TTM Technologies Inc (TTMI) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the TTM Technologies First Quarter 2011 Earnings Call.

(Operator Instructions).

This conference is being recorded today, Thursday, May 5, 2011.

I would now like to turn the conference over to Diane Weiglin, Executive Assistant, and we'll now go over TTM's disclosure statement.

Please go ahead, ma'am.

During the course of this call, the Company will make forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include but are not limited to fluctuations in quarterly and annual operating results, the volatility and cyclicality of various industries that the Company serves, and other risks described in TTM's most recent SEC filings.

The Company assumes no obligation to update the information provided in this conference call.

The Company also will present non-GAAP financial information in this call.

For a reconciliation of TTM's non-GAAP financial information to the equivalent measures under GAAP, please refer to the Company's press release, which was filed with the SEC and which is posted on TTM's website.

I would now like to turn the call over to Mr.

Kent Alder, President and Chief Executive Officer.

Please go ahead, Kent.

Okay.

Thanks, Diane.

Good afternoon and thanks for joining us for our first quarter 2011 conference call.

Joining me on today's call are TTM's CFO, Steve Richards, and Canice Chung, CEO of our Asia Pacific region.

I will begin with a review of our business, and Steve will follow with a discussion of our financial performance.

Then we will open the call to your questions.

I'd like to begin with a review of the highlights from the first quarter.

Our first quarter results were in line with our guidance for the quarter.

Net sales were $342.8 million.

GAAP net income attributable to stockholders was $27.1 million or $0.33 per diluted share.

Non-GAAP net income attributable to stockholders was $33.3 million or $0.40 per diluted share.

Gross margin was 23.9%, in line with 24.1% from the fourth quarter.

During the first quarter, our Asia Pacific operations performed slightly ahead of plan and our North American operations met expectations with business normalizing following high levels in the fourth quarter.

Overall, sales were up about 16% compared to the first quarter of 2010 pro forma sales of $296.5 million which includes results from Meadville prior to our combination.

Continued strong demand for our Advanced Technology products drove our financial performance during the quarter.

We held gross margins steady despite the decline in revenue from the fourth quarter.

This reflects the growing contribution of our Advanced HDI products to our overall product mix as well as the effectiveness of our cost control efforts.

We continue to experience high capacity utilization rates in Asia Pacific while closely managing capacity to maximize efficiency at our North American operations.

Our results continue to demonstrate how well we are leveraging our combined strengths as a global company.

I would now like to review the results of our operating segments for the quarter.

The Asia-Pacific segment had sales of $202.5 million in the first quarter compared to $220 million in sales in the fourth quarter.

The decline in sales was primarily due to plant shutdowns for the Chinese New Year.

Gross margins for this segment was 25.1% in the first quarter compared to 25.6% in the fourth quarter.

First quarter operating segment income, before amortization of intangibles, was $33.1 million compared to $38.3 million in the fourth quarter.

The North American segment reported first quarter sales of $142.3 million compared with $156.4 million in sales in the fourth quarter.

Gross margin for this segment increased to 21.9% from 21.4% in the fourth quarter.

First quarter operating segment income, before amortization of intangibles, was $16.8 million compared to $19.0 million in the fourth quarter.

In the first quarter we experienced typical seasonal softness in sales and also modulated demand following high order levels in the fourth quarter.

On a year-over-year basis, first quarter sales in Asia Pacific increased from $159 million pro forma to $202 million, an increase of 27%.

In North America, sales increased from $138.2 million to $142.3 million, an increase of 3%.

Steve will provide more details later in the call.

Now moving on to our end markets.

Networking is our largest end market.

Sales in this end market were 34% in the first quarter compared to 37% in the fourth quarter.

First quarter sales to this end market in both segments declined to more normalized levels following very strong yearend demand in the fourth quarter.

Sales to this end market are expected to be somewhat higher in the second quarter.

Computing, storage and peripherals is our second largest end market.

Sales were up strongly sequentially and represented 27% of sales in the first quarter versus 22% in the fourth quarter.

While sales in this end market as a percentage of total revenue were largely consistent with Q4 levels in North America, sales increased significantly in Asia Pacific as we experienced robust demand for printed circuit boards used in touchpad tablets.

We expect sales in this end market to continue to increase in the second quarter.

We experienced stable conditions in the aerospace and defense end market which represented 16% of sales in the first quarter, unchanged from the fourth quarter.

Customers in this end market are served by our North American operations.

As a reminder, we support a diverse mix of programs for domestic defense, foreign military sales, and commercial aerospace.

While the current debates regarding the US budget have challenged long term visibility for US defense spending, we anticipate continued stability in the second quarter.

In the cellular phone end market, sales were 9% of total sales in the first quarter compared to 12% in the fourth quarter.

Customers in this end market are served by our Asia-Pacific operation.

Sales declined in line with normal seasonality in the first quarter and are expected to increase in the second quarter as we continue the transition of our mix to include more SmartPhones and the normal seasonality starts to improve.

The medical, industrial and instrumentation end market represented 8% of sales in the first quarter, unchanged from the fourth quarter, reflecting stability in both of our operating segments.

We expect this end market to be relatively stable in the second quarter.

The other end market experienced little change in sales in either segment and represented 6% of sales in the first quarter compared to 5% of sales in the fourth quarter.

Included in this end market are automotive products, consumer, office products, and others.

Now our top five customers accounted for 33% of sales in the quarter.

We had one customer above 10%.

That customer represented 13% of sales during the quarter.

In alphabetical order, our top five OEM customers were Apple, Cisco, Ericsson, Huawei and ZTE.

As expected, lead times for both our operating segments were four to six weeks which reflects normal lead times in Asia Pacific and a return to normal lead times in North America.

I want to make a few comments on the impact that the tragedies in Japan had on our business.

We have been actively engaged with our customers and suppliers to identify any potential supply chain issues stemming from these events.

During the quarter we did not experience any impact to our business from these events.

On the material supply side in the second quarter, we expect very minimal disruption and do not foresee a material impact to our business.

We continue to work closely with our customers to determine if any near term disruptions in their components supply chain will impact their order patterns.

So far, no major customers have changed their forecast or booking patterns due to this issue.

We'll continue to monitor the situation closely.

Additionally, as has been widely reported, both labor and material costs have risen substantially.

Labor costs in Asia Pacific will increase approximately 18% in the second quarter.

Copper and other global commodity prices also rose towards the end of the first quarter.

While we expect to see some near term impact to gross margins from these higher costs, our strategy to shift our product mix to more advanced technology products will enable us to mitigate these cost increases and maintain our margin profile over time.

With this mix shift, we have seen a steady increase in our ASPs per square foot in Asia Pacific for the last four quarters.

In Asia Pacific we are allocating more of our $115 million CapEx expansion program for 2011 to the Advanced HDI capabilities to meet the growing demands of our customers.

We are also evaluating the timing of additional CapEx in Asia Pacific to accommodate this increase in Advanced HDI demand as well as the longer lead times associated with equipment purchases.

So in summary, our results this quarter demonstrated the ongoing strength in our business model and the continued execution of our growth initiatives.

We remain excited about the prospects for continued growth and success in 2011.

I will now turn the call over to Steve to review our financial performance for the quarter.

Thanks, Kent.

Good afternoon, everyone.

First quarter net sales of $342.8 million decreased $30.6 million or 8% from fourth quarter net sales of $373.4 million due largely to normal seasonal sales patterns.

Gross margin for the first quarter of 23.9% decreased only slightly from fourth quarter gross margins of 24.1%.

Selling and marketing expense decreased to $9 million in the first quarter from $951 million in the fourth quarter.

As a percentage of net sales, selling and marketing expense in the first quarter was 2.6%, up from 2.5% in the prior quarter.

First quarter G&A expense decreased to $23.1 million or 6.7% of net sales from fourth quarter G&A expense of $23.4 million or 6.3% of net sales.

Amortization of intangibles decreased to $4.2 million in the first quarter from $4.6 million in the fourth quarter.

Operating income for the first quarter was $45.7 million compared to $52.6 million for the fourth quarter, a decrease of 13.2%.

Interest expense decreased slightly to $6.3 million in the first quarter from $6.4 million in the fourth quarter.

Our effective tax rate was 27.9% in the first quarter compared with 25.2% in the fourth quarter.

We have partners who hold minority interests in three of our Chinese companies.

Net income attributable to these minority interests was $2 million in the first quarter compared to $3.5 million in the fourth quarter.

Net income attributable to stockholders for the first quarter was $27.1 million or $0.33 per diluted share compared to fourth quarter net income of $33 million or $0.41 per diluted share.

First quarter non-GAAP net income attributable to stockholders was $33.3 million or $0.40 per diluted share.

This compares to fourth quarter non-GAAP net income attributable to stockholders of $39.7 million or $0.49 per diluted share.

Non-GAAP net income attributable to stockholders adds back amortization of intangibles, stock-based compensation expense, non-cash interest expense, asset impairment, restructuring and other charges, as well as the income tax effects related to these expenses.

EBITDA for the first quarter was $66.5 million or 19.4% of net sales compared with fourth quarter EBITDA of $76.5 million or 20.5% of net sales.

Cash and cash equivalents at the end of the first quarter totaled $202.3 million, a decrease of $13.8 million from $216.1 million at the end of the fourth quarter.

Debt payments of $32.1 million accounted for this decline in cash.

Net debt was $321 million at the end of the first quarter.

Cash flow from operations in the first quarter was approximately $37 million.

Capital expenditures for the first quarter were approximately $26.5 million.

This reflects $21.8 million for Asia Pacific, and $4.7 million for North America.

Depreciation for the first quarter was $15.7 million.

Our guidance for the second quarter includes no material impact from the tragic events in Japan.

In the second quarter we expect to return to revenue levels we experienced in the fourth quarter in Asia Pacific while we anticipate a slight sequential decline in revenue in North America.

Overall, we expect second quarter revenue to be in the range of $350 million to $370 million.

We expect GAAP earnings attributable to stockholders in a range from $0.28 to $0.37 per diluted share and non-GAAP earnings attributable to stockholders in a range from $0.36 to $0.45 per diluted share.

This is based on a diluted share count for the second quarter of approximately 83 million shares.

Our second-quarter gross margin is expected to be in a range from 21% to 23%.

Our gross margin guidance reflects expected higher cost of goods sold due to labor rate increases in China and higher global commodity prices.

Over time, we anticipate being able to pass on some of these increases to our customers.

We expect that SG&A expense will be about 9.5% of revenue in the second quarter.

We will record combined amortization of intangibles of about $4.3 million.

We expect our blended tax rate to be approximately 24% in the second quarter.

With that, let's open the call to your questions.

(Operator Instructions) Matt Sheerin, Stifel Nicolaus.

Thanks.

So a couple of things.

On the revenue, North America expected to be down.

What segments are expected to be down there, Steve and Kent?

Maybe, Matt, that might lead to a little bit of a discussion about the end markets.

Our end markets in the first quarter, all the changes were driven mainly by Asia Pacific.

Because if you look at North America, our aerospace and defense in the first quarter was up 1%.

We anticipate that going forward it will probably be up another 1% going to about 40% of North America revenue or 16% of the total Company.

In the first quarter our networking was down by about 1% in North America and we forecasted it back up in the second quarter.

So most of the changes then come from Asia Pacific.

And when you look at the cell phone end market, that's down let's see, 12% to 9% overall.

That's driven mostly by some seasonality.

And there's probably a little bit of transition issues in there as we transition to the SmartPhones kind of away from cell phones and some of the feature phones.

So there's a little bit of transition, but mostly seasonality in there.

So coming out of the second quarter we think that we'll see some increase in demands coming from cell phones just because of the end of the seasonality.

Computing, that was up as a company from 22% to 27% mainly driven by the touchpad tablets.

And so that end market will see some pretty nice, continue to see the increases there.

The medical, really not much change there, 8%, 8%, that should be steady going into the next quarter, second quarter.

Networking, that decreased from 37% to 34% and that just basically was from slower demand and then some softness in the Chinese marketplace.

But I think, again, we're coming out of that seasonality there so we'll start to see that improve in the second quarter both with the networking and computing and then some cell phones.

Those end markets will continue to improve over the second quarter but really gain some strength in the third and fourth quarters.

Okay, but at the midpoint of the guidance, you're looking for sales up 5% sequentially.

But I think Steve said that revenue will be up or actually I guess equate to the December numbers in Asia but be down in North America.

So I just wanted to clarify that.

It sounds like you're saying most markets are going to be flat to up, so I'm trying to figure out what are the issues in North America where you're looking for revenue to be down sequentially.

I think in North America -- let me look here.

Basically when you look at North America we'll be down, what is it -- just about a percentage -- a couple million down.

Gosh, just North America, if I go back a year and compare the first quarter, like Steve said, we're up 3% year over year and up 1.5% second quarter forecast compared to the second quarter.

So I think North America, I mean is just looks like, Matt, it's overall.

Because when I'm looking at the end markets, there's really not too much change in the percentages.

When you go down through the percentages, it's pretty much an overall -- the percentages don't change.

So when you look at our forecast, basically flat from $142 million to $140 million in North America.

Okay, but the growth coming from -- and the growth in Asia, is that mostly on the mobility side, the tablets, but you're seeing growth in other computing?

And then also, I know you have a lot of exposure to telecom in China.

Are you expecting that to bounce back?

Let me just throw a few comments on that.

I think the cell phone, you kind of get the end of the seasonality, so that starts to improve in the second quarter and then in computing with our tablet business, we think that will continue to perform well for us.

And then there's some softness in the Chinese market in the networking that will start to improve.

Then the medical, that doesn't amount -- I mean that's pretty consistent and so forth.

So maybe, Canice, if you want to add a little bit of your comments to the Asia Pacific end market there, that would be helpful.

I think after some adjustments in Q1, we are expecting the majority of the sectors will be improving back such as even the communication although it was usually relatively slower, sectors are (inaudible) Q2 for China market.

But we are also seeing strength globally on the communications sector.

Cell phone from the low base of Q1 will definitely be improving and then tablets, like Mr.

Alder mentioned, should be still holding strong momentum on that sector.

So all in all the Q2 projection, the improvement were indeed from all these majority sectors and not just focusing on one sector or two sectors here.

Okay, and the gross margin guidance for 21% to 23%, I understand that there's materials cost and labor cost.

That's a pretty good jump -- sorry, decline given that you've got some volume growth particularly in China where in theory the margins are better.

I know you've talked about having the ability to pass along price increases, particularly since lead times are relatively short particularly in Asia, so what's happening there?

Are you just kind of caught off guard?

Do you think you're going to be able to pass those prices along?

And you've talked about kind of the 23%, 24% gross margin goal for the company.

How long do you think it will be before you get back to that level?

I think, Matt, there's some timing here on some of these things.

Some of the material cost increases started to occur in the first quarter, but a lot of that will be effective for the whole second quarter.

And then on the labor side, our labor increased by about 18% in Asia Pacific and that started like day one in the second quarter.

So all of that is wrapped into our forecast.

And the way we counter that is with our Advanced Technology strategy.

We think we can move up in ASPs.

We've been moving up in our ASP in Asia Pacific for the last four quarters pretty significantly, and then in the last quarter, our ASP went up about 13%.

So I think our strategy in that change to the Advanced HDI work will drive our ASPs up.

It will help overcome that cost.

Then you talk about passing that onto our customers, I think on some of the commodities like the gold, we're more successful passing that on.

Some of the laminate prices, that takes a little while longer and it's a little more hit and miss, but we can still pass some of that onto the customer.

So when you look at this long term, we have some pressure on our margins because of the increase in labor and materials in the second quarter.

But long term, as we drive our revenue to higher levels and we drive the product mix, we'll increase the ASPs and combine that with passing some of these costs on to our customers.

We think we've got a short term issue that we knew was going to be there and we've got our strategy in place to overcome that.

So we're still pretty optimistic about where we can move and get to in the third and fourth quarter and second quarter should be okay.

We'll get through this and lay the foundation and start moving on.

Okay, and then just lastly, I know you announced the intent to purchase the remaining 10% of Meadville.

So what happens there, Steve, to the P&L?

Does the minority interest go away?

And what's your estimate in terms of accretion to EPS?

Actually, Matt, it's an interesting structure.

We do have three joint ventures in Asia.

This particular one that we're buying out the remaining 20% of, is one where we have a contractual obligation to buy out the other 20% in January of 2013.

So we have always included every bit of this subsidiary's results in our income statement and balance sheet.

So going forward, there's no impact to owning all of this one.

That's a bit of a contrast to the other joint ventures we have.

So no P&L impact.

The big plus of this in our mind is that we're settling a 17.4 million Euro obligation in January of 2013 for 14.5 million Euros now, a savings of about 2.9 million Euro or at current exchange rates a bit more than $4 million US.

So that's the advantage here.

There really won't be an impact to he financial statement.

Got it.

Okay, thank you.

Shawn Harrison, Longbow Research.

I was hoping to get a little bit more detail just on updates to the capital spending plan for the year.

I think last time on the earnings call it was $115 million with $90 million of that for expansion and a lot of it toward HDI.

Just is there any change in the numbers for the year and kind of the mix to the HDI and then also how that comes online throughout 2011 as well?

Yeah, Shawn, I think there's really at this point no change.

We still have a capital budget of $115 million for Asia Pacific and a little less than $20 million for North America.

And you're right about -- we have the numbers here at about $70 million of that $115 million for Advanced HDI, $20 million for other technology expansions, and then $25 million for just the maintenance and some replacement and improvement technologies.

What we're looking at though is the demand for our HDI product and evaluating if we should accelerate some of our planned CapEx in 2012 into this year.

And so we're looking at that because of the increased demand for our product and also some of the lead times on the equipment that we need to purchase have gone out.

So we're looking at possibly expanding that We're looking at the numbers right now and so forth.

I think still the benefit for that is, one you get the CapEx in place, for every expansion CapEx you still get about a $2 -- for every dollar of expansion you get about a $2 annual revenue benefit from that.

However, it doesn't happen immediately because on some of the equipment, particularly the plating equipment, it takes you about two, three months to put that in place.

So from the time it arrives on your dock it takes about a quarter to put that into action and then it takes a while to build up the flow through that product.

So I think the $115 million, we would look at that -- I mean it's not spread equally over the course of the year, but pretty close when you look at trying to calculate when that comes online.

Okay.

And then last quarter with the HDI, I think you gave a mix of maybe total Asia Pac was something in the mid 30s with maybe half of that the kind of upper end HDI technology.

I'm guessing that changed to a greater percentage of the mix into the March quarter?

Yeah, I think we're looking at in the March quarter going to about 40% and about 65% to 70% of that is the Advanced HDI product.

So where it used to be 36% in the fourth quarter, we're moving up to 40%, and where half of it used to be HDI, now about two-thirds of it is the Advanced HDI.

Okay.

And then I guess as you look at potential purchasers of your capacity, how is the market looking for new customers?

I know you have the one big customer on the tablet side, I thought you were bringing in some new ones on the SmartPhone side, but maybe just talk about kind of customers, or new potential customers looking at your capacity.

We're always working with customers and new customers and new programs within existing customers and looking our capacity which is limited and how we allocate that.

And clearly we're going to take care of our existing customer base right now.

As we look out with new customers, there are some that we're making some pretty good inroads in and that are contributing to the top line and they're in the SmartPhone arena mostly and some of the infrastructure end market as well as the tablets.

But really the bottom line, there's not, on kind of the tablet side, nobody is making a significant dent here, so there's not a lot of demand for other customers

That's fair, and then just last question, the book to bill ratio for North America and Asia for the March quarter?

Yes, our book to bill, we've got kind of two parts here.

In Asia Pacific our book to bill was 1.1, in North America it was 0.81.

TTM overall was 1.02.

In North America that's a little light and that was relative to the strength we had in the fourth quarter where we had some pretty strong strain and our lead times went out, and so I think we were impacted by that.

And so our April book to bill in North America was 0.98, just under 1.0, and Asia Pacific it was 1.12.

And also when you look at our bookings through the first quarter, January was by far the slow month and then improved in February and March and April is pretty similar to March, so we're looking to be close to the 1 area as we go forward here.

In North America is just sounds like.

In North America, yes.

That was more of an inventory adjustment?

Right.

When you look at going back to 2010, I mean our lead times got out to 12 and 13 weeks.

And so that was a lot of orders being placed that we shipped in the first quarter as we just ate through the backlog is basically what happened.

Okay, thanks a lot.

Amitabh Passi, UBS.

Thank you.

I just had a couple questions.

Kent, can you update us on the kind of yields you're getting in your HDI and Advanced HDI technology in Asia?

Yes, thanks for the question.

I think we're doing very well.

As we moved some of that product into different facilities we've been able to get some yields that were very satisfactory to us.

So maybe that's a question that Canice could answer more directly and give you the latest update on that.

Canice?

I think HDI, Advanced HDI all depends on how many times (inaudible) that is required.

It range from one time to that of five times.

So our yield is in the range of about 60% to 85% of the yield there.

But despite of that, I think the margins tells everything.

Again, our margins are likely to be on the high end of all our peers.

So as demonstrated, we are performing rather on the high side of the market benchmark.

Sorry, just to clarify, Canice, you said 60% to 85%, you said that was the range?

Yes.

And, Amitabh, when you look at -- we can call that Advanced HDI, but not every product is equal.

Every product is going to have its unique capabilities and there's interlayer capabilities, there's different layer counts and different cycle times through the facility.

And every one of those carry kind of a different yield.

So we talk about broad yields of 60% to 85%, well we're doing very well and better than what we see in the marketplace.

We still think there's some upside to improve our yields as we go forward.

Got it.

And then is it fair to assume the one 10% plus customer was in your computing segment?

Yes, right.

Okay, and then, Kent, I apologize, not to sort of belabor the issue, but if I look at your mobile device segment, it looks like sales were down almost 32% sequentially, networking down 17%.

Just trying to understand, it seems like it's something beyond just sort of seasonality here.

Was there anything specific in each of these segments that drove the sequential decline?

I think in the mobile, talking cell phones, that was pretty much seasonality.

That's not unusual from where we have been in the past years.

And in networking, there's still some seasonality moving into that with some probably softness within our China customers.

But normally, if you look at first quarter compared to fourth quarter we were down, what 5%?

And normally that ranges from 8% to 10% and sometimes a little higher.

So I think we did pretty well in the first quarter even with some of the seasonality.

So there wasn't anything surprising in there to us.

Okay, thank you.

I'll step back in queue.

(Operator Instructions).

And we have no further questions at this time.

I'd like to turn the conference back over to Mr.

Alder for any closing statements.

Okay.

Thank you, everybody.

We appreciate your time and we're excited about where we're at.

I think we're going to have some good opportunities as we go forward.

So thanks for your time and we'll look forward to another call in next quarter.

Thank you very much.

Ladies and gentlemen, this concludes the TTM Technologies First Quarter 2011 Earnings Call.

If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 with the pass code 4434320.

ACT would like to thank you for your participation and you may now disconnect.