Ttm Technologies Inc Q4 FY2021 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to TTM Technologies Fourth Quarter 2021 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. As a reminder, this call is being recorded today, February 9, 2021. Sameer Desai TTM's Vice President of Corporate Development and Investor Relations will now review TTM's disclosure statement. Please go ahead.

Thanks Keith. 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, including the factors explained in our more recent Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. These forward-looking statements are based on management's expectations and assumptions as of the date of this presentation. TTM does not 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-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 measures prepared and presented in accordance with GAAP. And we direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release, which was filed with the SEC, and is available on TTM's website. We have also posted on our website a slide deck, which we will refer to during our call. I will now turn the call over to Tom Edman, TTM's Chief Executive Officer. Please, go ahead Tom.

Thank you, Sameer. Good afternoon, and thank you for joining us for our fourth quarter and fiscal year 2021 conference call. I'll begin with a review of our business highlights from the quarter and a discussion of our fourth quarter results, followed by a summary of our business strategy. Todd Schull, our CFO, will follow with an overview of our Q4 2021 financial performance and our Q1 2022 guidance. We will then open the call to your questions. In the fourth quarter of 2021, TTM delivered revenues above the guided range and non-GAAP EPS at the high end of guidance, despite a challenging supply chain and labor environment and the impact of the Omicron variant of COVID-19. All end markets performed better than we expected with strong year-on-year growth led by our commercial end markets. These results were achieved despite ongoing operational headwinds, including supply chain constraints for ourselves and our customers, inflationary pressures, and continued labor and logistics challenges in North America, resulting in production inefficiencies. Given the time that raw material prices take to work through our inventory, the impact to our cost of goods sold was larger in Q4 than in Q3, but it's stabilizing at an elevated level in Q1. During 2021, we mitigated virtually all of the material price increases through additional cost-savings, adjustment in mix, and product price adjustments. However, production inefficiencies and labor challenges in North America further exacerbated our costs and output challenges in the fourth quarter and will continue to do so in the first quarter. Looking into the first quarter, we are expecting a sequential decline in revenues and profits due to seasonality associated with Chinese New Year having one less week in the quarter and continued labor changes in North America. For the full-year 2021, excluding divested and closed businesses, TTM grew 10.9% with solid profitability, despite all the challenges we previously mentioned. Full-year cash flow from operations was $176.6 million and we used part of our cash flow to return capital to shareholders, as Todd will discuss later. This has been and continues to be one of the most difficult manufacturing environments we have ever experienced and I am proud of what our employees have accomplished in the face of these challenges. I would also like to update you on the COVID situation. As you are aware, the Omicron variant has created another surge of positive cases during the winter in North America, as well as other parts of the world. At TTM, our employee population was similarly impacted with positive COVID cases that continue into Q1 resulting in employee quarantines, which, along with the general labor shortages, contributed to production inefficiencies and capacity constraints in North America. In some facilities, our absentee rate climbed to as much as 20%. In late January, we started to see relief as cases began to subside and our absentee rates started to decline. All of our manufacturing facilities have been and continue to be operational. Like many other companies, we continue to see challenges in attracting and retaining labor, particularly in North America. Our employees are paramount to the success of TTM and we actively endeavor to demonstrate their value to our company through a combination of financial and non-financial methods. We have done a thorough review of our compensation practices and have embarked on a significant initiative to realign our compensation in North America with a goal of being competitive in the labor markets in which we operate. These changes will increase our cost structure in the first half of the year while improving our labor positioning. In the fourth quarter, as it became clear that we needed to make these adjustments, we announced another round of price increases to our customers. Given our extensive backlog and contractual commitments, we do not expect the full impact of the new pricing to take effect until the second half of the year. As a result, we expect profitability to improve in the second half over the first half. Our long-term strategy remains unchanged. TTM is on a journey to transform our business to be less cyclical and more differentiated. We believe that over time, investors will be rewarded with more stable growth, strong cash flow performance, and improving margins. As part of the strategic transition, we sold our mobility business in 2020. We are now able to generate more consistent cash flow with our strong set of technologies and broad exposure to longer cycle end markets. A key part of our ongoing strategy will be to add capabilities and products that are complementary to our current offerings, both internally and through acquisitions. As such, we continue to invest organically in differentiated product technology solutions from our advanced technology center, RF&S business unit, and microelectronics businesses. Looking forward, our balance sheet is in a strong position to pursue further acquisitions as well as to support our organic investment needs. Now I'd like to review our end markets. All historical end market disclosures exclude the divested mobility business unit and the two EMS plants, which halted production in December of 2020. For more details on end market disclosures, please refer to Pages 4 and 5 of our earnings presentation, which is posted on our website. The aerospace and defense end market represented 30% of total fourth quarter sales compared to 38% of Q4 2020 sales, and 31% of sales in Q3 2021. We continue to experience a positive defense climate with our A&D program backlog at $768 million, a new record compared to $687 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 significant bookings in the quarter for the SPY-6 AESA Radar program, and our overall book-to-bill for A&D was 1.25. We expect sales in Q1 from this end market to represent about 33% of our total sales. For the full year, aerospace and defense decreased 2.3% due to significant declines in commercial aerospace, and ongoing production inefficiencies in North America. We were happy to see the National Defense Authorization Act, or NDAA, for fiscal 2022 signed into law last December, providing a roughly 5% increase in topline defense spending. In addition, the new section 851 of the 2022 NDAA requires that the Department of Defense purchase products that contain printed circuit boards manufactured by U.S. suppliers or from U.S. allied countries that are part of the weapon systems and other telecom and datacom or other critical commercial applications used by the Department of Defense starting in January 2027. This should provide long-term benefits to TTM due to our strong North America footprint. In 2022, we expect growth to be in line with market projections of 2% to 4% driven by the defense side of our business as we expect a slow recovery in our commercial aerospace segment. Automotive sales represented 19% of total sales during the 4th quarter of 2021 compared to 17% in the year-ago quarter, and 18% during the third quarter of 2021. Automotive grew 30% year-on-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 will continue to monitor the situation closely. We expect automotive to contribute 20% of total sales in the first quarter. For the full year, automotive increased 51% as supply and demand rebounded after COVID impacts in 2020. In 2021, advanced technology was 24% of our automotive end market compared to 26% in 2020. While our advanced technology revenues grew 41% year-on-year, our standard technologies grew even faster. In Q1 despite Chinese New Year we are starting the year with solid year-on-year growth, and we expect the market in 2022 to be above longer-term forecast of 3% to 6%. The medical industrial instrumentation end market contributed 19% of our total sales in the fourth quarter, compared to 16% in the year-ago quarter, and 20% in the third quarter of 2021. The MI&I market exceeded $100 million in Q4 revenue and performed much better than expectations as we saw a broad-based strength across all segments. For the first quarter, we expect MI&I to be 18% of revenues with a continued strong demand environment. For the full-year, MI&I grew 11% following 12% growth the previous year, well above trend line for two years in a row due to strength in our industrial customers in particular. In 2022, we expect growth to be in line with the 2% to 4% forecast as these segments see moderated demand following the extraordinary strength of the past two years. Networking communications accounted for 16% of revenue during the fourth quarter of 2021. This compares to 16% in the fourth quarter of 2020, and 16% of revenue in the third quarter of 2021. We saw relative strength on a year-on-year basis in networking compared to Telecom, as the 5G build-out in China continues to be weak and as we made several strategic decisions to use our higher layer count capacity for data center and key networking customers. In Q1, we expect this end market to be 13% of revenue, as Telecom demand continues to be soft, and due to supply constraints in Networking. For the full-year, Networking communications declined 0.3% with strengthened networking offset by weakness in Telecom. We expect this market to grow, but be below the longer-term forecast of 5% to 8% growth in 2022 due to the anticipated soft start in the early part of the year. Sales in the Data Center Computing end market represented 15% of total sales in the fourth quarter, compared to 13% in Q4 of 2020 and 14% in the third quarter of 2021. This end market was up 34% year-on-year, due primarily to growth from our data center customers. We expect revenues in this end market to represent approximately 15% of first quarter sales as strong data center demand continues to drive year-on-year growth. For the full year, data center computing grew 25% as we saw growth across our data center customers. In 2022, we expect to be above the forecasted end market growth of 1% to 3% driven primarily by data center growth. Next, I'll cover some of the details of the 4th quarter. All of the following operations metrics exclude the mobility business unit and the two EMS plants that we closed. This information is also available on Page 5 of our earnings presentation. During the quarter, our advanced technology business, which includes HDI, rigid flex, microelectronics, and RF subsystems and components, accounted for approximately 31% of our revenue. This compares to approximately 31% in the year-ago quarter and 29% in Q3. 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 Q4 compared to 63% in the year-ago quarter, and 91% in Q3. Our overall capacity utilization in North America was 50% in Q4 compared to 58% in the year-ago quarter, and 50% in Q3. Our top five customers contributed 32% of total sales in the fourth quarter of 2021 compared to 28% in the third quarter of 2021. We had one customer above 10% in the quarter. At the end of Q4, our 90-day backlog, which is subject to cancellations, was $597.2 million compared to $483.9 million at the end of the fourth quarter last year, and $594.8 million at the end of Q3. Our PCB book-to-bill ratio was 1.20 for the three months ending January 3rd. 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 better than we expected as a direct result of our employees and our supply chain partners' concerted efforts to support TTM and our customers. Now Todd will review our financial performance for the fourth quarter.

Thanks Tom, and good afternoon, everyone. I'll be reviewing our financial results for the 4th quarter and some highlights for the year, which are also shown in the press release distributed today, as well as on Slide 7 of our earnings presentation which is posted on our website. For the 4th quarter, net sales were $598.1 million, compared to $523.8 million from continuing operations in the 4th quarter of 2020. The year-over-year increase in revenue was due to strong growth in our commercial end markets, which more than offset a modest decline in our aerospace and defense end market due to commercial aerospace softness and production challenges in North America. In addition, there was a headwind from the closure of our two EMS facilities which generated $23.7 million in revenue in the year-ago quarter, and no revenues in the current year quarter. Excluding the impact of the EMS closures, revenues of our ongoing business grew 19.6% year-on-year. For the full year, revenues grew 10.9% driven by our Automotive, Data Center Computing, and Medical Industrial and Instrumentation end markets. Both the fourth quarter and the full-year 2021 numbers include an extra week when compared to the comparable periods in 2020. That extra week contributed approximately $42 million of revenue. GAAP operating income for the fourth quarter of 2021 was $33.1 million compared to $29.2 million in the fourth quarter of 2020. On a GAAP basis, net income for the fourth quarter of 2021 was $8.4 million or $0.08 per diluted share. This compares to net income of $39 million or $0.34 per diluted share in the fourth 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 non-cash 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 fourth quarter was 16.7% compared to 17.5% in the fourth quarter of 2020. The year-on-year decline was largely due to labor and production challenges in North America. 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 $15.6 million in the fourth quarter, or 2.6% of net sales versus $15.2 million or 2.9% of net sales a year ago. Fourth quarter G&A expense was $30.4 million or 5.1% of net sales compared to $24.4 million or 4.7% of net sales in the same quarter a year ago. In the fourth quarter of 2021, R&D was $4.8 million or 0.8% of revenues compared to $4.6 million, or 0.9% in the year-ago quarter. Our operating margin in Q4 was 8.2%, this compares to 9% in the same quarter last year. Interest expense was $11.2 million in the fourth quarter, a decrease of $0.4 million from the same quarter last year, due primarily to lower levels of debt as we repaid our $250 million convertible bond in December of 2020, partially offset by the extra week of expense in the current quarter. During the quarter, there was a negative $2.5 million foreign exchange impact below the operating line. Government incentives and interest income reduced this to a negative $1.1 million or $0.01 impact on EPS. This compares to a loss of $1.9 million or $0.02 of EPS in Q4 of last year. Our effective tax rate was 1.6% in the fourth quarter, resulting in tax expense of $0.6 million. This compares to a tax benefit in the prior year of $6.4 million or $0.06 per share. Fourth quarter net income was $36.2 million or $0.34 per diluted share. This compares to fourth quarter 2020 net income of $40.2 million or $0.37 per diluted share. For the full year, net income was a $138 million or $1.28 per diluted share compared to $116.7 million or $1.10 per diluted share last year. Adjusted EBITDA for the fourth quarter was $70.4 million or 11.8% of net sales, compared with fourth quarter 2020 adjusted EBITDA of $68.2 million or 13% of net sales. Depreciation for the quarter was $22.2 million. Net capital spending for the quarter was $19.5 million. Cash flow from operations was $62.4 million. And for the full year, cash flow from operations was $176.6 million. Our balance sheet and liquidity positions remain very strong. Cash and cash equivalents at the end of the fourth quarter of 2021 were $537.7 million. And our net debt divided by last 12 months EBITDA was 1.4. During the fourth quarter, we repurchased 2.2 million shares of our common stock under our previously announced $100 million stock repurchase program at an average price of $13.47 per share for a total out-expenditure of $29.6 million. For the year, we have spent a total of $64.6 million for stock repurchases to buy back 4.7 million shares. Now I'd like to turn to our guidance for the first quarter. As Tom stated earlier, our first quarter sees normal seasonality associated with Chinese New Year, and this year the first quarter has one less week than our fourth quarter. In addition, we are adjusting the compensation for our employees in North America to improve our competitiveness. While we are increasing prices to balance these higher costs, these increases won't have a significant impact until the second half of the year as we work through our existing backlog. Given that, we expect total revenue for the first quarter of 2022 to be in the range of $540 million to $580 million. And we expect non-GAAP earnings to be in the range of $0.20 to $0.26 per diluted share. EPS forecast is based on a diluted share count of approximately 105 million shares. Our share count guidance includes dilutive securities such as options and RSUs but no shares associated with our warrants since all of those have settled now. We expect that SG&A expense will be about 8.5% of revenue in the first quarter and R&D to be about 0.9% of revenue. We expect interest expense to total approximately $11 million. And finally, we estimate our effective tax rate to be between 12% and 18%. To assist you in developing your financial models, we offer the following additional information. During the first quarter, we expect to record amortization of intangibles of about $9.7 million, stock-based compensation expense of about $4.8 million, non-cash interest expense of approximately $0.5 million, and we estimate depreciation expense will be approximately $21.3 million. Finally, I'd like to announce that we will be participating virtually in the Cowen Aerospace/Defense & Industrials Conference tomorrow and the J.P. Morgan IEO and Leveraged Finance Conference on March 1st. That concludes our prepared remarks. And now I'd like to open the line for questions.

Thank you. We will take our first question from Srini Pajjuri with SMBC Nikko Securities. Please go ahead.

Thank you. Thanks for taking my question and great job on the quarter, guys. So I guess Todd or Tom, as we look out to the first half, you are guiding for profitability to decline which is not a surprise given the cost inflation that you talked about, but as we go into second half you did mention that your price increases will kick in. Do you have a target profitability as we go through the second half, and do you know how long it might take for you to get back to whatever the normalized rate is?

I'll try to answer that, and Tom can add if he wishes. Let me go back to 2021, a very challenging year with significant material cost increases and supply chain issues. We experienced substantial growth in our material costs and have been working hard to address this and adjust our pricing model. I'm pleased to report that we've made significant progress by the end of the year, which was our goal. However, we now face rising labor costs due to inflation, which we are proactively addressing. Our backlog will take some time to clear, meaning that the impacts of our price increases will not be felt until later in the year. We will begin to experience cost inflation starting in Q1, but we anticipate that pricing adjustments and internal efficiency initiatives will help mitigate this later in the year. We expect to return to a more normal position in the latter half of the year. While there may be some unforeseen issues, our team has navigated a lot over the past year, and we have more work ahead. Nonetheless, we believe we know what needs to be done, and we have a plan to achieve a much healthier position by the second half of the year.

I would like to provide some additional details regarding the labor adjustments we are implementing. This is part of the long-term strategy we initiated following the Anaren acquisition. We started a project focused on standardizing our organization's structure and compensation globally, along with defining responsibilities to ensure we have strong alignment worldwide. As a result of this initiative, we are now assessing the situation in North America and need to make some adjustments. These changes aim to ensure that TTM remains competitive in the long run. I want to emphasize that this process has involved a thorough review of our overall organizational levels. We are enthusiastic about where we stand in this project, as we are entering the implementation phase and will soon be able to provide our employees with a clearer roadmap for career development that includes global opportunities. This represents a significant step for TTM, and we are looking forward to it.

Got it. That makes total sense. I have a question about potential price increases. I suspect that this will positively impact your top-line growth as we move into the second half. Looking at your annual guidance by segment, it seems like there aren’t significant changes, which aligns with what you've previously communicated. I’m curious if we are being conservative here, given the possible price increases approaching in the second half.

What I can share regarding the end markets is that we experienced nearly 11% growth over the past year, partly due to price adjustments, but primarily driven by strong customer demand, especially from our operations in Asia, which helped us maximize output. As we look ahead, it's important to note that we focus more on actual demand rather than pricing adjustments. We are optimistic about returning to a solid mid-single-digit growth rate, which is where we typically like to be, especially following a year of elevated growth. While there may be some aspects we're overlooking, we anticipate robust growth moving forward.

We'll take our next question from Jim Ricchiuti with Needham & Company. Please go ahead.

Hi. Good afternoon. I'm wondering if you're seeing any, putting aside the labor challenges, I'm wondering if you're seeing any signs of cost stabilizing in other areas of the business? Or is this still a case where you may be having to react as you go through the next one to two quarters and potentially have to take other pricing actions?

Yes, Jim. We have noted a stabilization in material prices, which are generally high. In the last quarter, we experienced some increases in certain chemical-related inputs at our facilities in China, but we managed to navigate that. We are also facing higher electricity costs this winter, particularly in China, but these are relatively minor compared to the laminate situation, which is our primary raw material. Overall, the situation remains at high levels, which we hope will decrease over time, but at least we are observing a stabilizing trend.

And Tom, in light of the moving parts to the business still within the next couple of quarters and some of the actions you're taking, what can you say about some of the other activities you might be pursuing on the M&A side?

We are continuing to pursue our strategic direction. Overall, our pipeline process remains very active. To reiterate our strategic themes, we are focused on expanding our presence outside of China and North America, particularly in Europe and Southeast Asia. Additionally, strengthening our RF position to enhance our Aerospace and Defense business in that area is a major priority. These priorities are firmly in place. With market fluctuations, we are experiencing some volatility, but we hope this will lead to more realistic valuation expectations moving forward.

We'll take our next question from Mike Crawford with B. Riley Securities. Please go ahead.

Thank you. Just a follow-up on the M&A question. Given the $20 billion Intel's investing in fabs in Ohio and other OEMs building on U.S. footprints, how does that change your calculus regarding your own footprints in the U.S.?

A few things to discuss. First, we are confident about our position in North America. This position primarily serves defense customers, but also addresses some prototyping and pilot production needs for our commercial clients, especially in the MII sector and in computing and communications. As we move forward and observe positive initiatives from our customer base, we will actively engage in discussions about their requirements in North America, which will remain a focus for us. It's important for our customers to understand that there is a cost differential, even with advanced printed circuit board capabilities, due to material supply and infrastructure being mainly located in Asia. The recent NDAA emphasizes production outside of China, and as our customers express interest in supply chain resilience, we anticipate a change in perception regarding production in North America. However, this will also involve an acceptance of the associated cost differential. We will continue our active discussions and see where they lead us.

Thanks, Tom. And then I know you mentioned RS for aerospace and defense, but you also talked about your high layer count capacity in North America already being somewhat allocated to more strategic verticals. Does that mean that there would be some room to add to that high layer count position in North America just through internal investment or?

When discussing the demand from data center and networking customers, we see a significant need for high layer count requirements. We have had to make some allocation decisions based not only on North America but on our overall capacity, which has been challenging. However, we have a clear strategy focused on advancing technologies and higher layer count needs, directing our efforts towards markets and customer requirements aligned with that strategy. This shift is largely driven by new chipsets that require additional circuitry for support. We anticipate this trend will persist as we determine where to allocate capacity. If North America becomes increasingly important and our customers require that capacity for automation and understand the associated cost differences, then it certainly makes sense to focus there. In the meantime, other regions may also be viable options to ensure supply chain resilience. We will definitely continue evaluating our footprint to support our customer base.

Thank you. My last question is about the production record metric you track in the automotive sector, which was $629 million in 2020. Do you have that figure for 2021?

I sure do. In the automotive sector, we had 26 design wins totaling $146 million in the most recent quarter. This is an improvement compared to the previous year, where we had 35 design wins amounting to $81 million, indicating a very strong quarter. Looking at the entire fiscal year, we achieved 147 design wins generating around $532 million, which compares to a stronger 2020 at $629 million and 2019 at $475 million. The automotive growth we observed last year includes programs that began production stemming from gains in 2019 and 2020. Moving forward, we expect the projects from 2020 and 2021 to contribute to our growth as customers enter production. This provides us a solid foundation to build upon.

Great. Thank you very much.

Thanks, Mike.

We'll take our next question from Matt Sheerin with Stifel. Please go ahead.

Yes, thanks. Good afternoon. Just a follow-up question regarding the gross margin. How should we consider the potential for gross margin expansion in the second half of this year compared to the second half of fiscal '21, especially with the costs you're passing along and the stabilization of raw material prices?

Matt, it's a challenging question because it's difficult to make projections so far out. However, I can provide some context for you and everyone else. Remember that Q1 is typically our seasonally low quarter due to Chinese New Year and the production inefficiencies that result from it. This is something to consider when looking at year-over-year comparisons. We definitely expect Q1 to be the lowest point of the year, consistent with our historical patterns over the past several years. The primary issue we're facing, which we observed in Q4 and are currently addressing, will negatively impact us in the first half of this year. This relates to the labor situation in North America, which Tom has explained well. To give you an idea of the impact, this challenge affected us by about 100 basis points in Q4, and we're anticipating a greater impact in Q1, closer to 120 to 150 basis points. If we can resolve this issue—something we believe we have a plan for—we should be able to mitigate the impact. That said, there are many other factors that influence margins, including overall volume and revenue growth throughout the year, which could be positive. We also hope to avoid any further supply chain challenges that affected us significantly in 2021. I hope this provides some clarity regarding the magnitude of the labor challenge we are currently addressing.

And that's all a hit to COGS, not SG&A? Those labor issues in North America because it's mostly factory jobs.

Essentially, yes. There's a minor amount in SG&A, but it's really, really too minor to talk about.

And I know you talked about the utilization rate of 50% in North America, and I know it's always significantly below Asia because of the nature of the products that you do, etc. But certainly, you're well below where I think you wanted to be. What's the optimal level and where do you think you can get it between now and the end of the year?

I can start on that, and then please feel free to add. In terms of North America's contribution to our revenue, we are still at about 43%, similar to last quarter. After the mobility sale, it was at 50%. If we consider utilization, we want to increase this mix back to 50%. This depends on our labor force, but as we improve our labor availability in the plants, it will help enhance our margin performance since we will be better utilizing our facilities. To answer your question, we aim to have operating utilization in North America above 60%. This level indicates that we are efficiently processing products through our high mix, low volume approach. If we exceed these levels, we will need to think about expansion.

And in terms of the impact on these labor issues on your business, I know you talked about some headwinds. But is it a pretty much across all your end markets? Or mostly areas where you're doing, like you said, a high mix, a lower volume, more complex stuff here in the U.S. like MilAero? Or is it across the board where you're doing like NPI for networking for instance?

Yes. The biggest way absolutely aerospace and defense, of course, 100% of that is North America production, or not a 100 but it's very close as we do a little bit of commercial aerospace in China. But by far above 90% is North America. The other end market that's affected by this is MII. We have several facilities that service the MII market and that's mainly a quick turn early development market, and also a niche market, if you will, for some of the applications. So that's a market that is dependent on North America production. And then a little bit going into Data Center and Netcom, but that's primarily our Chippewa Falls facility, which is a fairly small part of the North America footprint.

Okay. Lastly, your positive comments about the Data Center indicate strong growth there. You expect to outperform the market, even though market growth is in the low to mid-single digits. Given the backlog and the growth we've observed at those customers, do you anticipate performing significantly better than that?

We certainly expect to perform significantly better than that. The 1% to 3% figure is largely based on the Prismark forecasts, which include both laptop and desktop monitors in that sector. This tends to dampen the data center growth, which is clearly increasing at higher rates.

Hey, guys. Can you guys just help us understand the wage inflation in North America. What were you paying hourly labor in the blend as I know by geography would be modestly different, but just to give us a rough idea, pre-pandemic what you were paying and now what you're paying now on a go-forward basis?

I can help clarify that for you. The changes we are implementing are part of the necessary structural adjustments in our overall compensation strategy. It involves more than just starting pay or the general workforce pay. Looking at the broader perspective, I've noticed that inflation has been around 5% this past year regarding salaries. However, for our hourly workforce, the increases have been significantly higher, often exceeding 10% year-on-year when making comparisons. This is considerable, and when we look at starting wages, manufacturing has shifted from an average of about $15 per hour to getting closer to $20 per hour. There has definitely been a significant movement in this area.

Have you guys seen any push back from any of your customers? Or as your order book or backlog for future revenue based on price increases due to readily raw materials, but obviously significant increases in labor costs? Have you seen any push back from customers on that?

I haven't encountered a customer who is truly content with our pricing increases. Nevertheless, the reasons behind this move are clear. We've experienced raw material inflation and labor challenges that our customers understand. Some customers may consider switching to competitors, especially if they don't see similar price adjustments from them in the commercial sector. However, given our current utilization rates and strong market demand, there are circumstances where this situation can actually provide some relief, depending on the program. So, while we have definitely faced pushback regarding price hikes, there is also a general recognition of the current environment we are operating in.

That makes sense. My last question is about the utilization rate in North America, which seems quite low. Given the complexity of some of the programs, can you operate those facilities at full utilization, or does full utilization actually equate to around 75% or 80%?

The measure we use to assess utilization is based on plating capacity use, which is essential in a printed circuit board facility. It's an effective metric for evaluating capacity utilization in a high-volume setting, as it tends to be a bottleneck area. In North America, however, these bottlenecks can shift due to the high mix and low volume nature of incoming business. Bottlenecks can occur in drilling and inspection as well, and they tend to change frequently. This variability necessitates having excess capacity to meet quick turnaround demands and the diverse volume of requirements we receive. Typically, if utilization exceeds 60%, it's time to consider capacity expansion. Reaching 70% is akin to operating over full capacity. Currently, the challenge we face regarding capacity utilization is a labor shortage, as the issue is more about labor than equipment.

Great. That helps on that clarity. Thank you. No other questions.

Alright, thank you. Yeah, I'd just like to close by summarizing some of the points that I made earlier. First, we delivered revenues above the high end of our guidance, and that was despite some of the operational challenges that we covered. Second, our end market diversification is playing out solid year-on-year growth of 19.6% for the quarter and 10.9% or almost 11% for the year, so very strong growth. Third, we used solid cash generation to continue to repurchase our stock. And finally, I'd just like to, again, thank our employees, our customers, and you, our investors, for your continued support. Thank you very much.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.