.
I am proud of how TTM employees have worked to deliver excellent performance. Despite the formidable challenges of this environment.
Next I would like to provide an update on our long term strategy.
TTM.
Q1 on the journey to transform our business to be less cyclical and more differentiated.
We believe that over time investors will be rewarded with more stable growth strong cash flow performance and improving margins.
As part of the strategic transition, we sold our mobility business last year.
We are now able to generate more consistent cash flow with a strong set of technologies and broad exposure to longer cycle end markets.
In the second quarter, we generated $56.9 million of cash from operations or 10% of revenue.
A key part.
Part of our ongoing strategy will be the 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 further acquisition to pursue further acquisitions as well as to support higher.
Our organic investment needs.
Another benefit of our strategic shift is the seasonality of our business.
<unk>, we experienced significant seasonality in revenues with the softer first half and ramping volumes in the third quarter, which usually peaked in the fourth quarter.
The mobility divestiture this pattern has changed.
Now experienced modest seasonal softness in the first and third quarters due to holidays and vacation periods in China, and North America, respectively, and stronger revenue revenue levels in the second and fourth.
Fourth quarters.
This seasonality combined with some pull forward of demand from Q3 into Q2 is resulting in a sequential decline in our revenue guidance.
I would also like the update you on the Covid situation.
The vaccine rollout in the United States has resulted in a decline of new Covid.
Covid cases, and we've seen the same dynamic within our employee base.
However, many parts of the world of much lower vaccination rates and the rise of the Delta variant as led to significantly increasing case counts and a number of countries with the potential of another round of Lockdowns.
We are watching these developments very closely monitor impacts on demand and supply.
We're using a data driven process monitoring vaccination rates and the local case counts to determine safety precautions at our facilities as we welcome back visitors begin travelling.
[noise] again and returned of number of our remote employees back to the workplace.
Global manufacturing facilities have been the operating throughout the pandemic.
Given the rapid reopening in the United States, along with the summer holiday season, we are seeing more challenges in attracting and retaining labor.
<unk>, which is resulting in elevated costs in production and the inefficiencies in North America.
Our employees are Paramount to the success of the T. G M and we actively endeavor to demonstrate their value to our company through a combination of financial and nonfinancial methods.
We are also hopeful.
Of the exploration of elevated unemployment benefits in the U S and the increased vaccination rates will encourage the potential employees to join TTM as we work to support our customers.
Now I'd like to review our end markets.
All historical end market disclosures.
For the glued the mobility business unit and the 2 E. Ms plants, which halted production in December of 2020.
For more details on end market disclosures. Please refer to page 4 of our earnings presentation, which is posted on our website.
The aerospace and defense end market.
Ex represented 33% of total second quarter sales compared to 34% of Q2, 2020 sales and 36% of sales in Q1.2021.
We continue to experience of positive defense climate with our A&D program backlog of 670.
The <unk> million dollars compared to $647 million a year ago.
On a year on year basis defense continues to outperform commercial aerospace, which saw meaningful year on year of declines in the quarter.
The relative stability in the defense market as a result of our strong strategic.
The 1 program alignment and key bookings for the ongoing franchise programs we.
We saw a significant bookings in the quarter for northrop's upgrade of the F 16 fighter Jets with scalable agile beam radar.
We expect sales in Q3 from this end market to represent about 33%.
T J of our total sales.
The medical industrial instrumentation end market contributed 19% of our total sales from the second quarter compared to 21% in the year ago quarter and 17% in the first quarter of 2021.
The M ini market exceeded.
The $100 million quarterly run rate and performed much better than expectations as the instrumentation customers in the semiconductor capital the capital equipment end market were stronger than expected and medical as well as industrial customers rebounded for.
For the third quarter, we expect MRI.
Ceded to the 18% of revenues.
Automotive sales represented 18% of total sales during the second quarter of 2021 compared to 11% in the year ago quarter and 17% during the first quarter of 2021.
Automotive grew almost 80.
Per cent year over year and continues to grow sequentially above our expectations exceeding a $100 million quarterly run rate, which is the level not seen since 2018.
We are aware that the shortage of semiconductors is currently limiting the automotive production, but this phenomenon.
And Ah is not directly affected our business since we do not purchase semiconductors.
While we are monitoring the situation closely to date. It has had very limited indirect impact on our non on our PCB demand.
We expect automotive to contribute 19%.
Of total sales in Q3.
Networking communications accounted for 15% of revenue during the second quarter of 2021.
This compares to 19% in the second quarter of 2020, and 15% of revenue in the first quarter of 2021.
We saw <unk>.
Sent the strength on a year on year basis in networking compared to the telecom as the <unk> buildout in China faced difficult year on year comparisons.
In Q3, we expect this end market to be 15 per cent of revenue.
Sales in the data center computing end market represented 14%.
Relative to sales in the second quarter compared to 13% in Q2 of 2020 and 14% in the first quarter of 2021.
This end market was up 15% year on year due primarily the growth from our data center customers.
We expect revenues in this end market to represent.
Rent of approximately 14% of third quarter sales as data center continues to drive year on year of growth.
Next I'll cover some details from the second quarter.
All of the following operations metrics exclude the mobility business unit and the 2 E. Ms plants that we closed.
Of total information is also available on page 5 of our earnings presentation.
During the quarter, our advanced technology business, which includes HDI rigid flex and the RF subsystems and components accounted for approximately 31 per cent of our revenue.
This compares.
This approximately 28% in the year ago quarter and 31% in Q1, we.
We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities in new programs and new markets.
Capacity utilization in Asia Pacific was 88% in Q2 compared to 70% in the year ago quarter and 80% in Q1.
Our overall capacity utilization in North America was 49% in Q2 compared to 63 per cent and the year ago quarter.
Theres, 2 and 55% in Q1 as we added plating capacity in 2 of our North American sites for the first time in several years.
Our top 5 customers contributed 29% of total sales in the second quarter of 2021 compared to 33% in the first.
First quarter of 2021, we.
We did not have any customers above 10% in the quarter.
At the end of Q2, our 90 day backlog, which is subject to cancellations was $553.1 million compared to $436.6 million at the end of the second quarter.
Fear and $545 million at the end of Q1.
Our PCB book to Bill ratio was 126 for the 3 months ending June 28.
I'd like to conclude by again thanking our employees for continuing to contribute to TTM.
Last year, and our critical mission of inspiring innovation with our customers.
Despite the raw materials and labor related challenges, we are facing our business performed better than we expected as a direct result of our employees and our supply chain partners concerted efforts to support TTM and.
And our customers.
Now Todd will review, our financial performance for the second quarter Scott.
Thanks, Tom and good afternoon, everyone.
I'll be reviewing our financial results for the second quarter, which are also shown in the press release distributed today as well as on page 7 of our earnings presentation, which is posted on.
Right.
For the second quarter net sales of $567.4 million compared to $573 million from continuing operations in the second quarter of 2020.
The year over year decrease in revenue was due to the closure of our 2 E. Ms facilities.
Which generated 21.
Of revenues in Q2 of last year and no revenues in this most recent quarter.
Excluding that impact revenues of our ongoing business grew 3.4% year on year as growth in our automotive and data center computing end markets more than offset declines in other end markets.
GAAP operating income for the second quarter of 2021 was $49 million.
Compared to GAAP operating income from continuing operations of 23 millions of dollars in the second quarter of 2020.
On a GAAP basis net income in the second quarter of 2021 was $28.3 million or 26.
Per diluted share.
This compares the net income from continuing operations of $9.3 million or <unk> <unk> per diluted share in the second quarter of last year.
The remainder of my comments will focus on our non-GAAP financial performance, our non-GAAP performance excludes our divested mobility business unit non.
Routine tax items M&A related costs.
Structuring costs, certain noncash expense items 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 the facilitate comparison with expectations and prior periods.
Gross margin in the second quarter was 18% compared to 18, 4% in the second quarter of 2020 the.
The year on year decline was largely due to the appreciation of the Chinese currency versus the U S dollar in our China facilities.
And production inefficiencies in certain North American plants.
Selling and marketing expense was $14.2 million in the second quarter or 2.5% of net sales versus $15.7 million or 2.7% of net sales a year ago.
Second quarter, G&A expense was $28.6 million or 5% of net sales.
Compared to $30.4 million or 5.3% of net sales in the same quarter a year ago.
In the second quarter, R&D was $4.1 million or 0.7% of revenues compared to $5.2 million or zero of <unk>, 9% in the year ago quarter.
Our operating.
Waiting margin in the second quarter was 9.7%. This compares to 9.4% in the same quarter last year.
Interest expense was $10.5 million in the second quarter of decrease from the $15 million in the same quarter last year due to lower levels of debt as we repaid 400.
Million dollars of our term loan and our $250 million convertible bond as well as lower interest expense following our debt refinancing in the first quarter.
During the quarter, there was a negative $1.8 million foreign exchange impact below the operating line Gov.
Government incentives and interest income.
Reduces to a negative zero point $7 million of approximately <unk> <unk> of EPS.
This compares to a gain of zero point of $2 million in the second quarter of year ago.
Our effective tax rate was 8.7% in the second quarter.
Second quarter, net income was $40 million or.
6 cents per diluted share. This compares to the second quarter 2020, net income of $33 million or <unk> 31 per diluted share.
Adjusted EBITDA for the second quarter was $75.6 million or 13, 3% of net sales.
Compared with second quarter 2020 adjusted.
30.
Of $76.8 million or 13, 5% of net sales.
Depreciation for the quarter was $21.2 million net.
Capital spending for the quarter was $22.7 million.
An ongoing focus for us is cash flow from operations during the second quarter we.
The EBITDA to deliver consistently strong results generating $56.9 million or 10% of revenue from operations.
Our balance sheet and liquidity positions remain very strong cash and cash equivalents at the end of the second quarter of 2021 were $558.3 million.
And our net debt divided by last 2.
12 months EBITDA was 1.4 times.
We are using that strength to repurchase stock and to avoid issuing new shares related to our warrants.
We previously announced the $100 million stock repurchase program and during the second quarter, we bought back 411000 shares for $6.1 million.
We also.
Spent $3.1 million to cash settled 60% of the stock warrants that matured during the quarter, thus avoiding the issuance of approximately 210000 shares.
Now I'd like to turn to guidance for the third quarter.
As Tom stated earlier, the nature and amount of seasonality, we experience has changed since the divestiture.
Stitcher of the mobility business as.
As a result of that change in the demand pull forward into Q2 that we witnessed we expect sequentially lower revenue in Q3.
In addition, we expect the larger inflationary impact in Q3, which will contribute to lower sequential operating margins.
Given that we expect total.
For the third quarter of 2021 to be in the range of $530 to $570 million.
And we expect non-GAAP earnings to be in the range of 31 to 37 per diluted share.
The EPS forecast is based on the diluted share count of approximately 109 million shares.
Our share count guidance.
Revenue load of securities such as options and our issues, but no shares associated with our warrants as the current stock price is under the stock of the strike price of $14.26.
We expect that SG&A expense will be about 8.2% of revenue in the third quarter and R&D will be about 0.9.
9% of revenue.
We expect interest expense to total approximately $10 million.
Finally, we estimate our effective tax rate to be 10%.
To assist you in developing your financial models, we offer the following additional information.
The third quarter, we expect to record of amortization of intangibles of about $9.7 million.
<unk>.
Stock based compensation expense of about $5 million noncash.
Noncash interest expense of approximately zero point $5 million and we estimate the depreciation expense will be approximately $21 million.
Finally, I'd like to announce that we will be participating virtually in the Jefferies Industrial conference.
Third the Needham Industrial Technology Conference on August 9th and the Jefferies. It hardware Communications infrastructure Conference on August 31.
That concludes our prepared remarks, and now I'd like to open the line for questions Travis.
Thank you.
Like to ask a.
On on please signal by pressing star 1 on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach of our equipment again for star 1 to ask a question.
Our first question comes from William Stein true of Securities.
Great.
Thanks for taking my question Congrats on the good quarterly results I think.
Margin took a nice tick up to 9.7% in the quarter.
I recall you have.
Historically had a 12% to 14% target.
Yes.
On this metric.
But that was before.
Question is true that you did and I'm wondering whether you still think 12% to 14% is a good target and whether you have a time frame.
That you have in mind to achieve it.
Well I'll take that 1.
Good to hear your voice again well.
Interest.
For the desk for your question.
Yes, we still believe in those targets.
The key for US was a couple of things 1 with getting our utilization levels up in Asia.
<unk> to see that point now so that's a very favorable development.
And then second.
Is continuing to grow our aerospace and defense business.
Particularly our RF.
Components and sub sub assemblies.
A portion of that business, which has better than than the usual PCB fabrication margins. So that's the key element that needs to continue that we need to continue to drive and then the other thing we have to do is some of the good news that we would've expected.
Expected to have seen already from the improved utilization in Asia has been a little bit muted by the inflationary cost that we've been seeing in terms of raw materials that Tom commented on in his opening remarks.
As well as we're seeing of you know of tighter Labor force.
We have challenges getting the labor and then of icily.
As a result of that you're seeing some price inflation of wage inflation from the from the labor too. So those those 2 elements of kind of.
Working against US headwinds if you will that are muting the benefit that we would normally see from the growth and the improved utilization as in Asia, but those are I view as temporary.
We will work through.
Mitigating through ongoing cost management actions as well as pricing actions. So I view those as is the transition aerie or temporary in nature, but they will be with us here have been for a quarter 2 of them probably will be for a couple of more quarters.
A follow up to that Todd I appreciate it but.
I just wanted to dig into that a little bit more.
With regard to the inflationary cost input costs.
Labor is 1 thing, but on the material side, we've seen among the other component suppliers.
Particular semi but other components as well.
That would mean a very.
Yeah, let's say of a strong willingness and ability.
Well the willingness among the suppliers.
And also willingness among the part of the willingness among the sellers, but willing is also among the buyers to accept higher prices in this environment the.
We of Sun's you're stretched.
Maybe they're not quite as stretched for your parts are.
Their input costs are going up in particular cost of foundry semiconductor costs are going up some ease or raising prices to their customers pretty well across the board even in markets where you.
Where you really don't expect this.
The lead to automotive and the customers are paying it.
I'm wondering if this is a matter of.
While I'm wondering why we're not seeing that in your business really it's sort of conservative.
Thank you.
Yeah. So so well this is Tom let me, let me cover the first of all.
Just sort.
The explain some of the the dynamics of work here.
And in the printed circuit board.
Both of us in particular.
But also in the tire business.
We have a set of businesses.
Approximately it depends on the on the given quarter, but if you think about 40 to 50.
For the 10th of our commercial business.
Yes.
It is related to the more spot type non contractual business.
And then if you think about our A&D business about half of the business and A&D is related to either again spot of a non cash.
For subtle business or contracts with escalation provision so the balance of the.
The business about 50% would be related to contracts that we have with our customers.
So we have obviously immediately.
As we receive increases.
The increase of or even forecasted to increase.
It was we were able to incorporate that in our quote models and take care of of the 40% to 50% of commercial in the 50% of our A&D that I talked about.
It's the balance that we're really addressing now in that and that takes negotiations obviously, the best time to negotiate with the contractual.
Traction for us when the contract comes up for renewal, which we which they do we most of our contractual relationships come up for renewal every year.
If not more often and so that's when you have your price negotiation.
In some cases, we've had to go back to even those customers from talk about.
Cost of of the present situation and ask and ask for their understanding I would say that on balance we've been able to mitigate approximately 75%.
Of that.
The increases that we've done.
Receiving.
And frankly I can.
Consider that.
Given the given the portion of our business that is contractual.
We've also of course as we always do we will focus on the cost side of the equation.
And improving our operational efficiencies.
And that's a constant for us so that that continues.
The other area of focus.
And as we go through contract contractual negotiations with our customers will be.
Talking through the pricing so the duration.
No.
So that's how that's really the how it works in the printed circuit Board World and the.
You know we're going to continue.
The work through this and as Todd said, we have confidence that we'll be able to mitigate its just a question of of.
The time as we as we work through those mitigation strategies.
Strategies.
Thank you.
Sure.
Yeah.
If you find that your question has been answered you may remove yourself from the queue by pressing star 2.
Our next question comes from Jim Ricchiuti.
Needham <unk> company.
Hi, good afternoon.
I may have missed the effects, you're talking about pull ins.
Shay elaborated.
8 of where you were seeing the Poland, which market verticals and maybe what was driving that how unusual is that to say.
Yes, sure the yes.
And predominantly where we where we saw that was in our.
And in the data center computing.
And market.
And a little bit of in the networking and the networking side as well.
And not unusual Jim.
The if you look at the blending of the Q2 Q3.
And so I would consider that.
Sort of.
Not it is normal to think about.
Okay.
Of multi multiple quarters.
And and generally we were because in Q2 as we highlighted Q.
Q2, we have that many more days of production in North America, coupled with the excellent utilization rates that we have in Asia Pacific.
In terms, so we were able to push that product out and our customers were pulling that product as we go into the queue in the Q3 here in those 2 areas we're expecting.
That we'll see a little bit of a.
Of more subdued.
The demand, but but really on the on the edges.
So still a very strong environment and then and then the other factor.
Is is just the ability with with vacations in North America.
Q3 is always going to be.
From a production output standpoint.
Lower production output quarter for us versus Q.
If you would always of the the.
2 factors that.
There were absorbing at this point in Q3.
I don't know if you want to size the quantify the time the.
The other question of the last question I have used for us on the utilization rates you guys alluded to the higher utilization rates in Asia Pacific, but I'm just wondering.
So at all concerned about your north American utilization rate.
Yeah, I think I think the way to.
To look at it on an a in terms of sizing is just look at the end market for.
Forecast that we provided and if you look at sort of Q3 versus Q2, you'll see.
Yeah.
You know in the in the data center area down down about 6% in networking telecom down about 2% bulk of that's going to be related to the.
The inventories and sort of that quarter to quarter to quarter blurring if you will of.
Of the demand.
And then if you look at AMD Q3 to Q2.
2 down about 3% and a portion of the MRI, which is down again about 6% that's more related to production limitations in North America.
So so that's that's how a good way to look at it.
If you know in terms of utilization I can't tell you how.
We're excited we are about.
It's funny to say that north of yes, North America utilization rates are down.
But what that really signifies is the fact that we added 2 plating lines in.
In the quarter.
And those are those are vertical plating lines there.
They are core to our process.
Ah represents.
Our.
Ability in the future here to respond.
2 of the robust demand that we are that we are feeling out there in the marketplace and.
And to continue our ability to respond to the quick turn requirements as well in those facilities.
We obviously have to have to continue to work on our staffing and our North America facilities, but this gives us the equipment capacity that we need particularly in those 2 facilities that were that were bottlenecks by plating.
And again, you know, adding plating lines great.
Great indicator too.
Our customers that we are prepared to service their there of heightened demand levels.
Got it thanks very much.
Thank you Jim.
Our next question comes from Matt Sheerin.
Stifel.
Okay.
Oh, yes.
Okay.
Hey, everyone.
Just a question regarding the the.
The the margin headwinds that youre seeing for some of the labor side and on the materials.
Syed.
It sounds like and you're not the only 1 saying conditions that will probably worsen.
Today, since a quarter or 2 ago.
You have any visibility into sort of the windows when the stabilizes and it.
Sounds like Youre catching up a little bit on passing those costs for long, but do you see any further progress in the December quarter.
So.
No.
It kind of add to what Tom said earlier about the process and how we can deal with pricing in our process.
What we've seen now is increases over a period of time they have been working themselves through the pipeline at our suppliers and then the our inventory and then out to customers.
And as we try to balance that cost increase which we've seen.
Pretty steadily and significantly over the last few quarters.
We know where we are.
Working to kind of try to get in front of that and work with our customers on pricing, but on the.
That 50% or so of the revenue stream.
Customer that takes longer to deal with the Tom was referring to earlier.
We're making progress Q3 has got a bit of of GAAP, we did really well I think in Q2 or the smaller hill decline.
The team did a really good job getting in front of it and working with customers and more of less mitigated the impact of that particular commodity.
That of inflation for for our business in Q3, though these costs keep ramping and and we've been working with our customers and we see it into Q4.
At this point, we don't it's hard to forecast out of our customer of our suppliers are going to be continued increased pricing on us in August and September.
We are today, we are implementing solutions to mitigate what we see today and that will have a better benefit in Q4 than in Q3, we have better coverage of any Tom alluded to the 75% or so.
I like to hit the climbing a mountain and was <unk> 75 per cent of the way up that amount in Q3 and the.
But we're working hard to try to get to get over that hump, but it's going to be tougher this quarter, but the Q4 piece of that where.
We're in better position, because we have more runway and we've been working that issue for a longer period of time that is of course subject to what our suppliers might continue to do to us here over the next few months.
That is a moving target.
The team has been increasing here over time, but.
We think we've got a plan in place we're executing we're closing that gap. We think Q3 at this point looks to be the most challenging quarter from that perspective, but thats subject to what happens in the marketplace for for from our suppliers as we go forward here.
Target and I'd only add.
Matt that we so that Todd was talking about also is inclusive of what we are seeing of forecasting with from our vendors.
As we look at there what we understand to be their plans.
And as you know this is sort of the.
Yeah, I sort of the times when you really understand the true partnership.
With with vendors on the.
The vendors that are able to forecast in that and the.
That are.
Doing their utmost to meet demand requirements.
And of transparent fashion those are the true partners.
<unk>.
And.
And we have a number of them the they're really of stepped up and.
So from that standpoint, we really are trying to to understand where the market is growing and make sure that.
That our customers understand that as well.
Okay. Thanks for that and could you remind us what.
The cost of goods is represented by the the laminates the copper clad laminate.
Yeah.
So it is probably our single largest the material cost that goes into.
Our overall cost.
Cost of goods sold.
And in total if you look at laminate as a percentage of our total cost of goods sold it's about 14, 5%. If you look at all of the copper related stuff.
<unk> metals that we use it's maybe in aggregate about 20% of our total cost of goods.
Ads sold is really what we're talking about here.
Okay. That's helpful and just the.
Second of my My second question just regarding M&A.
And obviously that's been the key part of your growth strategy and you've had a lot of success with integrating.
Acquisitions.
And the Anaren, obviously broaden your product portfolio.
What's your thoughts there in terms of opportunities obviously your balance sheet has been improving what should we think about the the M&A here.
No I think you pointed out.
It has been core to our strategy and it will continue to be in.
Critical element of our of our strategy.
We're still we're still working the are the revenue synergies if you will on the Ann or inside of net.
Certainly on the commercial side of the business that involves the cross selling efforts that we're involved in and then.
There's a very close really.
<unk> chip.
Between our RF component design efforts and our printed circuit board support.
And so we've obviously.
Now we're approaching what we've been 3 years.
And.
And that relationship now is good.
Just the optimal and so we have we have product now that is out in the market. We've been building our catalog beyond just couplers in resistors and adding transceivers in the.
Other components there.
Actively working on new markets beyond Telecom, where we've.
Done very well.
But continuing to look at opportunities in automotive.
The optical networking as well.
So really.
We'd like the compliment our team on how they how they continue to focus on that business development Thats really about differentiation in the direction.
We are going in as a company as we look at M&A, absolutely looking at building on that capability.
On the RF components side, looking at our aerospace and defense strength, and adding engineering capability there.
And then continuing to build out and make sure that we have.
The right footprint to support our customers on the commercial side of the business.
Is the third element.
So we are continuing to work on the work that pipeline.
That's a longer term effort for us strategically.
The first the first.
Sort of.
Hurdle, if you will internally is to make sure that there is the strong strategic fit.
But then over and above that we need to make sure of that acquisition satisfy financial criteria.
We continue to see elevated multiples in the market.
The elevated.
Multiple expectations.
I know that that will that will change here going forward. It always does adjust.
That certainly as we look at our second critical hurdle, which is are the financial metrics that is going to open up some of those strategic opportunities.
So we're going to continue the work that.
And it's a process that.
That is very much alive and well in the critical part of our strategy net.
Okay, alright, thanks, a lot of time.
Thank you.
Our next question comes from Mike.
Mike Crawford B Riley securely.
Thank you regarding the automotive business can you talk about design wins and a conventional.
Conventional mix versus EV, which I think in the past it's been around 77 per cent.
And also regarding design wins I think in 19, and 20 combined yet over 1 billion.
So.
The design wins, and so where that.
And today the file in 'twenty, 1 and the outlook for the future.
Sure Yeah, Let me, let me start with the with the design wins.
We are in the in this most recent quarter 1 about the.
Kevin.
New automotive design wins, a lifetime of the lifetime program value of about $121 million.
And a good a decent portion of that was was on the.
Nonconventional side of the business.
<unk>.
So so that gives you should give you a flavor of of this most recent quarter.
And what I would say in terms of of.
The overall automotive product mix.
Relatively constant with what we reported last year about 26.
40%.
Of our of the overall business was.
Nonconventional sort of advanced technology.
Capability.
So about 26% of the balance would be.
Conventional and clearly our focus continues to be.
And building that advanced.
Technology content.
In that automotive business.
And with.
With that focus on new design wins.
So.
Good good progress solid progress I would say in the quarter.
And and certainly strong prospects here.
And finally just to comment on.
The revenue I think you know.
Are we hitting again in 2018 levels.
Very very nice to see.
In particular.
We saw demand growth.
In Europe.
As a region.
North America and Asia.
With the remained at the high levels.
But to see Europe come in and of the mix in the grow was really the the change quarter to quarter for us. So.
Good strong demand there.
Okay. Thank you and then just further regarding advanced.
Excuse me of technology.
What percentage of revenue right now I assume it's quite small is attributable to I 3.
And given that you divested them some capabilities with the mobility business.
Like how important are.
Differentiated solutions, you can provide with that the that the I 3 our intellectual property and assets that you acquired a couple of years ago.
Yeah.
So so.
You're right. It's first of all from a percentage of total revenue.
It's still it's still.
The small we do we do track.
The opportunity set are the that comes out of R. A T C. As we call it our advanced Technology Center.
And that our advanced Technology Center in.
In Chippewa Falls, Wisconsin is where we moved the I 3 asset.
Assets.
In that facility we're doing.
Substrate like printed circuit board.
The capability, we supply our own needs there for for that so fine fine lines and spacing and you can think about.
Dense circuits.
We don't break break.
In terms of revenue.
But I can tell you that particularly.
As we look at our aerospace and defense customer Roadmaps are the the.
The capability is lining up very well with their interest.
And.
That as well as with their own technology Roadmaps going forward.
So today, we are supporting.
Down to about a 25 micron.
The lines and spacing kind.
Kind of area, we expect that the continue to push downward here as we go.
Through the course.
As of 5 years, or so and our plan is to support that had that need.
So that's probably the what I can tell you Mike is just a good good solid progress there coming out of the a T C.
Okay. Thank you and then final question a little of switching gears, but.
It looks like you guys are getting back into a you know.
Actual line trade show circuit in September with the Defense show in London, but is that Hum, how does that affect business development going forward.
It's always better to be face to face [laughter].
So the net you're absolutely right, Mike I mean I think.
Aye.
The the channel it's been challenging for our field application engineering team and our sales team.
2.2 they've done a great job of interacting with our customers remotely but.
It could be face to face to be able to get out to trade shows in and participate again more than anything else its just that debt.
You know our as our mission is really the inspire innovation at our customers and the best way to inspire innovation has to be sitting together and.
And the helping.
Helping on the design process.
And also designing to meet specifications that are laid out on the table by our customers. So closer interaction that's a real positive.
Excellent. Thank you.
Thank you.
Our next question comes from Christian.
Christian Schwab Craig Hallum.
Hi, this is timing of on behalf of the Christian Thanks for all of the first couple of questions.
The first you know last quarter, you guys outlined the or quantify the impact from these commodity prices and labor and FX impacts of 13 million of I believe and I don't think I heard you quantify it this.
This quarter, if you could and then.
It appears that your Q3 guidance at the midpoint implies gross margins are going to be up sequentially above 18%. So I guess first is that correct and then.
What's what's kind of the driver there.
Well the answer to your first question on the second quarter.
The headwinds from the.
For me inflationary issues primarily.
Raw material costs, we were able to mitigate those so that really wasn't a big factor in the quarter.
It'll be a little more challenging in the in the third quarter as we look at expectations.
Because there's a bigger mountain to climb and we have not solutions or.
Or mitigated all of the <unk>.
Cost pressure that we're seeing in the third quarter. So we have a bit of a shortfall of there.
And that will impact and factors into our guidance when you look at our Q3 forecast.
And kind of just true.
Interesting that with Q2 because of the similarity with the inflationary factors.
<unk>.
You know that becomes a bit of a challenge, yes, youre right our margins actually our margins are stable to in terms of gross margin probably stable to slightly slightly down.
But when you get down to operating margin.
The trickle through Youll see a similar effect so from.
A margin percentage standpoint as.
As our EPS guidance would suggest you're seeing a little bit of of.
The reduction there.
Shortfall.
Our that decrease sequentially is really being driven by the inflationary pressures that's the gap between our costs that are increasing and.
And what we've been able to mitigate now we're going to work to try to close that gap, but that's what we see as of this point in time.
Okay, Great and then.
Second question, a little bit of a follow up.
The lease rates in the United States, You said I think was 49% this quarter you know and below.
Low Asia.
But you're encouraged with the plate of machinery you added is a bottleneck I guess.
What's kind of a target rate there you know.
Some point in the future 1 yes, you are right.
Sure sure Yeah. So we're.
In North America, because so much of the business.
It is quick time.
You have to have you have to have the excess capacity.
<unk> will meet those needs and then you also have bottlenecks of room of moving around because of that high mix low volume nature of the North American business, So utilizations not of great indicator.
Based on the ability if you will because of that.
But if you were to ask what are we.
We really like to see there when we're at 60% or we're doing we're doing an awfully well.
If we ever started pushing to 70, we read.
We'd need the dramatically we made the dramatically.
Address that.
So.
So hopefully that gives you the flavor as we bring up the equipment that we've now installed as we bring in labor and we certainly hope we're going to start seeing better labor availability.
In the fall.
That will help us to raise.
Raise of that utilization rate above the 50% area in points.
Pointing towards that 60% of again.
That's great that's all from.
Thanks, guys.
Thank you.
There are no further questions in the queue at this.
I would now like to turn the call back over to Tom.
Okay, great Yeah, Thank you and the and I wanted to first thank all of you for attending.
Hopefully you understand and I'll just highlight a few of few of the factors from the quarter we delivered.
<unk> delivered revenues and earnings above the high.
This time of guidance, we did that.
Right.
The 19 related and supply chain challenges.
And our end market diversity diversification again really pulled through for us.
Solid year on year of growth of 3% for our ongoing business and the.
Then thirdly.
And we generated strong and consistent cash flow a nice demonstration of financial discipline on the on the part of our team.
And finally I'd just like the thank you again, and thank our employees and customers and vendors as well for your continued support thank you very much.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.