Q3 2021 TTM Technologies Inc Earnings Call

October 27, 2021

Good afternoon, ladies and gentlemen, thank you for standing by welcome to the TTM technologies third quarter 2021 financial results Conference call.

During todays presentation, all parties will be in listen only mode. Following the presentation. The carpets will be opened for questions to ask a question you May press star one on your telephone keypad as.

As a reminder, this conference is being recorded today October 27th 2021.

So we have decided ttm's vice president of corporate development, and Investor Relations, where I'll review Ttm's disclosure statement.

Thanks, James 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 one or more risks and uncertainties.

Adding factors explain 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 management's expectations and assumptions as of the date of this presentation TTM does not 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 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.

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 is available on Ttm's website at.

Ww Dod 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.

Thank you Samir good afternoon, and thank you for joining us for our third quarter for 2020 One conference call.

I'll begin with a review of our business strategy.

Led by highlights from the quarter and a discussion of our third quarter results call.

Joe our CFO will follow with an overview of our Q3 2021 financial performance and our Q4 2021 guidance. We will then open the call to your questions.

In the third quarter of 2021 T. G M generated revenues and non-GAAP EPS within the guided range, despite a challenging supply chain and the labor environment.

Year on year growth was led by strong demand in automotive data center computing and medical industrial and instrumentation end markets.

These results were achieved despite an unprecedented number of operational headwinds, including supply chain constraints for ourselves and our customers inflationary pressures and the labor and logistics challenges in North America, resulting in production inefficiencies.

And power restrictions in China.

Global operations teams have responded to these immense challenges with a remarkable focus on delivering the customer commitments, while flexibly responding to frequent surprises.

We have been actively managing supply constraints and higher raw material costs through such measures as supplier diversification ongoing operational efficiency efforts and quotation adjustments to mitigate the impact.

The overall impact to our cost of goods sold was larger in Q3 than Q2 and continues to be elevated in Q4, its entire laminate and other raw material prices in the first half of the year. It takes some time to work through our suppliers and our inventory.

Furthermore, raw material prices continued to rise in Q3, although at a diminished rate of increase.

Production inefficiencies in North America further exacerbated our cough and output challenges in the third quarter and will continue to do so in the fourth quarter.

Power restrictions in China did not have a material effect on the third quarter. As these impacts came late in the quarter right before the planned October holidays.

Coming out of the holidays, we have not experienced restrictions, but we are continuing to closely monitor the situation as we approach the winter season in China.

Next I would like to provide an update on our long term strategy.

T Amazon a journey to transform our business to be less cyclical and more differentiated we've.

We believe that over time, the 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.

We are now able to generate more consistent cash flow with a 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 offer.

Both internally and through acquisitions.

As such we continue to invest organically and differentiated product technology solutions from our advanced Technology Center RF in that business unit and micro electronics businesses.

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 situation.

The vaccine rollout in the United States. Initially had initially resulted in a decline in new Covid cases, however, the delta variant created another surge in late summer and early fall.

In addition, many parts of the world have much lower vaccination rates and the rise of the Delta variant led to significantly increase in case counts, resulting in a number of countries imposing lockdowns during the summer.

More recently case counts in the U S and Asia are declining and Lockdowns in Asia are being lifted.

P. T M. We are seeing similar trends and are using a data driven process monitoring vaccination rates and local case counts cause determined safety precautions at our facilities.

Our global manufacturing facilities have been operating throughout the pandemic, but in Q3, we dealt with a rising number of cases, and resulting Korean themes, which along with the general labor shortages contributed to production inefficiencies and capacity constraints in North America.

We are presently adjusting to the next normal.

Which we learned to live with COVID-19, while continuing to support our customers and keeping our employees safe.

Like many other companies, we continue to see more challenges in attracting and retaining labor.

Our employees are Paramount to the success of the P. P M and reactively endeavor to demonstrate their value to our company through a combination of financial and nonfinancial methods.

We continue to be hopeful that the exploration of elevated unemployment benefits in the U S increase vaccination rates and our strong company culture will encourage 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 exclude the divested mobility business unit and the two E. Ms plants plants, which halted production in December of 2020.

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 31% total third quarter sales compared to 37% of Q3, 2020 sales and 33% of sales in Q2 2021.

We continue to experience a positive defense climate with our A&D program backlog at $723 million compared to $625 million a year ago.

The solid demand in the defense market is a result of our strong strategic program alignment and key bookings for ongoing franchise programs.

We saw a significant bookings in the quarter for the a N spy six I use a radar program.

And our overall book to Bill for a and B was 132.

On a year on year basis, A&D revenues declined due to commercial aerospace weakness defense program timing and production inefficiencies in North America.

We expect sales in Q4 from this end market to rebound and represent about 32% of our total sales.

Given the year over year weakness in commercial aerospace as well as the labor challenges in North America, we do not expect to meet this year's growth target of 2% to 4%.

The medical industrial instrumentation end market contributed 20% of our total sales in the third quarter compared to 19% in the year ago quarter and 19% in the second quarter of 2021.

M I N I market exceeded $100 million in Q3 revenue and performed much better than expectations as medical and industrial customers continued to rebound.

For the fourth quarter, we expect <unk> to be 18% of revenues with continued strong orders from the medical and industrial markets.

However, I'm.

Revenue will be limited by capacity constraints and component shortages.

Given the strength in this end market in the first nine months of the year and the fourth quarter forecast, we expect to exceed the 2% to 4% growth target for 2021.

Automotive sales represented 18% of total sales during the third quarter of 2021 compared to 13% in the year ago quarter and 18% during the second quarter of 2021.

Automotive grew 50, 57% year over year.

We are aware that the shortage of semiconductors has been limiting automotive production.

But this phenomenon has not directly affected our business since we do not purchase semiconductors.

However, we are monitoring this situation closely and are starting to see a modest reduction in our PCB demand as more automotive Oems are reducing production plans due to the semiconductor shortage.

We expect automotive to contribute 18% of total sales in Q4.

Networking communications accounted for 16% of revenue during the third quarter of 2021.

This compares to 17% in the third quarter of 2020, and 15% of revenue in the second quarter of 2021.

We saw relative strength on a year on year basis in networking compared to telecom as the <unk> Buildout in China continues to be weak in.

In Q4, we expect this end market to be 15% of revenue as telecom demand continues to be soft.

Sales in the data center computing end market represented 14% of total sales in the third quarter compared to 13% in Q3 of 2020 and 14% in the second quarter of 2021.

This end market was up 29% year on year due primarily to growth from our data center customers.

We expect revenues in this end market to represent approximately 15% of fourth quarter sales as strong data center demand continues to drive year on year growth.

Next I'll cover some details from the third quarter.

All of the following operations metrics exclude the mobility business unit and the two <unk> plants that we close.

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 29% of our revenue.

This compares to approximately 29% in the year ago quarter and 31% in Q2.

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 91% in Q3 compared to 63% in the year ago quarter and 88% in Q2.

Our overall capacity utilization in North America was 50% in Q3 compared to 61% in the year ago quarter and 49% in Q2.

Our top five customers contributed 28% of total sales in the third quarter of 2021 compared to 29% in the second quarter of 2021.

We did not have any customers above 10% in the quarter.

At the end of Q3, our 90 day backlog, which is subject to cancellations was $594 8 million compared to $437 $8 million at the end of the third quarter last year and $553 $1 million at the end of.

Q2.

Our PCB book to Bill ratio was 1.29 for the three months ending September 27th.

Our backlog is higher than our revenue forecast due to uncertainty around both labor and supply chain challenges for our customers and ourselves.

I'd like to conclude by again thanking our employees for continuing to contribute to TTM and our critical mission of inspiring innovation with our customers.

Despite the raw materials and labor related challenges, we are facing our business performed in line with what we expected as a direct result of our employees and our supply chain partners concerted efforts to support P. T M and our customers.

Now Todd will review, our financial performance for the third quarter Todd.

Thanks, Tom and good afternoon, everyone.

I'll be reviewing our financial results for the third quarter, which are also shown in the press release distributed today as well as on page seven of our earnings presentation, which was posted to our website.

For the third quarter net sales were $556 $8 million.

Compared to $513 $6 million from continuing operations in the third quarter of 2020.

The year over year increase in revenue was due to strong growth in our automotive data center computing and medical industrial and instrumentation end markets, which more than offset decline a decline in our aerospace and defense end market and the headwind from the closure of our <unk> facilities, which contributed $25 million of revenue.

Q3 of 2020 and no revenues this year.

Excluding the impact of the EMS closure revenues of our for our ongoing business grew 12, 9% year on year.

GAAP operating income for the third quarter of 2021 was $32 2 million compared to GAAP operating loss from continuing operations of $40 3 million in the third quarter of last year, which included a goodwill impairment charge of $69 $2 million.

On a GAAP basis net income in the third quarter of 2021 was $21 million compared to GAAP operating loss from continuing operations of <unk> 40 excuse me.

$21 million or <unk> 19 per diluted share. This compares to a net loss from continuing operations of $61 $5 million or <unk> 58 per diluted share in the same quarter 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 restructuring 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 to facilitate comparisons with expectations in prior periods.

Gross margin in the third quarter was 17, 2% compared to 18, 4% in the third quarter of 2020.

The year on year decline was largely due to production challenges in North America, and foreign exchange headwinds and our China facilities.

During the quarter, we did experience significant material cost increases, but we were able to substantially mitigate the profit impact of those increases through customer price increases and manufacturing efficiencies.

Selling and marketing expense was $15 $1 million in the second quarter of two 7% of net sales versus $15 $3 million or 3% of net sales a year ago.

Third quarter G&A expense was $29 2 million or five 2% of net sales compared to $26 9 million or five 2% of net sales in the same quarter last year.

In the third quarter of 2021, R&D was $4 million or 0.7% of revenues compared to $5 $2 million or 1% in the year ago quarter.

Our operating margin in Q3 was eight 6% this.

This compares to nine 1% in Q3 of 2020.

Interest expense was $10 $6 million in the third quarter, a decrease from $12 9 million in the same quarter last year due primarily to lower levels of debt as we repaid $400 million of our term loan and our $250 million convertible bond in the second half of 2020.

During the quarter, there was a negative zero point $7 million of foreign exchange impact below the operating line.

Government incentives and interest income reduces to a negative zero point $1 million and a negligible impact to EPS.

This compares to a loss of $2 5 million or two cents of EPS in Q3 last year.

Our effective tax rate was one 1% in the third quarter as we now estimate our tax rate for 2021 could be 7%.

Third quarter net income was $36 5 million or <unk> 34 per diluted share. This compares to the third quarter 2020, net income of $26 $8 million or 25 per diluted share.

Adjusted EBITDA for the third quarter was $68 6 million or 12, 3% of net sales.

Compared with third quarter 2020, adjusted EBITDA of $67 2 million or 13, 1% of net sales.

Depreciation for the quarter was $21 million.

Net capital spending for the quarter was $19 8 million.

Cash flow from operations was $18 $6 million.

Lower than expected due to higher inventories caused by longer transit times and lower hub polls by our customers.

Accounts receivables were also higher than expected due to timing of customer payments.

Our balance sheet and liquidity positions remain very strong cash and cash equivalents at the end of the third quarter of 2021 were $529 $8 million.

And our net debt divided by last 12 month EBITDA was one five times.

During the third quarter, we repurchased $2 1 million shares of our common stock under our previously announced $100 million stock repurchase program at an average price of $13 71.

Per share for a total of 29 $28 $9 million.

As of the end of the third quarter, we have spent a total of $35 million for stock repurchases.

Now I'd like to turn to guidance for the fourth quarter.

As Todd stated earlier, we will continue to face elevated cost pressures in the fourth quarter as price increases in the first half of the year. It takes some time to work through our suppliers and our own inventory.

Furthermore, raw material prices continue to rise, though at a slower rate. We also expect continuing production efficiencies inefficiencies in North America.

Additionally, TTM has a 50 253 week fiscal calendar and 2021 is a 53 week year.

The extra week will be included in our fourth quarter.

Note, however that the extra week is the holiday week after Christmas and includes new year's.

Such the revenue benefit is modest at best but we do incur an extra week of operating expenses gives.

Given that we expect total revenue for the fourth 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 28% to 34 per diluted share.

The EPS forecast is based on a diluted share count of approximately 107 million shares.

Our share count guidance includes dilutive securities such as options and our issues, but no shares associated with our warrant at the current stock prices under the strike price of $14 26.

We expect that SG&A expense will be about eight 9% of revenue in the fourth quarter and R&D to be about 0.9% of revenue.

We expect interest expense to total approximately $11 million.

Finally, we estimate our effective tax rate to be between five and 10%.

To assist you in developing your financial models, we offer the following additional information.

During the fourth quarter, we expect to record amortization of intangibles of about $10 2 million.

Stock based compensation expense of about $5 $3 million noncash.

Noncash interest expense of approximately zero to $5 million and we estimate depreciation expense will be approximately $22 4 million.

Finally, I'd like to announce that we will be participating virtually in the Baird Industrials conference on November 19th and the Bank of America Leveraged Finance conference on November 30.

That concludes our prepared remarks, and now we'd like to open the line for questions James.

Yeah.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off July was snow Tree chart equipment again press star one to ask a question.

And we'll take our first question today from Jim Ricchiuti with Needham <unk> company.

Hi, Good afternoon, just wanted to go through the sequential decline in gross margins I mean, obviously there are several contributing factors but.

I'm wondering if maybe you could help us.

Trying to parse it out maybe quantify some of those factors, which had a bigger impact whether it was.

Higher cost of lower utilization in north.

North America or potentially mix.

Okay.

Sure Jim.

As we highlight the results our revenue was down about $10 $6 million sequentially.

Led by by A&D, which was down about 11 million automotive was down slightly and that was offset by strength in medical industrial instrumentation.

Our net number down about $10 6 million on revenue our gross margin decreased about 74 basis points to 17% 17, 2% and what's really driving that.

Some of it is the revenue decline, okay. So that hurts our margin a bit but really the production inefficiencies in North America, driven primarily by various related labor challenges, whether that's COVID-19 direct or the inability to.

Acquire the the staffing levels that we needed.

We're the really the big contributors.

And that resulted in our gross profit being down about $6 million sequentially and those two items revenue and the production inefficiencies in North America, We're about a 50 50 split.

Got it and just follow up just with respect to.

Some of the labor challenges here in the U S. It doesn't sound like that is a <unk>.

Proving much in the near term so I'm wondering how we should think about.

Pressures and in Q4 will be more significant pressures or do you see them using somewhat.

Youre anticipating improving in the early part of 'twenty two.

So.

Jim This is Tom let me just address.

How are you doing Joe.

Just let me address.

Q4, and then talk a little bit about about the longer term situation there.

We mentioned you know and I think this is this is being experienced by.

The number of companies as you know.

Substantial part of our production does come out of North America, that's really what we're talking about here.

And.

And the impacts in Q3.

Were compounded by Covid, So we had.

Yes, we were dealing with labor shortages, we also had to deal with the spike in Covid cases, and the resulting quarantines as we go forward into Q4.

The good news is at least we're seeing that case count come down so that will be.

An improvement in the labor situation. The other impact of this is that we are able now to get Tiger teams and have since the last quarter been able to get Tiger teams in some of our.

Facilities that were that were more challenged in North America that takes time too.

Two effect itself in terms of production.

Yield improvements, but we expect to start to see that those improvements payoffs as well.

As we come through Q4 and into next year, what we can't really.

Forecast as is the material situation.

And in terms of material shortages and whether that situation improves.

Also.

The inflation and what happens with the inflationary trends there so we can't really.

Forecast that piece and the other piece of course is logistics and logistics challenges.

So what I'm really saying is yes, there's a piece of.

The situation that will improve and we can see improving in Q4 around the labor, but the overall labor shortage will still be a challenge and then you've got the ongoing.

Impacts of materials logistics challenges going forward into Q4 as well.

And of course, we our teams our operational teams I mentioned are doing a fantastic job of adjusting on the fly in some cases to.

To meet customer demand.

And and I would remain optimistic that of course, our supply chain partners, we'll work through some of their challenges here as we go into next year.

Certainly for the for the fourth quarter, that's going to remain a.

The challenge that we need to confront.

Thank you.

Our next question will come from William Stein with <unk> Securities.

Great. Thanks for taking my questions.

First I'm, hoping you can give us an update on lead times I think typically your lead times are very short, but I don't think they extended the way semi.

Other component companies did in this.

Cycle that we're still in the midst of I guess, but if you can update us as to the.

Trajectory there and.

Sort of.

The pacing of things like Ah.

Expedite versus push outs and cancel thank you.

Yes, sure well.

Yes, the demand environment continues to be really robust.

If you look at the commercial.

The demand environment for our Asia facilities.

Our Asia facilities.

I think with the exception of one facility pretty much booked.

Through through the fourth quarter, you can see that reflected of course in the strength of the backlog.

So we're looking at substantial lead time extensions there will it depends again on the facility but.

Youre looking at I would say on average 16 weeks plus in those facilities North America.

Also generally very very tight in terms of demand.

And facilities that you know you're you're absolutely right would be on average four weeks kind of lead time in the past three to four weeks now youre looking at.

At lead times that stretch into into next year.

We as we book in to those facilities.

Certainly the demand climate remains overall very strong I talked about.

One area that continues to be <unk>.

<unk> commercial aerospace.

That's probably the one market where.

Where we've continued to see to see real.

Softness.

But outside of that are really really strong demand environment.

Paul if I can.

Density of buybacks versus M&A.

Any commentary on the M&A pipeline I think it's been.

I think it's been a while since you did a significant deal.

But any any.

Any update there please.

Sure I can talk about the M&A environment.

Maybe you can comment on the buyback obviously both.

Most critical parts of our balance sheet strategy.

And and we balance the two in terms of M&A strategy very much will remains in place.

As we look at.

Potential assets that are.

That would help to satisfy some of the strategic needs of the company. One of those is is looking at our footprint capabilities in the printed circuit Board space.

We look at the need to.

To move beyond our existing footprint into Europe into into Southeast Asia.

That's one area.

Even greater focus on adding to our RF.

Engineering expertise both on the commercial side and on the aerospace and defense side.

Looking at opportunities to to build on that capability.

We have not as you pointed out we have not.

Had a major acquisition event here for.

Or.

At a time.

And Thats really not we have a decent pipeline.

In the works.

But that pipeline then you need to work that you need to see those opportunities come to fruition.

And also we still are dealing with a.

Inflated expectation environment in terms of seller expectations outside out there and.

And the second area of focus for us is to really meet.

Not only our strategic needs, but also to make sense to the company financially as we run cash flow projections.

And put a valuation to these assets.

So.

You have to clear both.

And at that point at this point the second is more challenging I would say the two full.

Sure Phil.

We'll tell you that we continue to work that pipeline is still a very active process.

And just to add onto that.

When we look at our capital allocation structure and our plans going forward.

We recognize that our company has really matured over the last five years and we're at a different place than where we were before notwithstanding the challenges that we talked about our execution is relatively consistent in the market that we're participating in are our.

Pretty attractive that really affords us an opportunity to have a multi pronged allocation strategy rather than just one one option only.

First choice without a doubt is to find opportunities to grow the company, both organically or inorganically, but we feel now we've reached a point in our in our life that we can also have a.

Shareholder return element to that capital allocation strategy.

That we can keep up as we go forward at some.

Modest level.

We've talked about the fact that we announced the program. We haven't had a whole lot of activity in the first quarter or two for various reasons, which we talked about in the past.

We were in the market much more actively hearing in the last quarter and have now spent about a third of our total program amount that was approved and authorized by the board of $100 million.

So that program is still in force that's out there and we will continue to.

To take opportunity.

To buyback our stock when it makes sense.

But we don't believe it's mutually exclusive to Anthony we think we can balance the two.

And that is our intention going forward.

Thank you.

Okay.

Our next question will come from <unk> with <unk> Nikko Securities.

Thank you Hi, Tom and Todd.

Tom a question about your backlog versus your revenue guidance.

I guess last quarter, they were pretty similar.

I think I get why you're guiding your revenue a little bit below your backlog.

But given that you know you said labor situation is actually improving sequentially.

I'm, a little bit surprised that you're not guiding for you know so much similar.

You know.

Revenue backlog. So if you could talk about what sort of utilization.

You are assuming for Q4, especially given that you said you have an extra week, and then whats, causing that discrepancy.

That would be helpful.

Sure.

Yes.

The on the Labor front, yeah. Good good news.

Is that.

Covid cases have been trending downward.

But but that does not negate the fact that we still have significant labor challenges out there.

Both in terms of turnover and also in terms of labor availability.

And in those kind of those those challenges will continue in the fourth quarter at least from our vantage point.

We also have to take into account.

The.

Prospects of the supply chain material.

Mortgages.

Continuing to impact us in with various facilities.

And the logistics challenges so.

So that's as we look at at our production capabilities, we have to factor. These these elements in an.

And frankly that that leads us to be a little bit.

Conservative on the on the revenue side.

And.

I would add that is as Todd pointed out that additional week is.

It's really a it's a holiday week, so you're really you're looking at certainly additional expense the opportunity to put to push out more revenue is pretty limited.

During that period of time and so.

So that's that that that doesn't really have much impact on us.

Also Todd mentioned, we did we did build some some revenue or some inventory last quarter. This quarter. We're looking at a situation, where we're going to drive if anything drawdown.

Inventories, that's certainly our goal here and make sure that our inventories are properly inline.

To generate the cash that we need to as a company. So you put all that together and I'd say from a revenue standpoint, you know again.

We're comfortable where we are it's great to be in an environment.

Such a positive demand environment.

Our.

Working now to make the solid improvements that we need to operationally to.

To have an impact on that on that backlog as we go into next year Todd.

Todd anything to add.

I think you hit it you know theres a lot of holidays in the fourth quarter. So when you look at it on a production day basis Q4 to Q3, there is very little difference, even though it sounds like on paper there is an extra week.

Got it and then on the cost mitigation actions that are implemented.

You talk about where we are in the process and how receptive.

Your customers have been.

Because it it's no secret that the supply chain.

It has been going through an inflationary pressures I think it's well understood and I'm just curious as to you know where we are in that process and how receptive the customers okay.

Sure I think again this is an area that that that our teams have been working tirelessly on and it's a lot of like like you said generally recognized but but.

That doesn't mean that the customers are pleased when they're when they have to face a price increase.

So.

What we have been doing here is really coordinating between our supply chain our operations teams and the sales team and make sure that we are as transparent as possible communicating with our customers about the increased cost pressures that we have felt as Todd said.

We those cost pressures filter in.

And through the course of the year.

Certainly.

We will continue in the fourth quarter.

The third quarter, we did see some additional increase is broad based but not as extreme.

Fortunately as the first half of the year.

And so then you move over to the pricing side.

We did a good job in Q3 I think.

Characterize that is that we were 75% ish.

In terms of the progress in Q at the beginning of Q3.

And passing on cost increases.

We were able to pretty much close that gap in Q3 in.

In Q4.

Again, the bar goes up and we and we have an additional challenge.

We as we have conversations with our customers.

I would add that as you remember about 50%.

Of our of our business.

Is non contractual so we're able to adjust quote models.

Immediately as we as we forecast increases.

And or.

Is contractual but contains material escalation clauses.

Balances of 50% that we're talking about here, which is contractual.

At varying levels of contractual negotiation frequency and it's that piece that we've really been working on.

As a company.

This is an interesting time in the fourth quarter because of a number of our annual type contracts, particularly in automotive come up for negotiation in the fourth quarter. So.

So I know.

Our sales teams and business units will be working.

Very hard this quarter on on communicating with their customers.

And trying to really be looking forward looking as we as we look at the ongoing impact.

Zero of an inflation of the newly inflationary environment.

And I just might add that Cheniere Oh go ahead.

I was going to add.

The other part of it.

Our mitigating I use the word mitigating activities because it's not just all about pricing alright, we have other measures that we are working very hard to try to use to help offset the pain of higher raw material costs.

Be that looking at alternative suppliers.

Driving.

Gaining efficiencies as we build volume to help offset some of that negative cost and driving just cost controls in general within our facilities to try to turn minimized.

Pain cause because pricing is a tough road to go customers like as Tom pointed out they understand it but they don't like it.

And so you have to make sure Youre doing everything you can do.

To reduce the need to go to them right.

But we have been working all of those angles against the middle if you will to try to mitigate and we've done a good job here in Q2, and Q3 I think both quarters, we accomplish the goal.

We're looking at Q4, and hoping to get to the same place, but theres still a little bit of work to be done.

Did you have a follow up.

Yeah, just one.

Tom there's been a lot of noise about potential subsidies for the stomach.

Semiconductor industry and domestic manufacturing I'm just curious if you have had any discussions discussions in Washington.

And if you foresee potentially you know TTM benefiting from any sort of subsidy that might come out of there.

Oh.

Yes.

A couple of comments on that I think on the on the aerospace.

The defense side in particular.

I think there's a better understanding.

Out there.

And really reflected in the legislation to budget budgetary legislation around the defense spend defense as we look at next year.

Around the weaknesses that the that the supply chain faces in terms of the PCB production.

In North America.

I think that's a of certainly of concern.

To our defense customers.

And and.

And so I think it's a positive to.

You see that.

There is a developing understanding.

And Congress.

And within the Defense Department of how critical printed circuit boards are.

Two the capabilities into into our infrastructure needs as a country.

So.

We'll see how that develops in terms of specific legislation activity.

Another aspect would you, which you mentioned as you think about us.

Congress looks at.

At semiconductors, we've certainly been encouraging.

And educating around the need to broaden that definition to think.

Not just about chips, but about the broader electronics manufacturing infrastructure.

We like to say that chips don't float is a saying that we use.

It really is I think it's important.

That would be recognized that there needs to be an entire support structure around chips, we'll see again, where where the how the legislation ends up I think the there. It has been a broadening of definitions to include micro electronics.

And that's a positive.

Overall.

We're certainly encouraged to see that.

That there is that there is more attention being paid to this issue now.

Got it thanks, Tom and good luck.

Thank you.

Our final question will come from Mike Crawford with B Riley Securities.

Thank you just before I ask about defense could I just again here you answer about that.

The midpoint of your fourth quarter guidance would be $45 million below the 90 day backlog you have right now.

Oh sure Yeah.

So the backlog.

As we look at the backlog that is it is technically a 90 day backlog, but we are looking at a quarter, particularly in North America.

Where we have some ongoing challenges related to labor.

The two material availability and logistics challenges.

As we looked at the <unk>.

The revenue projections for the fourth quarter, we need to we need to include those challenges and and and so there's a bit of a of a shortfall. If you will from the revenue as compared to the backlog.

Okay. Thank you, Tom and I suppose in a different environment, sometimes you might actually book and ship and you could actually have.

Have a quarter that's above the backlog or is that always seemed kind of shortfall relative to backlog.

This is an this is an unusual circumstance Mike.

I'll be I'll be bought.

We saw we saw a little bit of last quarter. If you remember our backlog was pretty close to matching revenue.

Last quarter end.

And we spoke about.

Again about the need to be careful and we were proven right Terry.

Third quarter, but it was really as we looked at the third quarter. We knew we were in the summer.

In the summer we knew we were already seeing challenges on the labor front, and we and we anticipated that so this is again a second quarter of this.

It is unusual usually we would we would have a portion of our revenue that we can book in the quarter and ship.

But I talked a little bit will asked about the extended lead times.

That's absolutely part of this you can see an indication as lead times stretch that we're just going to have real challenges booking and shipping within a quarter. So it really does end up doing our best to shift as much of our backlog out.

During the course of the quarter.

As possible, so yeah, a little bit a little bit unusual.

Okay. Thank you so and then.

Somewhat related but.

When you're talking about ttm's growth expectations for vertical end markets Aerospace and defense, where you had a 1.32 book to bill in the quarter near $100 million year over year jump in defense backlog, yet, you're saying you expect to go slower than the industry's 2% to 4% growth rate, but is that.

Just for fiscal 'twenty, one is that what you mean by FY 'twenty, one view or you can't I don't think expect to grow slower than the industry in the next couple of years ago.

Oh no no.

Yeah.

Absolutely Mike.

Yes.

You know that that as we as you know we have grown for the.

Past.

Several years 334 years, we've been growing well above that rate.

Actually ever since the <unk> systems acquisition. So you can step back in 2016.

And take a look at the numbers, we've been growing well above that rate.

This year.

In aerospace and defense, we we got hit by a couple of things one is commercial aerospace weakness.

And that has an impact on several of our facilities that really we're focused on that area.

Primarily assembly needs in that area and that so those facilities were impacted.

And and then the other piece.

Piece of this has been dealing with with some of the ongoing.

Challenges production efficiency challenges in North America.

Certainly that that's heightened here in this past quarter as we go into next year.

Certainly from a capital planning standpoint, we are we are planning on growth, we see a strong backdrop.

Here in terms of program backlog.

To go out and service.

As you know we have we have.

Capital capability with balance sheet capability to grow in there.

Aerospace and defense and we have differentiated technology offerings here.

So our plan is to.

To continue to grow in aerospace and defense.

I'm hopeful that next year, we'll also see that turn in commercial aerospace and start to see it.

At least some some meaningful sequential improvements that will help feed into that story as well and Mike Todd here, just one other thing I would highlight aerospace and defense.

Unlike our commercial business.

When we book orders those orders are not necessarily for shipment in the next 90 days oftentimes those orders are shippable in the next one to two years and so.

Although the foundation if you look at the program backlog for aerospace and defense over $700 million is a great number it's not all shippable.

And so you kind of have to look at the balance order to procure.

That plays into a little bit to some of the challenges that we saw this year, but when you look at the program depth and the strength over the next couple of years its very favorable.

So you could have a little blips quarter to quarter.

Okay. Thank you for that clarification, and we saw Boeing today, you know a firm production increases in next year and we're hearing the same from Airbus. So I'm sure you'll be fine. Thank you very much.

Thank you Mike I appreciate it.

That will conclude today's question and answer session I will now turn the call over to Tom Edman for any additional or closing remarks.

Thank you just like to close by summarizing some of the points that I made earlier.

First we delivered revenues and earnings in line with guidance, despite production and labor inefficiencies in North America and supply chain challenges.

Our end market diversification enabled solid year on year growth of 13% for our ongoing business.

And third we used our strong cash position to repurchase our stock.

So in closing I'd like to thank you our investors again, our employees our customers and our supply chain partners for your continued just continued support the TTM. Thank you very much.

This concludes today's call. Thank you for your participation you may now disconnect.

Yeah.

[music].

Good afternoon, ladies and gentlemen, thank you for standing by welcome to the TTM technologies third quarter 2021 financial results Conference call.

During todays presentation, all parties will be in listen only mode. Following the presentation. The conference will be opened for questions.

That's a question you May press star one on your telephone keypad.

My name is Congress is being recorded today October 27th 2021.

So when you decide ttm's Vice president of corporate development and Investor Relations when I review Ttm's disclosure statement.

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 is available on Ttm's website at Www Dot TTM dotcom we.

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.

Thank you Samir good afternoon, and thank you for joining us for our third quarter for 2020 One conference call.

I'll begin with a review of our business strategy, followed by highlights from the quarter and a discussion of our third quarter results Todd Schull, our CFO will follow with an overview of our Q3 2021 financial performance and our Q4 2021 guidance. We will then open the call to your questions.

In the third quarter of 2021 T. G M generated revenues and non-GAAP EPS within the guided range.

Slight a challenging supply chain and the labor environment.

Year on year growth was led by strong demand in automotive data center computing and medical industrial and instrumentation end markets.

These results were achieved despite an unprecedented number of operational headwinds, including supply chain constraints for ourselves and our customers inflationary pressures and the labor and logistic challenges in North America, resulting in production inefficiencies and power restrictions.

In China.

Our global operations teams have responded to these immense challenges with a remarkable focus on delivering the customer commitments, while flexibly responding to frequent surprises.

The overall impact to our cost of goods sold was larger in Q3 than Q2 and continues to be elevated in Q4.

Higher laminate and other raw material prices in the first half of the year. It takes some time to work through our suppliers and our inventory.

Furthermore, raw material prices continued to rise in Q3, although at a diminished rate of increase.

Production inefficiencies in North America further exacerbated our costs and output challenges in the third quarter and will continue to do so in the fourth quarter.

Power restrictions in China did not have a material effect on the third quarter. As these impacts came late in the quarter right before the planned October holidays.

Coming out of the holidays, we have not experienced restrictions, but we are continuing to closely monitor the situation as we approach the winter season in China.

Next I would like to provide an update on our long term strategy.

Amazon a journey to transform our business to be less cyclical and more differentiated we've.

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.

We are now able to generate more consistent cash flow with a 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.

As such we continue to invest organically and differentiated product technology solutions from our advanced Technology Center, RF, and <unk> business units and micro electronics businesses.

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 situation.

The vaccine rollout in the United States. Initially had initially resulted in a decline in new Covid cases, however, the delta variant created another surge in late summer and early fall and.

In addition, many parts of the world have much lower vaccination rates and the rise of the Delta variance led to significantly increase in case counts, resulting in a number of countries imposing lockdowns during the summer.

More recently case counts in the U S and Asia are declining and Lockdowns in Asia are being lifted.

TTM, we're seeing similar trends and are using a data driven process monitoring vaccination rates and local case counts to determine safety precautions at our facilities.

Our global manufacturing facilities have been operating throughout the pandemic, but in Q3, we dealt with a rising number of cases, and resulting Korean teams, which along with a general labor shortages contributed to production inefficiencies and capacity constraints in North America.

We are presently adjusting to the next normal in which we learned to live with COVID-19, while continuing to support our customers and keeping our employees safe.

Like many other companies, we continue to see more challenges in attracting and retaining labor.

Our employees are Paramount to the success of TTM and Reactively endeavor to demonstrate their value to our company through a combination of financial and nonfinancial methods.

We continue to be hopeful that the exploration of elevated unemployment benefits in the U S increase vaccination rates and our strong company culture will encourage potential employees to join <unk>.

As we work to support our customers.

Now I'd like to review our end markets.

All historical end market disclosures exclude the divested mobility business unit and the two <unk> plants plants, which halted production in December of 2020.

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 31% total third quarter sales compared to 37% of Q3, 2020 sales and 33% of sales in Q2 2021.

We continue to experience a positive defense climate with our A&D program backlog at $723 million compared to $625 million a year ago.

Solid demand in the defense market is a result of our strong strategic program alignment and key bookings for ongoing franchise programs.

We saw a significant bookings in the quarter for the a and spy six I use a radar program.

And our overall book to Bill for A&D was 132.

On a year on year basis, A&D revenues declined due to commercial aerospace weakness defense program timing and production inefficiencies in North America.

We expect sales in Q4 from this end market to rebound and represent about 32% of our total sales.

Given the year over year weakness in commercial aerospace as well as the labor challenges in North America, we do not expect to meet this year's growth target of two 2% to 4%.

The medical industrial instrumentation end market contributed 20% of our total sales in the third quarter compared to 19% in the year ago quarter and 19% in the second quarter of 2021.

And the high market exceeded $100 million in Q3 revenue and performed much better than expectations as medical and industrial customers continued to rebound.

For the fourth quarter, we expect <unk> to be 18% of revenues with continued strong orders from the medical and industrial markets.

However.

Revenue will be limited by capacity constraints and component shortages.

Given the strength in this end market in the first nine months of the year and the fourth quarter forecast, we expect to exceed the 2% to 4% growth target for 2021.

Automotive sales represented 18% of total sales during the third quarter of 2021 compared to 13% in the year ago quarter and 18% during the second quarter of 2021.

Automotive grew 50, 57% year over year.

We are aware that the shortage of semiconductors has been limiting automotive production, but this phenomenon has not directly affected our business since we do not purchase semiconductors.

However, we are monitoring the situation closely and are starting to see a modest reduction in our PCB demand as more automotive Oems are reducing production plans due to the semiconductor shortage.

We expect automotive to contribute 18% of total sales in Q4.

Networking communications accounted for 16% of revenue during the third quarter of 2021.

This compares to 17% in the third quarter of 2020, and 15% of revenue in the second quarter of 2021.

We saw relative strength on a year on year basis in networking compared to telecom as the <unk> Buildout in China continues to be weak.