TTM Technologies Inc (TTMI) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the TTM Technologies third quarter 2011 earnings conference Call.

(Operator Instructions).

This conference is being recorded today, November 2, 2011.

And I would now like to turn the conference over to Miss Diane Weiglin, Executive Assistant.

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 filing.

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

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

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

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

Kent Alder, President and Chief Executive Officer.

Please go ahead, Kent.

Okay.

Thank you, Diane.

And good afternoon, and thanks for joining us for our third 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'll begin with a review of our business, and Steve will follow up with a discussion of our financial performance, and then we'll open the calls to your questions.

First I would like to begin with a review of the highlights from the third quarter.

Net sales were $358.3 million.

GAAP net income attributable to stockholders was $24.5 million or $0.30 per diluted share.

Non-GAAP net income attributable to stockholders was $31 million or $0.38 per diluted share.

Gross margin was 19.7%.

Revenue fell short our expectations, as demand for printed circuit boards was impacted by the challenging macro-economic environment and softer business conditions in China, which led to end the quarter push out by some of our customers.

Revenue for the third quarter was about 2% below our guidance range, while our GAAP and non-GAAP EPS were within our expected ranges.

Revenue slightly declined from the second quarter and was essentially flat with the third quarter of 2010.

The lower revenue impacted our fixed cost absorption, which contributed to slightly lower than expected gross margins.

While we experience continued solid demand for HDI and advanced HDI printed circuit boards, which are used in the production of touchpad tablets, smartphones, and most recently e-readers, the overall demand for conventional high layer printed circuit boards weakened during the quarter.

Advanced HDI products continue to represent a growing part of our overall product mix.

However, the increase in HDI demand did not completely offset the impact of lower demand for conventional printed circuit boards.

As expected labor rates and material prices generally held steady during the quarter, with the exception of gold.

In Asia-Pacific the increase in gold prices during the third quarter was one of the factors negatively impacting our gross margin.

We are carefully managing capacity to maximize efficiency in our operations in Asia-Pacific and North America.

In Asia-Pacific capacity utilization remained approximately stable over the quarter.

In North America capacity utilization declined somewhat in the third quarter.

Now I would like to comment on the results of our operating segments in the third quarter, and then Steve can add some more details later in the call.

The Asia-Pacific segment had sales of $222.3 million in the third quarter, compared to $226.2 million in the second quarter.

Gross margins for Asia-Pacific segment was 20.4% in the third quarter, compared to 21.7% in the second quarter.

The decline in gross margin was primarily due to higher gold prices and higher expenses for outside drilling and plating services as we continue to adjust our facilities towards a higher mix of advanced HDI printed circuit boards.

We placed equipment into service in September, which will mitigate most of this expense in the fourth quarter.

The North America segment recorded third quarter sales of $137.4 million, which was down as expected from $142.2 million.

Gross margin for this segment was 18.5%, compared to 19.9% in the second quarter.

The decline in gross margins was primarily due to lower fixed cost absorption as well as higher material content in Backplane Assembly operations due to customer product mix.

Our year-over-year basis third quarter sales in Asia-Pacific increased approximately 5% from $211.5 million in 2010.

The in North America sales decreased approximately 7% from $148.3 million in 2010.

Now moving on to our end markets.

Networking and communications is our largest end market.

Sales in this end market were 38% in third quarter sales, which was consistent with the second quarter.

Longer-term we anticipate that we will continue to benefit from demand or increase in infrastructure to support drilling bandwidth requirements.

However, we expect sales in this end market to be lower in the fourth quarter due to the slower economy.

The computing, storage and peripherals is our second largest end market.

Sales in this end market represented 21% of sales in the third quarter, versus 23% in the second quarter.

While we experienced a decline in sales in this end market, it was due largely to lower computer related memory, peripheral and server sales.

We are pleased to see that sales to the largest customer increased slightly in the third quarter.

We expect sales in this end market to be lower in the fourth quarter due to softer seasonal year end demand.

In the aerospace and defense end market, the sales represented 16% of third quarter sales, compared with 17% in the second quarter.

Sales to commercial aerospace customers in creased during the quarter, while sales to defense customers declined slightly during the quarter, primarily due to program timing.

We expect sales to hold steady in this end market in the fourth quarter.

In the cell phone end market, sales increased sequentially to 10% of sales, up from 9% in the second quarter.

Smartphone sales to several China based cell phone manufacturers increased during the third quarter while we continue to transition our mix toward more smartphone products.

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

The medical, industrial and instrumentation end market represented 7% of sales in the third quarter, consistent with the second quarter.

On a dollar basis sales were down slightly, reflecting more conservative order patterns by our customers in this end market.

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

Sales in the other end markets experienced a significant increase, growing to 8% of sales in the third quarter from 6% in the second quarter.

The increase in sales was driven by a new customer in the e-reader market.

We expect this end market to be up significantly again in the fourth quarter.

[Now] I'm talking about customers.

Our top five customers did not change productivity second quarter and accounted for 36% of sales.

We had one customer that represented 11% of sales.

In alphabetical order our top five OEM customers remain unchanged and were Apple, Cisco, Ericsson, Huawei and ZTELead times for both our segments were unchanged at four to six weeks, which reflects normal lead times in both Asia-Pacific and North America.

The pricing environment was somewhat spotty during the third quarter due to softer economic conditions, with blended ASPs holding steady in Asia-Pacific and declining slightly in North America,primarily due to product mix.

In summary we believe the macro environment has caused growth in demand for printed circuit boards to slow, but we also believe the fundamentals of our business strategy are sound, and we targeting the right diverse group of end markets and customers.

We remain confident that the underlying long-term drivers for advanced technological printed circuit boards, including the peripheral -- proliferation of converged mobile and media devices and the surge in network applications remain unchanged.

In the near-term we will closely manage our business for a lower growth environment.

We believe we have invested effectively in CapEx to date.

However, given existing market conditions our current CapEx strategy is to invest only in technological enhancements, bottlenecked areas, and maintenance.

We remain confident that TTM is well positioned for the next stage of growth when the demand environment improves.

Before we turn the call over to Steve, I would like to mention that our Connecticut plants have been closed for me days due to the power outage resulting from the recent snow storm.

Although we cannot be certain when the power will be restored, which we expect to happen in the next day or so, we do not expect these closures to have a material impact on our results for the fourth quarter,although we may incur some additional costs to achieve our planned production.

And with that, I will turn the call over to Steve to review our financial performance for the quarter.

Thanks, Kent, and good afternoon, everyone.

Third quarter net sales of $358.3 million decreased $7.9 million or 2.1% fromsecond quarter net sales of $366.1 million.

Gross margin for the third quarter of 19.7% decreased from second quarter gross margin of 21.1%.

Selling and marketing expenses was $8.7 million in the third quarter, compared to $9.3 million in the second quarter.

As a percentage of net sales, selling and marketing expense in the third quarter was 2.4%, downfrom 2.5% in the prior quarter.

Third quarter G&A expense decreased to $21.3 million or 6% of net sales from second quarter G&A expense of $24.1 million or 6.6% of net sales.

Amortization of intangibles was $4.3 million in both the second and third quarters.

Operating income for the third quarter was $36.3 million, compared to an operating loss in the second quarter of $8.5 million.

Excluding the impairment charge in the second quarter, operating income would have been $39.6 million.

The Asia-Pacific segment second quarter operating income before amortization of intangibles was $27.9 million, compared to an operating loss of $18 million in the second quarter.

Excluding the impairment charge in the second quarter, the Asia-Pacific segment's operating income would have been $30.1 million.

The North America segment's operating income for the third quarter before amortization of intangibles was $12.8 million, compared to $13 million in the second quarter.

Interest expense was $6.7 million in both the second and third quarters.

Our effective tax rate in the third quarter was 15.9%.

It decreased primarily due to a research and development tax credit we earned for 2010 and prior years, and which we recorded in the third quarter as we completed the necessary analysis and support.

In the second quarter our effective tax rate was significantly impacted by the impairment charge, only a small portion of which was deductible for tax purposes.

Excluding the impairment charge, our effective tax rate would have been 25.3% in the second quarter.

Net income attributable to stockholders in the third quarter was $24.5 million, or $0.30 cents per diluted share, compared to a net loss in the second quarter of $20.9 million or $0.26 per basic share.

The asset impairment charge in the second quarter negatively impacted net income attributable to stockholders by $46.6 million or $0.57 per diluted share.

Excluding this after-tax asset impairment charge, GAAP EPS for the second quarter was $0.31 per diluted share.

Third quarter non-GAAP net income attributable to stockholders was $31 million or $0.38 per diluted share.

This compares to second quarter non-GAAP net income attributable to stockholder of $32.9 million or $0.40 per diluted share.

Non-GAAP net income attributable to stockholders adds back amortization of intangibles, stock-based compensation expense, noncash interest expense, asset impairment restructuring and other charges, as well as the income tax [aspect] related to all these.

EBITDA for the third quarter was $59.3 million or 16.5% of net sales, compared with second quarter adjusted EBITDA of $64.2 million or 17.5% of net sales.

Cash and cash equivalent at the end of the third quarter totalled $207.7 million, a decrease of $28.2 million from $235.9 million at the end of the second quarter.

Net debt was $305.2 million at the end of the third quarter, down from $318.1 million in the second quarter.

Cash flow from operations in the third quarter were approximately $42.6 million.

Capital expenditures for the third quarter were approximately $28.3 million.

This reflects $25.7 million for Asia-Pacific and $2.6 million for North America.

Depreciation for third quarter was $17.2 million.

In the fourth quarter we expect revenue to remain about flat with the third quarter.

Overall we expect fourth quarter revenues to be in the range of $345 million to $365 million.

We expect GAAP earnings attributable to stockholders in a range from $0.19 to $0.28 per diluted share, and non-GAAP earnings attributable to stockholders in a range from $0.27 to $0.36 per diluted share.

This is based on a diluted share account for the fourth quarter of approximately 82 million shares.

Our fourth quarter gross margin is expected to be in the range from 19% to 21%.

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

We will record amortization of intangible expense of about $4.5 million We expect our blended tax rate to be approximately 24% in the fourth quarter.

Before we address questions I would like to mention that we will be presenting at two upcoming investor conferences in New York.

The UBS conference on November 15 and the JPMorgan conference on December 1.

We will provide further details in our upcoming press release about these two conferences.

With that I would like to open the call to your questions.

Thank you, sir.

(Operator Instructions).

Our first question comes from the line of Shawn Harrison from Longbow Research.

Please go ahead.

Hi everyone.

Hi.

I wanted to just first get into the guidance, particularly in the networking com business.

In terms of what you're seeing right now, quarter to date, have things stabilized?

Because it seems at least that's where maybe you saw some of the push outs occur late in the quarter, given that most of the risk to guidance appears in that end market.

And if it is true, how much of that is demand disruption versus -- or demand weakening versus just kind of an inventory disruption?I know you have seen that before as well.

Yes.

This is Kent, and thanks for the question.

It's a little hard to say how much of that was from demand and inventory adjustment.

In a way it all comes back to the same end market demand long-term anyway.

So we're seeing some demand in the network and communications improve in some customers and in some customers not improve.

I think that end market is probably more susceptible to the macro environment than some of the other end markets that we have, mainly because you deal with the Internet infrastructure and some major investments and so forth.

I mean you look at our other end markets; aerospace and defense will be down a little bit, but that's mainly due to program timing.

We think cell phones will probably be up.

We have a lot of China customers in cell phones, Computing; again, we'll see some seasonality on our computing end market, so that will probably be down a little bit.

And then in our other category, with a new customer there in our other category that end market will be up fairly significantly in the fourth quarter.

That's kind of an overview of all of the end markets.

I know you asked specifically about networking, but I think they all tie together to help give a complete picture of our business.

What was the book-to-bill ratio within -- or for North America for the quarter as well as Asia?

And I guess how has it changed here through October.

The book-to-bill for North America for the quarter was 0.96.

I think the good news, for the month of October it was 1.09, so we had a significant jump in October.

Our book-to-bill in Asia-Pacific for the quarter was 1.05, pretty solid bookings there.

Then you get to October, and we were 0.95.

I guess that -- if you compare that with the [ITC] number, which we don't have October numbers, but we do have for the quarter, that was 0.99.

Okay.

And then in the final question, copper prices, while volatile, they were down significantly from spot prices last quarter.

When would you expect to maybe see a raw material benefit more so in Asia than in North America, because I know North America seems to be less volatile, but on copper?

And then maybe you could talk about what you're seeing with gold as well?

Yes.

Good questions.

I think on the copper business, you're right that we kind of look at that in Asia-Pacific and North America.

Asia-Pacific will have a more immediate impact, so we'll see some benefits of that in the fourth quarter on the copper and general material prices.

With North America there is delayed kind of reaction due to some of the contracts we have and so forth.

We will see most of that benefit on lower copper prices take place in the first quarter.

Relative to gold, I mean, that was one of our issues in the third quarter, as it kind of peaked at around $1,900.

You are buying gold at different prices throughout the quarter, and then gold now is at $1,750 or $1,700, so it's down 8%, 7%, maybe 10% at times throughout the quarter.

So that will have a pretty beneficial impact for us as we go forward into the fourth quarter also,depending on if gold can stay at this level.

And with gold and some of these other prices, we generally can pass those onto customers with some time.

There's always a lag.

Given market conditions right now on the macro level, it is certainly more difficult to pass those gold costs on.

Thanks so much.

Thank you.

And our next question comes from the line of Amitabh Passi from UBS.

Please go ahead.

Hi.

Thank you.

First question, I just wanted to clarify the 10%-plus customer in the quarter, was that the same customer that was 10%-plus in 1Q and 2Q?

Yes.

Yes.

Okay.

Kent, maybe you can help me understand what's going on with your computing segment, because I believe you said your largest customer in that segment was up sequentially, yet the segment as a whole was down 11%.

So just trying to understand what's going on with the rest of your customer base in that segment.

I mean, revenues are now kind of flattish in that segment year-over-year despite phenomenal growth with your largest customer in that segment.

Yes.

I mean we have some good increases from customers, a lot of the customers in the -- with advanced HDI and so forth products were very positive i in that end market segment.

And then you move to some of the others, and it just depends on the particular product produced by that company, and then the particular customer.

So just a lot of movement back and forth, so while we had some positive movements with some customers, there were some issues that prevented other customers from contributing to that end market space.

And maybe -- let me see, Canice, could you comment a little more on that question with regards to the computing end market?

I think in general [desktop] as well as the [notebook okay] segments are very soft.

[In] our [reach we did] support certain of the EOC memory products on [subtree] as the high end [go fee cup], which to be consumed by both the notebook and the desktops.

These two segments of the business [gave] over in [did okay, bang], and then even wash out all the growth that we have seen on the largest customer growth.

So this is the situation in Asia-Pacific.

And of course the flooding in Thailand may also impact these two [of the] industry even more in the Q4.

So does the guidance of down, does that factor in some potential impact from the Thailand floods?

Ultimately, it will impact the industry supply chain, that may also [factor] (inaudible).

Apart from that, you see the economy [in everything].

[There] is more than just economy.

Got it.

And then are you able to comment, either Canice, on just any new potential programs we should be looking towards in the new quarter?

Any few customers particularly on the tablet side?

We don't really talk about customers specifically, but I think when you look at the -- our capabilities with advanced HDI technology, we can service a lot of customers with that capability.

And so we have kind of our fingers on the pulse of other customers, and when we talk about the new customer in the other category, that's an e-reader.

That's a customer in that advanced HDI capabilities, so that's probably one example of where we've stayed close to customers and been able to attract a new customers as they were able to bring their product to market, and we're staying right close with other customers.

So if that same scenario develops where they bring products to market, we're in pretty good shape with whoever can kind of break through and have a product that can take some market share there and win some business.

I feel like we're very much aligned with the right people right now.

So as that happens, I think we're in good shape to win some business.

Just my final question.

Why was several will cellular phones down on a year over year basis?

Like, how come we aren't seeing growth in that segment on a year over year basis?

Yes.

I mean cell phones -- most of our cell phone customers are China-related, and that end market is almost totally served by customers, so I think in general it has to do with the China market place.

And maybe, Canice, you could add some more specifics to that.

I think Kent is absolutely right.

The China based cell phone were much of the impact [out there] in relation to the tightening policy in China, okay.

But despite all of this, we are also working very successfully in transitioning ourselves from regular feature phones, okay, to even more into the smartphone.

Despite we are giving up the feature phones, we are still making quarter [over] quarter growth there [that was as] (inaudible) [quarter two], but when you benchmark a year ago, then you are indeed benchmarking more of this smartphone [than feature phone].

The feature phone was [supported in the last years].

Okay.

Thank you.

I'm thinking on the short-term, too, when you look at going into the fourth quarter, I think that's one of the end markets that will be up for us.

So in short-term basis, like Canice is saying, as we transition in more, and some of that is kind of complete, and we're relying more on the smartphone market, I think we will see us continue to gain market share and have that particular end market grow.

Got it.

Thank you.

Thank you.

(Operator Instructions).

Our next question comes from the line of Matt Sheerin from Stifel Nicolaus.

Please go ahead.

Yes.

Hi.

So a question on the -- it sounds like your gross margins are going to be flattish, and I guess operating margins overall.

Is this -- given that revenues now are at a lower level, and assuming that we bounce around this range for a while, are there things that you can do to improve the gross margin and operating margin in terms of costs, whether it be pulling in labor or other things that you can do?

Or is it not as important as having the infrastructure in place, preparing for the next upturn or the next snap back in demand?

Matt, very good question.

Again, I think we're always cognizance of how we can manage our costs an keep our cost structure down.

When we have flat sales as we do this quarter, next quarter, we always go back and look at our cost structure and how do we improve and make that a focus of our Company.

But since that's an ongoing practice, we don't think that there's a lot there on a major scale.

I think we can at that tweak and do better on the cost side.

I think it's important to understand that as we've invested in our Company with CapEx pretty heavily to position us with the right products -- and we're talking advanced HDI, the smartphones, the touchpad tablets, the Internet infrastructure -- we think we have done that very wisely and effectively.

However, the -- it's never a straight line up.

There's always a little pauses here and there, and I think we're into a pause.

But as you look longer-term at our position now with the investments that we've made, we can move pretty quickly upward as the marketplace enables us to.

But in the mean time we're going to keep working hard to win market share and take advantage of our global scale, our global position to continue to drive margins.

So I do think that we're well positioned in the long-term, and I think we've invested wisely.

So as the market kind of turns and we win some business, if it doesn't turn, I think we'll see some improvements as we go forward.

Okay.

And at your Analyst Day you had given a wide range for a CapEx targets for next year, and you just talked about in your opening statement about you also being cautious on CapEx.

Has that a changed?

Have you brought that number in?

And remind us again what that range is, and are you biased toward the low end now given the demand environment?

Matt, the range we gave at Analyst Day was about $85 million to I think $120 million, $130 million.

It was a pretty big range and pretty big numbers.

As Kent mentioned, we're definitely going to evaluate the capital program in line with market demand for 2012.

We're currently in the middle of our budgeting process now so we have better clarity on those expectation is for you in the next call.

But for right now we are definitely [heeling] more closely to the current demand and the current outlook.

Okay.

And just last question on the tax rate for this quarter.

What do you think we should be using?

Yes.

24% for Q4 is the right rate to use.

We actually this it big benefit this quarter, about a $1.4 million benefits in the taxes because of this R&D tax credit, and also an additional manufacturing credit for the state of Connecticut.

So 24% for Q4.

Got you.

Okay.

Thank you.

Thank you.

And at this time I am showing no further questions in my queue.

I would like to turn the conference back over to Mr.

Alder for closing comments.

Okay.

I would like to thank everybody for your time today, and if you have follow-up questions further on, please feel free to call.

And thank you for your interest, and we'll talk to you next quarter.

Thank you.

Thank you.

Ladies and gentlemen, this does concludes our conference for today.

If you would like to listen to a replay of today's conference, you may do so I dialing 303-590-3030 or 1-800-406-7325, and entering the access code of 4482252-pound.

We thank you for your participates, and you may now disconnect.