Okay, good morning. Thanks for joining us today for the, well, and welcome to the 27th Annual Needham Growth Conference. We're going to be having a discussion with TTM Technologies. I'm happy to have with us today the company's CEO, Tom Edman, CFO, Dan Bailey, and Sameer has just walked in. Sameer Desai, who does corporate development and investor relations. My name is Jim Ricchiuti, in the Equity Research Department at Needham, covering companies in the advanced industrial technology areas. TTM, as many of you know, is one of the world's largest PCB manufacturers, but in recent years, has expanded its technology offering to include microelectronics in some pretty interesting areas, including Aerospace & Defense, and some other areas.
Tom, why don't we start, just give us a brief overview, but maybe talk to this transformation that's occurred in the last couple of years.
Sure. Good morning, everyone. Thank you for coming in early in the morning. So, just quickly, TTM is about $2.5 billion in size in terms of revenue, about 16,000 employees around the world. Jim highlighted the transformation that has occurred with the company. We've really moved from what was a PCB solutions manufacturer to what I would call a broader technology solutions provider at this point, with mission systems portfolio, engineered product portfolio there, also an RF microwave microelectronics position and specialty components position, as well as what we do in printed circuit boards. So, a little bit about that journey. We have, on the Aerospace & Defense side of our business, in the last 10 years, we've grown defense from about 20% of our business to, today, about 45% to 46% of our revenues.
Of that mix, on Aerospace & Defense, about half of that is non-printed circuit boards, and half is printed circuit boards. When you move over to the commercial side of our business, we've also been on a bit of journey. We've been moving towards, more and more, diversification in terms of our footprint. We always had a strength in North America, combined with China-based production. We now have added a facility in Penang, Malaysia. And in 2020, we sold our Mobility business, so moved away from direct consumer exposure on the commercial side of the business. So if you think about TTM, think about a broader portfolio company that is almost half defense at this point, and then on the commercial side, serving a pretty diverse set of end markets that I'm sure we'll get into.
Okay, good. That's a good starting point. Let's zero in on the A&D side of the business, which, you know, I think was, yeah, 46% through the first nine months. How much? Remind us how much of that defense. There's also a commercial aerospace component.
Right.
There's an emerging commercial space piece. Just maybe frame that for us.
Sure. If you look at that Aerospace & Defense pie and start to take that apart a bit, about 5% of that is commercial aerospace. About 7% in our most recent quarter was in space. That's commercial and defense space. And then the balance is what I would call defense program-based. We're in about 200 defense programs overall. Now let's take that apart a bit. About half of that defense business is in radar-related. The next largest area for us would be guidance systems, primarily for missile programs. That's the next largest. Then a pretty broad exposure elsewhere in terms of the defense program. Again, broad exposure, 200 programs, but with particularly deep portfolio in regards to radar.
Okay. And with respect to radar, maybe help us understand some of what's happening in that market. This is a market you guys have focused on for a while, but we're seeing quite a bit of activity.
No, that's right. It's so radar going through a very interesting transformation. The systems that you think about as sort of the static radar antenna based radar systems have now increasingly been replaced with what is called active electronically scanned array, and so a much better more dynamic radar system approach. The foundation for that is RF technology, and so as TTM we always had a strength in printed circuit boards for RF, but as we started to build on our portfolio we added Anaren's capability back in 2018. That is primarily RF microwave capability that we added into that portfolio. So now we were building modules, so full RF modules based on our printed circuit boards with components both produced and procured and doing the sub assemblies. We were also simulating radar performance, so we were in major programs at that point.
If you think about major programs that are based on active electronically scanned array, you can start to think about SPY-6, AMDR, so ship-based radar, LTAMDS. So that's a long-range radar program, tied to really a replacement for the Patriot. So on the radar side. So that program also, if you start to think about major jet fighter programs, all involved all using AESA arrays. So we were really in at that point had a very nice program depth. We wanted to build on our knowledge base. So with the Telephonics acquisition, we acquired an engineered products capability. So the ability to build radar systems. And so with Telephonics, we now can supply radar systems. Primarily these go into maritime and helicopter-based applications.
We can also, if a customer is looking not for the full system, but for the discrete modules, we can provide those. And even if they're looking just for the printed circuit board, we can meet those requirements. So what we gained with the Telephonics acquisition was a knowledge base, a much greater engineering capability tied to radar systems. And been really excited about how that's come together with our engineering team. So yes, particular depth when we start talking about radar programs.
You know, one of the things I think that's been pleased investors, obviously, is the margin profile of some of the businesses that you've added and some of the areas that you've expanded into. Give us a sense on excuse me, on the integrated electronics portion of that defense business, the margin profile versus, say, the traditional PCB in that defense area.
Right. So there are two aspects of this. Largely very similar in terms of existing margin profile. If you look at integrated electronics versus what we call Interconnect Solutions or a PCB side. Why is that? Because there are a few reasons. One, we tie our printed circuit boards into our own program. So the margins can vary with based on that. Also, integrated electronics includes assembly. So we have an assembly operation for defense. That's typically going to be slightly less margin, less capital intensive than printed circuit boards, but also typically a little bit of a less margin. Then we have the engineered product side where you rightly would expect greater margin performance. We've been building that margin profile here post Telephonics acquisition.
That's been a primary goal of ours, to continue to use what we're very good at, which is operational efficiencies, driving consolidation of our footprint, improving margin profile over time, and dealing with, frankly, a couple of years ago, some serious supply chain issues that we also had to overcome in that, on that side of the business, so all of that together has allowed us to march steadily in terms of improving our margin performance on that Integrated Electronics side of the business.
Okay. And also, you've had a consistently strong backlog in this area. What was it? $1.5 billion?
Close to $1.5 billion.
Yeah. At the end of September.
If you want to round, I like that. Rounding up to one and a half.
So how are you thinking about this near- to intermediate-term pipeline, the growth trends that you're seeing in the business? Talk to us about that.
Yeah, sure. So generally that program backlog can tie to programs that are anywhere from two years to even longer, some stretch for five years. So what does it provide us? And it really gives us an assurance that we have tailwinds in terms of order profile to ship against. It also gives us some flexibility as we're running our operations to ship some of the programs early if we need to, and great visibility in terms of long term performance. If you think about this year as an example, very similar to last year, we're going to have more than 70%, close to 80%, booked already in backlog in our defense business. So it becomes a question of execution. That's not always simple.
There's a lot of complex products that we're building, but it is an execution challenge versus a booking challenge, and that's the kind of visibility that we have in that defense business.
You mentioned Penang, but there's also been some significant investments that you're making in the Syracuse, New York area.
Yes.
Which is geared to the A&D market, the defense business. Talk to us a little bit about that and where you stand with that.
Yeah. So we have embarked on the construction of a facility immediately adjacent to our existing Syracuse facility that will be focused on ultra-high density interconnect PCB capability. There are no such facilities in the U.S. today. What we are meeting here is a programmatic need for more advanced technology requirements on PCBs. The drivers are very similar to what we see on the commercial side when our customers are driving for size. They're driving for weight, right? They're trying to lighten up in terms of form factor. They're trying to miniaturize in terms of capability. As they do that, they drive the circuitry needs to be denser. And the package or the printed circuit board package becomes much more complex.
So you're combining functionalities into one printed circuit board that is acting really as a printed circuit board, but also as a substrate, as well. So, with that trend, we saw that coming out of our defense customers. And we have specific program needs that require a rapid ramp. We can build some of that product in our existing facilities, but the yields are not optimal. So Syracuse is a facility that will be designed for these advanced technology PCBs. It's about approximately $130 million in terms of capital investment, about $30 million of that provided by the Department of Defense funding. And we will be driving to complete that facility towards the end of this year and be in production next year.
Very important because we have program requirements that are tied to this facility that demand a rapid ramp next year. So, we'll be scaling this up as quickly as we can as we get into next year, working with some critical customers tied to the Defense Department needs.
Yeah. When you describe this business, what comes across and maybe you could talk to it is your competitive position.
Right. Yeah. So, this is, you know, when you think about TTM, this is really an important point. We learned from our commercial side of our business, having the exposure that we have in terms of technology drivers, whether it's artificial intelligence, or other areas where complexity is being driven into that board. That capability is also increasingly important to our defense customers, so as we are uniquely positioned in terms of that combination of North America presence and defense presence and the knowledge base that we gain out of Asia that we can bring back into the U.S. Competition from a PCB standpoint tends to be relatively small companies. Most of them are steep. They're in the U.S. That's that is their focus. And we certainly are the largest.
With that technology understanding, we believe that we're uniquely equipped to meet those requirements coming out of the Defense Department. That's what we're driving for.
Great. Let's turn to that, what, 55% or so of the business that's commercial. And that really covers a lot of ground. So help us understand what some of those bigger pieces are. And maybe we could talk about getting to a little bit more detail.
I'm sure you're going to want to go into depth. Yeah. So broadly, if you start looking at these other areas, Data Center Computing, which is primarily hyperscaler data center driven, that business is about 20%. Think about Medical, Industrial & Instrumentation, a secondary very broad area. That's about, generally about 15% of the business. Networking is somewhere around 8% to 10% of the business. Automotive, somewhere around 15%. I don't know if that all added up correctly.
That's close enough, so the question that I'm sure we're going to hear already, throughout the conference, but let's talk a little bit about tariffs and trade policies. You know, talk to us about how you guys are looking at it versus, you know, the first go around.
Yeah. So yeah, the first go around was critical. I mean, I think at that point, so remember where we're shipping. Generally, we're going to be shipping EMS companies, contract manufacturers. Those contract manufacturers had to adjust their footprint pretty dramatically in the first Trump administration. So we saw a number of our customers shift their assembly out of China, into Southeast Asia, into Mexico, into Eastern Europe. Okay. So they made those adjustments. Now with the next iteration, the question is going to be, are there further adjustments needed? From a TTM standpoint, we have very little, at this point, very small direct imports out of China into the U.S. We really have already taken care of that. We have our Penang facility coming up, which again, will be very helpful.
We have a little bit of exposure in Toronto, so we have a Toronto facility. Think about, you know, roughly it's sized for about $120 to 130 million annual revenue. That facility, about half of the revenue today comes from products shipped to the U.S. So there we would have some exposure. But if you start to do the math, you can see that's less than 2% of our revenue that would be directly impacted there. So it's really going to be a matter of continuing to stay very close to our EMS partners, ensuring that we have the capability to ship to them successfully wherever they may locate. That's going to be our emphasis.
How about, Tom, Mexico? Because some of your EMS partners have a pretty good presence there as well. Any sense how that might play out? And again, this is a moving target.
This is a moving tool. So now you're getting into conjecture. You know, I really, look, and we do understand assembly pretty well. We on our defense side of our business, we assemble and add value. Now we do that work in the U.S. So, we're sympathetic to our customers. They tend to have lower capital or, you know, capital asset to asset intensity. So I was tremendously impressed with how our customers, our EMS customers, how quickly they pivoted in the first administration, how quickly they moved their facilities where they needed to. I would expect more of the same, and so if Mexico is impacted, yeah, there's going to be a relook. Equipment can be moved, and so they'll be ready to move equipment to wherever it's needed to go.
Now, you know, all the ramifications around inflation cost, the cost to do that, those aren't trivial. And, you know, I think that's something that sometimes gets lost in the discussion. But certainly, there's an inflationary aspect to what might happen, depending on how the EMS customers have to move, that I think you also can't ignore. But again, we will be ready to service them wherever they might go.
Okay. Let's turn to one of the areas that we get a lot of questions about and that you guys get a lot of questions about, and that's the Data Center Computing business. You know, we're all hearing, obviously, we've been hearing about it for well over a year, but talk to us about, you know, what you've put some numbers to the AI component of that business. Maybe you just remind us.
Yeah, sure. So think about, roughly at this point, about 80% of that Data Center Computing space for us is being driven by AI, either directly or indirectly, right? You're seeing that a huge transition occur there. From a PCB standpoint, what is happening is our customers, whether they're hyperscalers or chip folks, have unique designs that are incorporated into the printed circuit boards. And so those proprietary designs drive the demand that we see. Very much program tied. We're tied to specific programs. Those programs tend to ramp pretty quickly. They tend to be, think about, a year to 18 months in terms of ramp cycle. And so we're seeding those programs generally a year ahead, approximately a year ahead.
The critical point for TTM is to get involved early on the prototyping side, be working with our customers, engineers, and then scaling with them, where and by the way, determining the right destination, from a technology standpoint, from a footprint standpoint for any particular program. That's how we work. The business has been growing, and you know, growing in that 20% kind of annual range. You know, think about a business Data Center Computing overall that for us was, if you go back to 2023, about 10%, you know, 10% to 12% of our revenue. Now it's at 20%. Certainly seeing strong growth there. We have positioned our capabilities for the more complex AI work that we've been doing in China. We have expanded our facility that does that work in China.
And we have been cross qualifying or qualifying an additional facility out of China, also ramping Penang, all in order to service this Data Center Computing requirement down the road. That's the primary purpose. Certainly, Penang, we'll see other business go into Penang, but that will be the major driver will be Data Center Computing.
In the near term, just given some of the trends you've seen in the business, are you able to meet the demand? I mean, it sounds like you're doing some things, you know, for this high complex board work. You know, to what extent are you able to meet the near term?
So what I just talked about in terms of the capacity that we added into the existing facility and the work that we're doing with another facility in terms of qualification gives us about 20% incremental capacity. And to answer your question there, Jim, it's needed, for sure. You know, certainly you always see waves of increase and, you know, depending on programs. But what I can tell you is that, yeah, that is absolutely required at this point. We're bringing that 20% on early this year.
Early this year.
Yeah. So we actually finished the expansion last quarter. So we've already been on ramp in terms of the expansion, and the cross qualifications, that's program dependent.
Okay. Automotive, that's been an area that folks are a little bit more concerned about, to say, I think, is fair to say. And just talk to us about what you're seeing there in, you know, the EV portion versus the ICE portion and the impact maybe that your customers are having dealing with what we see as a bigger threat, competitive threat from China.
Yeah. And I think that's that, you know, if you start to sort of force rank where our commercial markets are, the bulk of the commercial markets are in good shape. Of course, Data Center Computing, very strong, networking, increasingly strong, inventory issues now sort of behind in the rearview mirror there, which is positive. Medical industrial instrumentation, sort of a mixed bag depending on the segment. I'm sure we'll get into that. And then you have automotive. Automotive is what I would call the area that I'm most cautious about, frankly, the impact of China there. Therefore, if you think about OEM revenues, roughly 20% to 25% of European Western world OEMs, that business has to all intents and purposes, it's no longer relevant to them.
And then you take that to the tier ones. The tier ones have also been affected by this, right? Their primary customers are Western world OEMs. And so, again, varies depending on their position in China to China, but also feeling the impact. So, and so that and then on top of that, the EV transition, which is being driven by China, and potentially the EV dominance of China OEMs. These are shocks that our automotive customers are coming to grips with. Certainly the tone has shifted. I think, you know, a year ago there was, I would say overoptimistic view of their capability of competing on some of these EV models.
I think today they are gearing up for battle and they are really streamlining their inventories, looking at how they can respond to the competitive environment. That's the challenge. I think if you look at TTM's position, we are a Western world provider of printed circuit boards. We may provide them out of China, but the China tier ones are not going to procure their printed circuit boards from TTM. For us, it's critical that our tier one customers remain healthy, that we continue to service them properly in automotive, and that we continue to see printed circuit board content, electronics content, driving printed circuit board content increase. That's certainly an ongoing positive trend. We see now about $125 of printed circuit boards in each automobile.
That's up from, you know, if you go back to 2017, it was about $70. So we have seen that content continue to increase driven by innovation, ADAS, EV. That's a trend that's going to continue, that's positive for us. Put all that together, I would say that this year is going to be a tough year. I think, you know, last year, again, we were flat or negative in terms of growth. I think this year probably somewhere around there as well, flat to slightly negative.
Yeah. On the MII portion, that's been a little surprising. I think some of us thought it might turn. Is that just, you know, a function of some of the inventory overhang that we've seen throughout the whole supply chain?
Yeah, I think there's the customers are very cautious about inventories. Medical has been moving along in fits and starts, but you know, decent level of demand. Industrial has been where the biggest challenge is in automation. And a lot of inventory that is has been resident there in industrial. If you think about our mix, medical, industrial, instrumentation, it's about a third, a third, a third. And so, that's the area of primary weakness. Instrumentation, by contrast, has been strong. And we've seen growth out of the semiconductor capital equipment area, that's been very positive. Also some of the other test and measurement equipment areas that we service have been stronger. So, instrumentation, not an issue. Medical, depending on the customer, it's some strength there.
And then industrial has been where we've been looking for that strength to return.
Let's see if we can get an update on Penang. That's been a little bit slower, we think, to scale. What's the latest that you can say about that?
Yeah. I think we, you know, we adjusted this several quarters ago. We were looking at, we're looking at a breakeven target middle of this year. So think about, you know, Q2, Q3 timeframe, getting to that to that breakeven point. That's going to be driven by program timing. So, making sure that we intersect properly customer program timing. We have been working through qualifications, and audit. So audits and sampling, quite a bit of sampling for different programs. And so as we get into this year, now we're looking at program ramp, program ramp timing, making sure that we are intersecting that properly and that we yield in the facility. So, that's what we'll be giving, you know, giving you updates on, as we go through the course of this year, is an active volume ramp in Penang. Good news. The interest is, absolutely there.
If anything, of course, with the new administration, that interest has only grown from our customer base, and we do have critical customers that are tied to long-term agreements, and have paid deposits for product with this facility. So they are invested in this as TTM is invested in Penang, so great to have some strong customer partners involved.
Okay. 2024, I think based on your guidance that you gave late October, high single-digit growth. I mean, you've given us some framework as to 2025, but any preliminary thoughts that you would say?
Yeah. So, you know, I think the overall, we're always looking to grow, mid single-digit kind of growth rates. That's what we're driving towards in terms of revenue growth of that mix of end markets. I don't, we haven't given any guidance. I think I gave you a little bit of color on how we view the end markets. But, just to reiterate, we expect growth in Data Center Computing, strong growth, over forecasts. We're, you know, expecting Aerospace & Defense to continue to perform very well, for us. So right there, you take, 45%, add 20%, you've got six, you know, approximately 65% of the business. Add in networking at about 10%, you've got about 75% of the business that we have real confidence in terms of performance.
And then beyond that, you start talking about, okay, medical, industrial, instrumentation, recovery, and the timing of that, and then the automotive piece. So that hopefully gives you a picture of TTM and how we're viewing end markets.
Good. Let's maybe wind up the discussion talking about capital allocation. You know, you get. Will the priority you know, you've done M&A, but what's the priority in terms of paying down debt? How are you thinking about capital allocation?
Yeah. And that's shifted a little bit. We're in great shape, first of all. We're, you know, if you look at our leverage ratio at 1.4 times, that's exactly where we like to be. So our balance sheet is in great shape. So, now how do we use the capital? The primary and for the biggest allocation is for capital expenditures, with Syracuse coming on, building Syracuse with Penang, continuing to invest in Penang. That's our job number one, continuing to invest there. We typically are at 4%-5% of revenue in terms of capital expenditures. We're going to be above that. And, we're above that last year. We'll continue to be above it this year from a cash standpoint. But that is the priority, right?
So after that, we start to look at our M&A pipeline. We'll continue to work on this. The focus in defense is microwave, microelectronics, building that capability. But we only pull the trigger when it's the right M&A opportunity, so we're very disciplined about that, and we'll continue to be disciplined about our M&A moves, and then we have returning. We do have an active authorized program from a share buyback standpoint, and we'll continue to look at that as well.
Good. I think we'll end it there. Tom, thank you.
Thanks, Jim. Appreciate it. Thank you, everyone.