TTM Technologies Inc (TTMI) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the TTM Technologies second quarter 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).

This conference is being recorded today, Tuesday, July 31st, 2012. I would now like to turn the conference over to Diane Weiglin, Executive Assistant. Please go ahead ma'am.

During the course of this call the Company will make forward-looking statements that relate to future events or performance. These statements reflect the Company's current expectation and the Company does not undertake to update or revise these forward-looking statements, even if experience of future changes make it clear that any projected results expressed or implied in this or other Company statements will not be realized.

Furthermore we wish to caution you that these statements involve risks and uncertainties, many of which are beyond the Company's control, which could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties include, but are not limited to, the Company's dependence upon the electronics industry, contemplated significant capital expenditures and related financing requirements, the Company's ability to integrate and manage its Asia Pacific operations, the Company's dependence upon a small number of customers, the unpredictability of and potential fluctuation in future revenues and operating results, and other risk factors set forth in the Company's most recent SEC filings.

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. Participating on today's call are TTM's President and Chief Executive Officer, Kent Alder, TTM's CFO, Steve Richards, and Canice Chung, President of TTM's Asia-Pacific business unit.

I would now like to turn the call over the Mr. Alder. Please go ahead, Kent.

Thank you Diane. Good afternoon. Thanks for joining us for our second quarter 2012 conference call. As usual I will begin with a review of the business, and then Steve will follow-up with a discussion of our financial performance, and then we will open the call to your questions.

First let's start with a review of the highlights for the quarter. Net sales were $327.4 million, GAAP net income attributable to stockholders was $7.4 million, or $0.09 per diluted share. Non-GAAP net income was $13.6 million, $0.17 per diluted share, and gross margin was 16.7%.

Our second quarter revenue was in line with our guidance for the quarter. However, unfavorable product mix and continued weak demand, particularly for our advanced technology printed circuit board, and higher labor costs in Asia Pacific, negatively impacted our gross margin and net income for the quarter. During the second quarter, advanced HDI products declined as a part of our overall product mix, comprising approximately 23% of our Asia Pacific revenue in the second quarter, compared to 26% in the first quarter. The decline was primarily due to softer than expected sales of touchpad tablet printed circuit boards during the quarter. The multiple customer programs we have ramping in the third quarter utilizing the advanced HDI printed circuit board technology, gives us confidence that advanced HDI will resume growing as a percentage of our overall product mix in the third quarter.

Now I would like to comment on the results of our operating segments for the second quarter, and then Steve can add the details later on in the call. The Asia-Pacific segment had sales of $195.6 million in the second quarter, up from $171.8 million in the first quarter. Gross margins for Asia-Pacific were 15.4% in the second quarter, compared to 17.4% in the first quarter. The decline in gross margins was primarily due to two factors. Higher labor costs due to salary and head count increases, and a lower than expected mix of advanced HDI printed circuit boards. Also capacity utilization in Asia-Pacific during the quarter was about 70% for our conventional printed circuit boards, and approximately 75% for advanced HDI facilities.

In the third quarter, we expect to operate at a similar level of utilization in our conventional printed circuit board facilities, but at a higher level in our HDI facilities. In our North America segment, we performed largely as expected, and recorded second quarter sales of $132.3 million, up from $130 million in the first quarter. Gross margins in North America was 18.5%, compared to 20.4% in the first quarter. This margin decline primarily reflects lower facility utilization in our conventional printed circuit board factories. Our capacity utilization percentage in North America was approximately 75% in the second quarter compared to 80% in the first quarter. And we expect our capacity utilization in North America to decrease further during the third quarter, due to weakness primarily in the networking end market.

On a year-over-year basis, second quarter sales of Asia-Pacific declined 13.5% from $226.2 million in 2011. In North America sales decreased approximately 7% from $142.2 million in 2011.

Now moving onto our end markets. Networking communication is our largest end market, consistent with the first quarter second quarter sales of this end market were 32% of total sales. We experienced some improvement in sales to certain global telecom infrastructure customers, although demand from other customers was uneven during the quarter. Moreover, we experienced softer demand from our China-based customers during the quarter. On a longer-term basis, we anticipate that we will benefit from our diverse participation across the enterprise, service provider, internet, and telecom infrastructure markets. However, we anticipate sales in this end market to be challenged in the near future.

Computing storage peripherals is our second largest end market. Sales in this end market represented 21% of second quarter sales, compared to 24% in the first quarter. Sales were down sequentially due to unexpected softer touchpad tablet printed circuit board demand. This was somewhat offset by increased demand from our high end computing customers. In the third quarter we expect sales in this end market to increase, as we ramp production for various touchpad tablet programs.

The aerospace and defense end market represented 16% of second quarter sales compared with 17% in the first quarter. We experienced continued solid sales to commercial aerospace customers. In our defense business, while forecast and long-term visibility remain uncertain, we continue to benefit from our broad program participation across the defense customer base. We expect sales in this end market to remain steady during the third quarter.

In the cell phone end market, sales increased to 12% of second quarter sales from 10% in the first quarter. We are seeing an increased contribution from new programs, and we expect to see a further increase in sales in the third quarter in this end market.

The medical industrial instrumentation end market represented 9% of sales in the second quarter, compared to 10% in the first quarter. On a dollar basis, sales increased sequentially. We expect this end market to be relatively stable in the third quarter. Sales in the other end market increased to 10% of total sales in the second quarter from 7% in the first quarter. The increase in sales was due primarily to an uptick in demand for wireless, modular substrate printed circuit boards, or handheld devices, as well as our automotive related business during the second quarter. We expect this end market to be slightly down in the third quarter.

Now talking about our customers, our Top Five customers accounted for 29% of sales in the second quarter. In alphabetical order, our Top 5 OEM customers were Apple, Cisco, Ericsson, Huawei, and IBM. We had one customer who accounted for 10% of sales during the quarter. As noted during the second quarter our product mix shifted to less advanced HDI products resulting in ASPs declining approximately 3% in Asia-Pacific. In North America, ASPs declined approximately 2% due to lower advanced technology product mix.

Before I wrap up my discussion, I would like to provide an update on the maintenance work we are performing on our SYE plant located in Dongguan, China. The refurbishment of this facility has proceeded as planned and on schedule. The work will be completed, and the facility ready for operations during the third quarter. As we have previously noted, our capital investments are focused on advanced HDI expansion, technology improvements and maintenance. We are on track to invest $120 million to $135 million in 2012 as we expand our manufacturing capabilities primarily in advanced HDI, which provides the best growth and highest margin potential for our business.

In summary, we are pleased with our broad customer engagement and diversified end market participation. We have important leadership positions in many of the markets we serve. As demand for HDI product increases in the third quarter, we will capitalize on our previous investments in Asia-Pacific with sales expected to increase on a sequential basis. Going into the second half of the year, we expect increased revenue contributions from our advanced HDI, flex, and rigid-flex business for touchpad tablets, Smartphone and ereaders.

Now Steve will take us through and do a review of our financial performance for the quarter.

Thanks, Kent. Good afternoon everyone. Second quarter net sales of $327.4 million increased $26.9 million, or 9% from first quarter net sales of $300.5 million. Gross margin was 16.7% in the second quarter compared to 18.8% in the first quarter. Selling and marketing expense was $9 million in the second quarter compared to $8.6 million in the first quarter. As a percentage of net sales, selling and marketing expense in the second quarter was 2.8%, down from 2.9% in the prior quarter.

Second quarter G&A expense increased to $23.5 million, or 7.2% of net sales compared to G&A expense of $22.1 million, or 7.4% of net sales in the first quarter. Amortization of intangibles was $4.1 million in the second quarter, compared to $3.9 million in the first quarter. Operating income for the second quarter was $18.1 million, compared to operating income for the first quarter of $21.8 million. The Asia Pacific segment's second quarter operating income before amortization of intangibles was $11.2 million compared to operating income of $12.8 million in the first quarter.

The North America segment's operating income for the second quarter before amortization intangibles rose $11.1 million compared to $12.9 million in the first quarter. Interest expense was $6.4 million in both the first and second quarters.

Our effective tax rate in the second quarter was 35%, an increase in the first quarter effective tax rate of 27%. The increase was due primarily to the greater contribution to pretax income of our US operations which bare a higher tax rate. The second quarter tax rate was 800 basis points higher than the forecasted 27%, which accounted for a $0.01 reduction in EPS. Net income attributable to stockholders for the second quarter was $7.4 million, or $.09 per diluted share compared to net income in the first quarter of $12.6 million, or $0.15 per diluted share.

Second quarter non-GAAP net income attributable to stockholders was $13.6 million, or $0.17 per diluted share. This compares to first quarter non-GAAP net income attributable to stockholders of $18.8 million, or $0.23 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 affects related to these expenses.

Adjusted EBITDA for the second quarter was $42.3 million, or 12.9% of net sales. Compared to first quarter adjusted EBITDA of $46.4 million, or 15.4% of net sales. Cash and cash equivalents at the end of the second quarter totaled $248.5 million, an increase of $24.7 million from $223.8 million at the end of the first quarter.

Net debt was $299.9 million at the end of the second quarter, down from $306.9 million in the first quarter. Cash flow from operations in the second quarter was approximately $39 million. Capital expenditures for the second quarter were approximately $33 million. This reflects approximately $28.1 million for Asia Pacific, and $4.9 million for North America. Depreciation in the second quarter was $20.2 million.

In the third quarter we expect revenue to be in the range of $340 million to $360 million. We expect GAAP earnings attributable to stockholders to be in the range of $0.08 to $0.16 per diluted share, and non-GAAP earnings attributable to stockholders in a range from $0.16 to $0.24 per diluted share. This is based on a diluted share count in the third quarter of approximately 82 million shares.

Our guidance reflects the realities of the current global economic situation. Given these uncertain circumstances, customers are increasingly cautious as they make production commitments. We expect that SG&A expense will be about 10% of revenue in the third quarter. We will record amortization of intangibles expense of about $4.1 million. We expect our blended tax rate to be approximately 27% in the third quarter and for the remainder of 2012.

Before we address questions, I would like to mention that we will be participating in the Longbow Research, Industrial, Manufacturing and Technology Investor Conference on September 13th in New York. We will provide more details in an upcoming press release.

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

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Shawn Harrison with Longbow Research. Please go ahead.

Hi, thanks for the advertising, Steve. I guess the first question I had was just the unexpected decline in the touchpad tablet business. Was that a market factor, or has your share stayed the same, I guess is the big question I had?

Yes, Shawn, that is a good question. We don't believe we have lost any market share. I think that is key for everyone to understand. When you look at the macro environment, I think there are issues there which impact demand for those products. And I think the other factor is you get in between product introductions and there is somewhat of a lull there. Sometimes I think our customer's customers are maybe waiting for the next revision, and that impacted our mix more so than we expected in the quarter.

And then I guess getting into the guidance, it implies essentially no real change for gross margin in the September quarter despite higher sales particularly with the advanced HDI work. What is working against you into the September quarter so that you wouldn't see incremental gross margin expansion?

And Shawn again, Asia-Pacific will do well in the third quarter and capitalize on our investment of the HDI products, or equipment that we have in place there. But the drag on earnings in the third quarter comes out of North America, and it is mainly out of our commercial accounts, and it goes back to being related to the telecom infrastructure, the internet infrastructure build out. We have seen a significant dropoff in demand for those products at the end of the second quarter. As we forecasted out with our customers, there is not much optimism within that end market. And so when you look at North America, we are actually going forecasting from 132 down to 123 approximately. And all of that is in the advanced technology products. That is where we have some of the higher margins, impacts our commercial facilities, particularly our largest facility that has a lot of leverage in the model. So that negativity there has some offset to the gains we are going to have in Asia Pacific.

Thanks so much. I will hop off and get back in the queue.

Thank you. Our next question is from the line of Matt Sheerin from Stifel Nicolaus.

Thanks. Following Shawn's question on the margins, you talked about the weakness in North America. In the past you have been fairly nimble in cost-cutting. I know in Chippewa Falls for instance, you have taken labor down at least temporary. Are there any near term plans to bring down production levels in order to improve margins, or do you think this is more of a short-term issue?

I think , Matt, it is not quite short-term. It is a little longer than short-term, but it is not long-term either. Our approach is to systematically controlling overtime, controlling hours, and so forth. We have some furloughs in place in our largest facility. We have employees taking some time off every pay period. We restricted the overtime and looking at what we can do to further enhance that, and we are trying to balance that again with when does this demand come back? That is somewhat of a challenge. In North America we are taking actions there to keep our costs in line, and we have done so I guess for the last four or five weeks. In Asia Pacific it is a little different tail there, because we are starting to ramp up in our advanced HDI products. We need to be ready for that, so that is a little different situation there.

And just on the advanced HDI and the different program wins, so a multi-part question. First, the touchpad customer weakness that you saw in the last quarter, do you expect that to come back? And what other types of programs without naming names are you seeing? You talked about ereaders. You talked about smartphones. As you get through the third quarter do you expect that to continue into the fourth quarter? I know seasonally Asia-PAC falls off toward the end of the fourth quarter, but are there enough program ramps now that you are going to see pretty nice sequential growth again in the fourth quarter in Asia-PAC?

That is a good question, Matt, and I will provide an answer here, and then Canice can come back and add some color to that. Clearly our touchpad tablet business we believe will grow dramatically in the third quarter, and then into the fourth quarter on the ereader side of things. We have one product being introduced in the third quarter, and another product in the fourth quarter, so we feel pretty positive about that. You look at the Smartphone business, and that is a little lag behind some of the touchpad tablet business. We are pretty optimistic about the Smartphone business.

While I am on that topic, let me talk a little about those handheld devices that we just talked about are the main drivers for advanced HDI. We have had some products outside of that handheld division that have used advanced HDI products too. We have seen a little bit of that technology spread to end markets and it is fairly early in that process. I don't want everybody to get excited that it is going to happen any time soon. Over the long haul there will be plenty of opportunities for advanced HDI.

And then not only with the new products, or new customers, when you look at our current customer base, advanced HDI products they continue to get more complex as they go up and layer count moves, any layer technology. That utilizes a lot of capacity when we have technology just move forward within our existing products. So I might ask Canice, you are a little closer to that in Asia Pacific, maybe update everyone on the latest if you would, please?

There is no doubt in the Q2 of the macro sentiment, it has impacted quite a bit of the sales, particularly on the PCB sales with the touchpad tablet markets, but we are seeing various of the products at the new introduction from various customers. So we are seeing a lot of this upside opportunity in the Q3 and Q4 going ahead there.

So you do see perhaps better than seasonal outlook obviously it is a ways off, but it sounds like you would at least at this point expect a decent ramp in the fourth quarter as well?

Yes, I think that is correct, Matt. Yes.

Okay. And you have talked in the last quarter about potential opportunities on the Smartphone side with some project wins with a big customer. Is there anything you can share on that with us?

I don't think we are any different than we have been in the past. We are still very confident and optimistic there.

And just lastly if I may on the cost side, you cited increased labor costs as an issue for the gross margin erosion, you did talk about that last quarter, and we thought that was sort of baked into your guidance. So aside from the mix and the volume erosion in some of your businesses, was there anything above and beyond the cost issues that you were talking about?

You are right. We did guide that we felt the various drivers for higher labor costs, head count increases, and changes in working hours, and wage increases. They impacted our results by 150 to 200 basis points, and they impacted us by about the high end of that guidance range. So really the decline in our margin from our guidance, from our targeted projections are most related to the lower utilization of our facilities, primarily in China as well as the shift in mix. That is really the most dramatic factor. Whether you expecting to see an increase in your advanced HDI content and it actually goes down, and that is the most lucrative line of work we have, it does compress margins.

Okay. That is helpful. Is that pretty much it then in terms of big head winds in terms of cost at least near term?

Yes, the outlook for material costs are for some modest declines over the rest of the year. That is it for headwinds. They are significant enough.

I think, Matt, just to add a little more color, our challenge is more on the macro level. We have capacity utilization almost throughout the Company with our facilities running at 70% to 75% utilization. So as we get through some of these global market head winds and get our utilization up, which also ties right in with our mix, so we get a better mix of advanced HDI and then a better mix of advanced technology products in North America, and that would help both utilization and ASPs and profitability to get the mix in place, and have our facilities run at higher utilization rates.

Got it. Okay. Thanks a lot.

Thank you. And our next question comes from the line of Amitabh Passi, UBS. Please go ahead.

Hi. This is actually Chelsea Shi on behalf of Amitabh. Just really quick to follow-up, on the CapEx side, since the second quarter is slightly higher than the first quarter which is quite understandable, just wondering at this point is $100 million to $110 million still about the right range for the full year?

Actually, Chelsea we are looking at $130 million to $135 million total for the year at this point, with about $36 million in the third quarter and about $40 million in the fourth quarter to round out the totals.

Cool, thanks. That is very helpful. And just another really quick question, for the top five customers, the total sales declined about 5% in the second quarter, and we all understand those customers, they also experience some weakness on their ends. Just trying to understand, is this decline purely based on the macro headwinds, or there are some other movements driving such declines?Or it could be potentially a good thing, operate correctly. So just trying to get some additional colors about that.

And when you look at our top five customers, Apple, Cisco, Ericsson, Huawei, and IBM for the second quarter, and last quarter Juniper and ZTE were part of the top five. Ericsson and IBM were not. We probably have seven or eight customers that could make the top five any given quarter. But with all of those customers it is just the macro environment. You look at the products they produce, and you can see when you talk about the internet infrastructure buildout those customers tie into that.

Okay, cool, thanks. If I may just another final really quick question about the margins. I think other analysts touched about this a little bit, so just trying to understand in the long-term what do you think the margin will be normalized at? Is that something about 20%, or that could be a goal kind of hard to reach at this point?

Chelsea, I think 20% gross margin for instance is not a goal that is hard to reach. I think we are just currently challenged by such diverse weakness in various markets that we serve that we are not seeing the utilization we need to. We still believe that at full utilization and with a very strong product mix using all of our capacity, we can even achieve the targeted gross margins that we outlayed before of 23%. It is more a matter of the various head winds we have that are kind of holding back our utilization, and impacting the margins right now.

Cool. Alright. Thanks very much.

Thank you. And our next question is from the line of Steven Fox with Cross Research. Please go ahead.

Hi, Good afternoon. First question, I understand what you are saying about the one touchpad customer in Q2, but you also talked about macro head winds at the same time you are talking about new product ramps on the consumer side. So excluding just customer specific comments or even product specific comments, if I looked from Q2 to Q4 in terms of the ramps you are expecting on consumer-related products, has that ramp been flattened out in aggregate because of the macro? And then I have a couple follow-ups.

I think the ramp is still in place for the commercial ereader-type products. There are basically two products, one we are going to develop in the third quarter, and the other one in the fourth quarter. I don't see any flattening of that. Canice, do you have any addition to help answer the question?

I think the macro environment, there is no doubt it has been impacted quite a bit in Q2. We are expecting on the Q3 and Q4, in particular in the late Q3 and Q4, we should be able to see better seasonal sentiments. And we are seeing customers. It is not one customer. There are more customers that they have been able to schedule their launching of new products in Q3 and Q4 onwards. So we definitely will also bring momentum for our [16 TI] requirement in Asia-Pacific there.

And that ramp to make sure I am clear is not really starting in July or August even, it is going start in September so what we will see in the numbers will be mainly the December quarter when we see the most dramatic impact?

Because the plot that we are talking about is almost about three-fourths of the projects. If you run in gradually rather than it all run in at July and August or September, some impact on Q3 and some impact on the Q4.

Okay. And just a couple of other quick questions, on the capital spending did you say how much advanced HDI is up in CapEx is related to HDI rather?

It is about 75% to 80% of that number. It is a little higher this year because we are putting in some water recirculation capabilities in several of our facilities. That runs up the maintenance side a little bit higher than normal.

It is government mandated.

Steve, let me maybe to answer your question, just from a book to bill perspective?

Sure.

When I look at Asia, our book to bill for the second quarter was less than what it was 0.97. When you look at the month of June standalone in Asia-Pacific was 1.04. A lot of that booking came late in the quarter. If you look at how we booked through the first two, three weeks in July, we are running 1.38 on a book to bill, so some the some of this we have been talking about with advanced HDI, you can see why the book to bill numbers are starting to come onto the books so that we can start to roll here. It is still in the beginning infancy phases.

That is very helpful. Appreciate that color. And then just lastly, Steve, so I am clear, in terms of the labor inflation pressures you talked about last quarter and where it came out this quarter, are you saying going forward you don't expect any incremental wage pressures for third quarter, fourth quarter, first quarter of next year?

I don't think they will be significant. The big increase was in Q2. We implemented that 60-hour workweek, we included the wage increase that was government mandated, and then a little additional and beyond that. The only increase in our labor costs would be at this point likely for increased workers, and that should be in line with the production demand. I am not expecting to have a further impact on the margin beyond what it did in Q2.

Got it.

So just a little more color there too, if you look at what happened in April, we got a little bit of a double whammy on the labor, if you will because we raised the wages. But we also complied with the social requirements of some of our customers reducing the overtime which then required us to add more people. That will not happen in the future. I think as they get to the April timeframe of next year we will probably have another wage increase, but we won't get the other costs that we have to incur by adding head count.

And that implies that the churn rate that you expected off the new head count was in line with your expectations?

Right.

Thank you very much. That is great color. Appreciate it.

Thanks, Steve.

Thank you. (Operator Instructions). And our next question is from the line of Jiwon Lee with Sidoti & Company.

Thank you and good afternoon.

Hi, Jiwon.

Just wanted to start off with this question, how is the new program mix if we think specifically between touchpads and smartphones, in terms of either the number of new programs, or however you could characterize if?

We don't talk too specifically about customers and programs, but as you look at our customers and listen to them as they announce their products, you can be assured that we are involved in those products both on the touchpad tablet and on the Smartphone side.

And Kent, when you were talking about Smartphone ramp lagging a little bit, but nonetheless you were optimistic, were you expecting substantially better ramp by the fourth quarter, or is there going to be more of a 2013 event?

I guess when I say lagging, I guess what I meant was behind the touchpad tablet. Not that the program is lagging as a standalone program. So when you look at our business, we will see some of the touchpad tablets come first, and then the smartphones follow.

Okay. And on your revenue guidance, if I read things correctly, the HDI on a sequential basis should be up I guess double-digit, but it is offset by weakness in North America on the telecom and internet infrastructure spending?Is that correct?

That is correct. And then a little more details in that. If you look at North America, it is interesting that our aerospace and defense work is really holding steady. We are forecasting that to be very steady and maybe up slightly in the third quarter. It just comes back to this commercial work tied to the telecom internet infrastructure that is weak. As that end market gets healthy and comes back to us, it will make a dramatic improvement in our North American numbers.

Okay. Lastly on the CapEx side, what would be the larger to maintain the spending this year?

I think that is a good question. We have been I think one of the earlier investors in advanced HDI technology. We have done that in a fairly sizable way. The result of that is the opportunities that we now have, and the customers we now have and are able to serve. Had we not made those investments I think we would have fallen behind the market, and not have the opportunities that we have now. Our advanced HDI CapEx last year and this year are pretty heavy.

As we look at our customers and where they are taking products and watching technology advance, which uses up more advanced HDI capability, we think we are on the right trail here. I also might add that not only is it just buying the CapEx, I think the fact that we did it early in the process enabled us to develop the expertise and the knowledge and know-how to build these products. It is one thing to buy the CapEx and it is another thing to execute and deliver the products. I think that the fact that we did that early is providing us some good, solid customer relationships, and being the preferred supplier that we might not have that status otherwise. So as we look at the CapEx for this year though, that puts a lot of capacity in place for the Company. So you go out in future years, and the CapEx for advanced HDI, well, we don't have that refined at the numbers, it will probably not be as heavy as it has been in 2011 and 2012.

Understand. And one last thing for Steve. The HDI percentage, I did hear correctly it was 26% in Q1 and it was 23% in Q2?

The advanced HDI percentage, right.

Advanced, okay.

There are some more simple HDI designs that are characteristic of the speakerphones. Those are running more steady state, like about 19% of sales in Asia.

That is very helpful. Thank you very much.

Thank you. (Operator Instructions). And our next question comes from the line of Rich Kugele with Needham and Company. Please go ahead.

Thank you, good afternoon. I want to ask one question about HDI again. If we take a step back and look at the entire market, the most capable competitors that you bump into, and just the advanced HDI, what would you say your share is, and what are you seeing from a CapEx perspective from those guys? Just trying to make sure as you look out 12 to 24 months even, that we are not heading into a situation where there is so much excess capacity that the gross margins just do not come back on that side?

Rich, that is a good question. You have addressed a concern that we have also looked at as we operate this business, and it is probably safe to say that when we looked at this HDI business, and first started to invest in that, we didn't anticipate that our competitors would invest as quickly as they did. And so we have had some competitors invest in HDI similar to what we have. Instead of having a real exciting time, it kind of brought our industry now to more normal PCB cycles, when a new technology comes out. Although I still think the fact that where we are at, our position with our customers is a really solid position.

It was not one situation where others could not invest. Now it becomes how well you have positioned yourself with customers, how you service customers, and do you even have that capability? Clearly it is not a normal printed circuit board that you see across the industry. Not everyone can do this advanced technology, but probably more people did invest in that than we normally thought. But we still have some pretty optimistic outlook on our position, and where we are at, and like I mentioned earlier, it is not only the CapEx, it is the expertise that we have developed, and the relationship with customers. And I will again ask Canice if he has any additional comments that might bring some more clarity to that.

I think the global HDI capacity no doubt has been dominated by the top tiers of the players. It is not a matter of financial capability. It is also another capability of the technology that we can master, but having said that, we are seeing more and more products are in fact, turning to the application of the advanced HDI, and even if the advanced HDI heads south, are also driving to more complicated that currently the maximum is 10, and we are already hearing the customers requesting for 12 layer or layers. If shifting from 10 layer to 12 layers means an additional 20% of the capacity, requirement is the same square footage of the requirement would be the same numbers as were there. The market on the technology of advanced HDI are still dynamically developing going ahead, where you are seeing a lot of opportunity in front of that.

And I might add too when this first technology came out, you looked at almost everybody that would announce that we have HDI technology, or advanced HDI technology, and as we went through a very quick maturing process, not everybody could do that. It narrowed down to four or five major competitors who have had the financial wherewith all and the ability to expand. We are very pleased that we are one of the top tier people who, the companies who invested in that HDI and have the opportunities that we now have looking forward.

And maybe in that vein, is there any risk that traditional HDI capacity or technology improves to the point where you don't need the advanced versions?

The way I look at that, and they have had some different technologies that have come onto the scene to try to replace the copper-filled, plating copper-filled technology, which is basically advanced HDI, and none of those have really taken hold, and none of those has been successful. They don't deliver the same quality and same performance level of the processes that we do, and you look at the smallness, the tightness, the holes, the thinness, and I just don't think there will be a technology anytime, I don't know soon, or my lifetime, Maybe that is the way to put it, that we will see that would replace that advanced HDI technology.

It sounds like it is just waiting for the macro?

That is exactly right. The macro that will help us utilize our facilities, and get a better mix, better ASP, and higher margins.

Thank you.

Thanks Rich.

Thank you. And at this time I am showing no further questions in my queue. I would like to turn the call back over to Mr. Alder for closing comments.

Again I would like to thank everybody for their interest in TTM. Steve and I will be available after this call if you think of other questions, have other follow-up information, don't hesitate to give us a call. We will look forward to the next quarter. Thank you everybody, and we appreciate your interest.

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