TTM Technologies Inc (TTMI) 2016 Q4 法說會逐字稿

Good day and welcome to the TTM Technologies, Inc.

Q4 earnings conference call.

At this time, I'd like to turn the conference over to Sameer Desai, Senior Director of Investor Relations.

Please go ahead, sir.

Thank you.

Before we get started, I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to TTM's future business outlook.

Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the factors explained in our most recent annual report on Form 10-K and our other filings with the Securities and Exchange Commission.

These forward-looking statements are based on management's expectations and assumptions as of the date of this presentation.

TTM does not undertake any obligation to publicly update or revise any of these statements, whether as result of new information, future events, or other circumstances, except as required by law.

Please refer to the full disclosures regarding the risks that may affect TTM, which may be found in the reports on Form 10-K, 10-Q, 8-K, the registration statement of Form S-4, and the Company's other SEC filings.

We will also discuss on this call non-GAAP financial measures such as adjusted EBITDA.

Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP.

And we direct you to the reconciliation of non-GAAP to GAAP measures included in the Company's press release, which was filed with the SEC and is available on TTM's website at www.ttm.com.

I would now like to turn the call over to Tom Edman, TTM's Chief Executive Officer.

Please go ahead, Tom.

Thank you, Sameer.

Good afternoon and thank you for joining us for our fourth-quarter and fiscal-year-end 2016 conference call.

I will begin with a review of our business strategy, including highlights from our 2016 fiscal year, followed by a discussion of our fourth-quarter results.

Todd Schull, our CFO, will follow with an overview of certain key balance sheet and cash flow metrics, our Q4 2016 financial performance, and Q1 2017 guidance.

We will then open the call to your questions.

First and foremost, I would like to thank our employees for delivering an excellent year in 2016 for TTM Technologies.

We achieved record revenues during fiscal year 2016 and closed the year with a very strong and record fourth-quarter non-GAAP EPS of $0.58, leading to an annual EPS in 2016 of $1.40, our highest level since 2011.

The 2016 results validated many of the elements of strategy we have communicated over the past year.

First, the diversification of our end markets helped to reduce quarterly volatility and stabilize our revenues in what was a challenging year in some of our end markets.

Specifically, growth in our aerospace and defense and automotive end markets helped to offset the difficult conditions in the cellular and networking and communications end markets.

Second, the automotive market continues to be a core growth driver due to increasing electronic content as well as the adoption of advanced technologies.

We see four key megatrends driving automotive content growth: number one, vehicle safety and autonomous driving; number two, increased adoption of hybrid and electric vehicles; number three, advanced infotainment; and number four, increased connectivity.

At the beginning of last year, market forecasters expected the PCB content per vehicle to grow from $55 to $65 by 2020.

However, driven by the automakers' focus on safety and emissions, PCB content per vehicle finished the year at $60 and is now expected to reach $70 by 2020.

In fact, some hybrid and electric vehicles can have well over $150 per vehicle worth of PCBs.

And, while hybrid and electric vehicles make up only 1% of automotive production today, some forecasts expect unit volumes to increase significantly following price parity with traditional combustion engines by 2022.

TTM is uniquely positioned to take advantage of these megatrends and content growth due to our focus on radiofrequency, or RF, and advanced technologies, such as high-density interconnect and rigid-flex.

TTM has a long history of RF technology leadership in the aerospace and defense industry, which is currently being applied to the automotive industry in radar and LIDAR technologies used in safety systems and autonomous driving initiatives.

We are currently shipping radar boards to eight automotive customers and qualifying seven more.

In 2016, automotive radar technologies grew 16%, twice the rate of our overall automotive revenues.

Infotainment applications, such as advanced dashboard screens, require more advanced graphic processors, which in turn drive the need for advanced HDI PCB technology.

TTM is a leading player in the advanced HDI market, first offering the technology to the cellular market years ago.

We are shipping advanced technology boards to 10 automotive customers and are actively qualifying 4 new customers.

We are also moving forward on two new major HDI programs to be used in 2018 autonomous driving platforms.

In regards to TTM's rigid-flex solutions, we are continuing to ship rigid-flex boards to eight automotive customers and are in the final stages of validation with two major automotive camera manufacturers to be used in rear and forward ADAS applications.

Finally, from an operation standpoint, 2016 was an exceptional year, as we fully integrated the acquisition of Viasystems, realized our projected synergies, and delivered strong free cash flow, which we used to repay debt and reduce leverage.

We consolidate the number of facilities from 28 to 25, reorganized our business structure to be more focused on our core end markets, and fully delivered on our synergy target of $55 million in annualized savings.

As a result, we generated $217 million in free cash flow in 2016, the highest ever for the Company, which allowed us to pay down approximately $218 million in debt and decrease our net debt leverage ratio to 1.9 times.

Now I'd like to review our end markets.

When I discuss each of the annual end market results as a percentage of total revenue in 2015, I will use pro forma results that assume that TTM acquired Viasystems on December 30, 2014.

Networking communications remained our largest end market, as sales accounted for 21% of revenue during the quarter.

This compares to sales of 21% in Q3 and 23% in the fourth quarter of 2015.

As expected, sales increased sequentially in Q4 due to growth from select telecom and networking customers.

In Q1, we expect this segment to be 23% of sales and we expect to see modest year-on-year growth.

For full-year 2016, networking communications declined 11% due to weakness primarily in the telecommunications end market.

In 2017, we expect the market to be in line with longer-term forecasts of 1% to 3% growth, driven primarily by the networking market as the telecommunications market prepares for the ramp of 5G technology.

In our second-largest market, automotive, sales represented 19% of total sales during the fourth quarter compared to sales of 19% in Q3 and 18% in the same period one year ago.

As expected, we saw a sequential increase in Q4, driven by stronger demand in China.

These were the highest quarterly automotive revenues in two years.

We expect revenues close to these levels in Q1 and expect automotive to contribute 22% of total sales.

For full-year 2016, automotive increased 8%, driven by increased content growth and unit volumes that fared better than expected.

In 2017, we expect the market to be in line with longer-term forecasts of 5% to 8%, driven primarily by content growth.

The cellular phone end market accounted for 19% of revenue in the fourth quarter compared to sales of 17% in Q3 and 18% in the same period one year ago.

As expected, we saw continued growth in cellular phone demand from some of our top customers in the quarter.

This drove 13% year-over-year growth, an acceleration from the 6% year-over-year growth in Q3.

We expect a seasonal decline in Q1, with sales to be 13% of revenues.

For full-year 2016, cellular declined 17% as an inventory overhang impacted the first-half results.

In 2017, we expect the market to be above longer-term forecasts of 5% to 8%, driven by more normalized inventory levels in the first half of the year and the introduction of new phone models in the second half.

The aerospace and defense end market represented 14% of total fourth-quarter sales compared to 15% of Q3 sales and 13% of sales in Q4 2015.

We expect sales in Q1 from this segment to represent about 15% of our total sales.

For full-year 2016, aerospace and defense increased 9% as TTM benefited from our leading position on multiple new program ramps.

In 2017, we continue to expect the growth to be at the high end of market projections of 2% to 4%.

The medical/industrial/instrumentation end market contributed 13% of our total sales in the fourth quarter compared to 14% in Q3 and 13% one year ago.

We saw broad-based sequential growth across a number of medical, industrial, and instrumentation companies.

We expect sales for this end market to represent approximately 14% in the first quarter.

For full-year 2016, MI&I declined 2%, as growth in the medical and instrumentation areas were offset by weakness in the industrial segment.

In 2017, we continue to expect the growth to be below the 4% to 6% forecasts as the year-on-year growth in the industrial segment, which is expected in the second half of the year, will not completely offset the softer start to the year.

Sales in the computing/storage/peripherals end market represented 12% of total sales in the fourth quarter compared to total sales of 12% in Q3 and 12% in the same period one year ago.

We expect sales in computing to represent approximately 13% of first-quarter sales.

For full-year 2016, computing grew 7% as we saw growth across our high-end laptop, tablet, and semiconductor customers.

In 2017, we expect once again to be above the expected end-market growth of 0 to 2%, particularly as advanced technologies are adopted by more of our computing customers.

Next I'd like to talk about details from the fourth quarter.

TTM delivered strong results in the fourth quarter.

Revenue came in at $706.5 million and was above prior guidance of $650 million to $690 million.

Non-GAAP earnings per share came in at $0.58 per diluted share and was well above first-call consensus by $0.13 and above the top end of our guidance.

All end-markets grew sequentially, with particular strength in the cellular and automotive end markets.

This was the highest quarterly non-GAAP earnings in the history of the Company.

From an overall operation standpoint, Q4 was an excellent quarter.

Much of our upside this quarter came from our cellular-phone-focused manufacturing facilities, which continued to successfully execute a strong new product ramp.

I continue to be pleased by our strong operational execution, which amplified the revenue upside and drove better-than-expected non-GAAP EPS during the quarter.

As evidence of our improving operating efficiency, our $0.58 EPS in the quarter was significantly better than the $0.31 EPS in Q4 last year, on revenue that was just 5% higher.

During the quarter, our advanced technology business, which includes HDI, rigid-flex, and substrate, accounted for approximately 38% of our Company's revenue.

This compares to approximately 36% in the year-ago quarter and 35% in Q3.

The year-over-year and sequential growth was driven by the cellular end market.

We are continuing to pursue opportunities and increased design activities that will leverage our advanced technology capabilities in new markets.

We are seeing these efforts yield results, most notably in the automotive and aerospace and defense end markets in terms of both customer qualifications and revenue diversification.

Capacity utilization in Asia-Pacific was 88% in Q4 compared to 80% in Q3, driven by the ramp of our cellular-phone-focused facilities.

Our combined overall capacity utilization in North America was 51% in Q4 compared to 57% in Q3.

The decline in the North American utilization rate was largely due to softness in the networking market and product mix.

Our top 5 customers contributed 38% of total sales in the fourth quarter of 2016 compared to 35% in the third quarter.

Our top five OEM customers during the quarter, in alphabetical order, were: Apple, Autoliv, Bosch, Cisco, and Huawei.

Our largest customer accounted for 20% of sales in the fourth quarter compared with 17% in Q3.

For 2016, our top customer represented 15% of our sales.

At the end of Q4, our 90-day backlog, which is subject to cancellations, was $405.3 million compared to $365.8 million at the end of the fourth quarter last year and $428.4 million at the end of Q3.

Our book to bill ratio for PCBs was 0.98 for 3 months ending January 2.

In summary, we delivered strong fourth-quarter financial results, which capped an exceptional year for the Company.

We demonstrated the benefits of our diversified end-market mix, growth in the automotive and aerospace end markets, as well as our operational execution.

Our superior cash flow in the year allowed us to make debt repayments in line with our stated strategy to delever our balance sheet and to refinance our debt to more favorable terms.

We continue to be optimistic about the future of TTM.

Now Todd will review our financial performance for the fourth quarter.

Thanks, Tom.

Good afternoon, everyone.

Before sharing my comments, I, too, want to express my appreciation to the employees of TTM for their dedication and efforts in delivering great results for 2016.

There are a lot of elements that contribute to a successful company, but fundamentally, it all starts with great people.

We had a terrific quarter in the fourth quarter.

Let me summarize a few of those financial highlights.

Revenue in the fourth quarter was $706.5 million, an all-time high.

And for the full year, revenue was over $2.5 billion.

Non-GAAP EPS was $0.58 in the fourth quarter.

This was above the midpoint of guidance by $0.13 and a $0.27 improvement from the fourth quarter one year ago.

Our results did include $0.07 of favorable unrealized foreign exchange gains, which can't always be counted on.

But even ignoring that, our performance was above the high end of guidance.

The year-over-year improvement reflects the benefits of our diversification and synergy initiatives, as we were able to offset the negative impacts of lower revenue in our networking and communications end market with growth in the automotive, aerospace and defense, and cellular end markets.

We achieved a non-GAAP operating margin of 11.5%, an improvement from the 8% operating margin one year ago and the highest level for any quarter since 2011.

For the full year, we achieved an operating margin of 8.8%, an improvement from 7% in 2015.

We generated $128.5 million of adjusted EBITDA versus $95.8 million a year ago.

This, too, is a record for TTM.

For the full year, we generated adjusted EBITDA of $395 million.

We repaid approximately $218 million of debt during 2016, including an additional $40 million in December.

As a result, we were able to beat our target of reducing our net debt to EBITDA ratio below 2.0 sooner than the 2 to 4 years we promised upon entering the Viasystems acquisition.

In fact, we did it in 19 months.

So on to some of the details.

For the fourth quarter, as I said, net sales were $706.5 million.

This compares to net sales of $668.9 million in the fourth quarter of 2015 and compared to the third-quarter net sales of $641.7 million.

The year-over-year increase in revenue was due to growth in virtually all of our end markets, partially offset by a decline in the networking and communications end market.

Sequentially, all end markets grew.

GAAP operating income for the fourth quarter of 2016 was $69.6 million compared to $36.5 million one year ago and $50.2 million in the third quarter of 2016.

On a GAAP basis, we recorded a net loss in the fourth quarter of $2 million or $0.02 per share, which included a charge of $47.8 million or about $0.36 of EPS for debt extinguishment costs.

This compares to net income of $9.5 million or $0.09 per diluted share in the fourth quarter of last year and net income of $25.6 million or $0.23 per diluted share in the third quarter of 2016.

The remainder of my comments will focus on our non-GAAP financial performance.

Our non-GAAP performance excludes debt extinguishment costs, restructuring expenses, acquisition-related costs, certain non-cash expense items, and other unusual or infrequent items, as well as the associated tax impact of these items.

Additionally, we exclude nonoperational changes in our tax expense, such as the impact of retroactive changes in the tax law and non-cash discrete items.

We present non-GAAP financial information to enable you, the investor, to see the Company through the eyes of management and to provide better insight into the Company's ongoing financial performance.

Gross margin for the fourth quarter was 18.9% compared to 16.3% in the fourth quarter of 2015 and 17.1% in the third quarter.

The year-over-year increase in gross margin was due to increased volume at our cellular and automotive-focused facilities, savings from our synergy initiatives, and improved execution at certain acquired plants.

The sequential increase was due primarily to operational execution and higher volumes in our cellular- and automotive-end-market-focused manufacturing facilities.

Selling and marketing expense was $16.5 million in the fourth quarter or 2.3% of net sales compared to $17.7 million or 2.6% of net sales in the same quarter a year ago and $15.4 million or 2.4% of net sales in the third quarter.

The year-over-year decrease in the amount of sales and marketing expense was due to our synergy initiatives.

Fourth-quarter G&A expense was $35.8 million or 5.1% of net sales compared to $38.1 million or 5.7% of net sales in the same quarter a year ago and $33.3 million or 5.2% of net sales in the previous quarter.

The year-over-year decrease in G&A as a percentage of sales was again due to our synergy initiatives.

Our operating margin was 11.5%.

This compares to 8.0% in the same quarter last year and 9.5% in the third quarter of 2016.

The significant improvement year over year demonstrates the benefits of diversifying our revenue base and our focus on operational execution and cost management.

Interest expense was $12.6 million in the fourth quarter, a decrease of $2.7 million from the same quarter last year.

We recorded $8.8 million of foreign exchange gain and other income net in the fourth quarter compared to a net gain of $3.7 million in the fourth quarter last year.

The gain in the fourth quarter of 2016 was due primarily to a 4.1% depreciation in the Chinese RMB versus the US dollar during the quarter.

Our effective tax rate was 22% in the fourth quarter compared to 25% the same quarter a year ago.

And the improvement is due to a more favorable geographic mix of profit.

Fourth-quarter net income of $59.8 million or $0.58 per diluted share -- this compares to fourth-quarter net income in 2015 of $31.5 million or $0.31 per diluted share and third-quarter net income of $40.1 million or $0.39 per diluted share.

Adjusted EBITDA for the fourth quarter was $128.5 million or 18.2% of net sales compared with fourth-quarter 2015 adjusted EBITDA of $95.8 million or 14.3% of net sales.

In the third quarter, adjusted EBITDA was $102.2 million or 15.9% of net sales.

Moving on to our segment performance, the PCB segment had net sales of $651.2 million in the fourth quarter, up from $607.9 million in the fourth quarter of 2015 and up from $595.5 million in the third quarter.

Gross margin for this segment was 19.8% in the fourth quarter compared to 17.1% in the same quarter a year ago and 17.7% in the third quarter.

The year-over-year improvement in sales and gross margins were noted in my earlier comments.

The PCB segment's fourth-quarter operating income was $97.1 million compared to $70.3 million in the same quarter last year and $76.4 million in the third quarter.

The electromechanical solutions segment had net sales of $55.3 million in the fourth quarter, down from $60.9 million in the fourth quarter a year ago, but up from $46.2 million in the third quarter.

The year-over-year decrease was due to a decline in the networking and communications and medical and industrial and instrumentation end markets, partially offset by the automotive end market.

The sequential increase in revenue reflects a rebound in the automotive end market.

Gross margin for this segment was 10.3% in the fourth quarter compared to 8.2% in the same quarter a year ago and 11.1% in the third quarter.

The gross margin increased year over year due to the closure of our Juarez facility as well as increased volumes in our automotive end market.

The electromechanical solutions segment's fourth-quarter operating income was $3.6 million compared to $2.9 million in the same quarter last year and $2.4 million in the third quarter.

Corporate SG&A expense not directly associated with either of these segments was $18.5 million in the fourth quarter of 2016, $19.9 million in the fourth quarter of 2015, and $16.7 million in the third quarter of this year.

The year-over-year decrease is due to the previously mentioned synergy initiatives.

Adjusted cash flow from operations was $98.5 million in the fourth quarter, and for the full-year 2016, adjusted cash flow from operations was $302.2 million.

Cash and cash equivalents at the end of the fourth quarter totaled $256.3 million.

Depreciation in the fourth quarter was $38.5 million.

Our capital spending for 2016 was $85 million, below the $110 million to $120 million we expected at the beginning of the year and below our target of 4% to 5% of revenues, as certain expenditures rolled over into 2017.

For this reason, as well as significant planned investments in technology, we expect CapEx to be approximately $130 million to $140 million in 2017.

Now turning to our guidance for the first quarter.

We expect revenue for the first quarter of 2017 to be in the range of $595 million to $635 million.

As a reference point, our first-quarter revenue last year was $583.3 million.

On a year-over-year basis, we are experiencing growth in all of our end markets, except the medical, industrial, and instrumentation end market.

We expect non-GAAP earnings to be in the range of $0.25 to $0.31 per diluted share.

This compares to an EPS of $0.14 per diluted share reported in the first quarter of 2016.

The EPS forecast is based on a diluted share count of approximately 103 million shares.

Our share capital guidance includes dilution from dilutive securities such as stock options and RSUs, but does not include dilution associated with our convertible bond, which is a function of our future stock price.

A reasonable assumption for your models is that for every dollar increase in our average share price during a given quarter above $14.26, our shares outstanding would increase by approximately 1.5 million shares.

We expect that SG&A expense will be about 7.4% of revenue in the first quarter.

This forecast reflects the reclassification of certain costs from SG&A to COGS as we work to harmonize our reporting processes post the Viasystems acquisition.

This will have no impact on operating income or margin.

The impact is simply -- of the reclassification is simply to reduce both gross margin and the SG&A as a percent of revenue by approximately 80 bps.

We expect interest expense to total about $11 million, and we estimate our effective tax rate to be between 19% and 23%.

To further assist you in developing your financial models, we offer the following additional information.

We expect to record during the first quarter amortization of intangibles of about $5.7 million, stock-based compensation expense of about $3.3 million, non-cash interest expense of approximately $2.6 million, and we estimate depreciation expense will be approximately $37 million.

Finally, I'd like to announce that we will be participating in the JPMorgan Global High Yield and Leveraged Debt conference in Miami, Florida, on February 27.

That concludes our prepared remarks, and now we would like to open the line for questions.

Lisa?

(Operator Instructions) Matt Sheerin, Stifel.

Just a couple questions from me.

Your outlook, it seems fairly bullish, except for that one market you talked about, the medical market.

For the year, it looks like you are growing in line to above the long-term trends.

Is that just visibility that you are getting from customers in general that gives you that fairly optimistic outlook?

Yes.

If you march through the end markets that we did, and I will just do that really quickly.

Aerospace and defense -- again, 2% to 4% growth rate projected long term.

We have a strong program backlog; we're at about $186 million there.

That gives us confidence that -- and it is a longer-term market, so it gives us some confidence in projecting that kind of a growth rate.

Automotive -- we have been, as you know, with both electronics content and unit volume growth, we have been growing above the 5% to 8% range that's projected for the long term.

As we look at this year and as we project perhaps a slowdown in unit volume growth, we are still expecting to see strong electronics content growth.

And that's, again, why we feel that we are in the 5% to 8% growth rate as we look out for the year.

Cellular phone business, as you know: always challenging to forecast the back half of the year.

The front half of the year, we are certainly feeling comfortable that as we look year on year that we are not going to see the same level or magnitude of inventory correction that we saw last year.

And then computing, we are seeing some promising signs of more use of our advanced HDI technology there.

That certainly helped us in this last year, and we -- growing above the 0 to 2% range therefore would not be a huge challenge.

So yes, I think if you put all that together, while the visibility certainly on computing and cellular phone, which are tied to consumer markets, is less than the other areas, we are still feeling pretty comfortable, at least in terms of the first-half projections.

Okay.

And the reclassification of the COGS and SG&A -- in an apples-to-apples basis, it looks like you are still growing gross margin year over year.

Obviously, you've got some higher revenue at the midpoint of your guidance, so leverage there.

But also I know some additional synergies that you captured through the year since the integration of Viasystems.

But could you just talk about maybe operating margins is the right metric to be looking at in terms of what you are thinking on the volumes that you are looking to grow this year?

I know you've talked about a 10% operating margin target in the $700-million-plus range.

Could you just walk us through assumptions on operating margin, what you're thinking through the year here?

Sure, Matt.

We've had that 10% target for a while and I think now we are starting to realize the reality of that objective.

Obviously, we have some seasonality in our business.

We've done a great job of diversification, which has helped us manage that a little bit better.

But we are still going to see seasonality, as you can tell from our Q4 performance and our Q1 forecast.

But the key for us has always been trying to focus on how do we lift our operating results each quarter with better utilization of our advanced technology facilities.

And that is particularly challenging in the first half of the year.

We will still see, though, probably our lowest performance of the year in the first half of the year with a ramp as we go into our stronger -- seasonally stronger Q3 and Q4.

So the 10% average, I still think, is a very doable goal.

And I think we are fast approaching that.

If you go back and reverse engineer the numbers from the guidance that we've offered, you're going to get an operating margin in Q1, I think, somewhere between 7.5% and 8% or something like that.

And that's obviously substantially better than last year, where I think we were 5.7%.

So it's quite a step up.

But as we talked about earlier, as Tom mentioned earlier, the Q1 last year had some significant challenges that were unique to that quarter that we don't see repeating itself this year.

And you add to that the fact that we do have some incremental synergies year over year, okay.

So that's going to help us a bit, to the tune of about $6 million, I think.

And you can see -- that's how we are building our improvement of almost doubling EPS on a 5% uptick in revenue or so.

So that's really what's driving it.

A lot of it is kind of what I'll call long term.

There are funded little changes that we made to the business over the last 12 to 18 months in terms of our synergy initiatives and some of our execution focus and so forth.

Those are things that are long-lasting and we will be able to maintain.

Obviously, we have to adapt to market fluctuations and what happens in revenue.

Tom's given you our best insight on that in his prior question, and that's always a variable that we can't always control.

But we are able to manage our business well and react to the revenue pictures that we see.

So we are quite optimistic for the year, and I think our guidance for the first quarter shows a pretty strong year-over-year improvement.

To be honest with you, I think that challenge gets harder as the year goes along, but still we expect to grow year over year.

That's very helpful.

And just a couple more quick ones, if I can.

Could you talk about any impact on your costs with copper prices going up, copper foil and copper-clad laminate prices.

And remind us what percentage of your costs are copper-related?

And then just related to your handset business, I know that there's some new technologies that some of your competitors have been talking about in terms of substrate, like PCBs for next-generation smartphones.

Could you talk about that technology and whether you are involved there and what kind of investments you are making there?

Sure.

I'll cover the second question, and turn it over to Todd to cover the first.

In terms of technology trends in cellular phone, as you know, the general trend there is towards increasing miniaturization.

That means driving narrower lines and spacing.

We were in the initial development of advanced HDI technology in order to meet those requirements.

Successfully came through that, commercialized the capability.

Every year we see technology -- technologies move.

And we invest in those technologies as they move.

As you know, we don't use a term like substrate-like PCBs because, let's face it, we're looking at lines and spacing that continues to narrow.

And we will meet that technology challenge.

And as Todd already covered the CapEx plans for the year, that includes the ongoing investment in technology development that is required in our market.

So that encompasses our technology development plans, and I can assure you, as you know, that the prototyping stage for the cellular phone business starts about a year ahead of actual ramp.

So we are well into the prototyping stage at this point.

So that should answer your question as to whether we are engaged in technology development.

In regards to your first question, Matt, in copper, copper is an important element in our materials.

So it's something we watch pretty closely.

But it's not an overwhelming percentage of our cost structure.

Our biggest costs tend to be laminate, and copper is an important element in the production of laminate.

But it's probably -- when you factor in percentages-of-a-percentage situation, where laminate makes up 30% to 50% of our material costs and copper makes up 20% to 30% of laminate cost, you quickly get down to, if you do the math there, copper is -- indirectly and directly makes up somewhere between 6% and 8% of our material cost.

So if that was to increase by 20%, say, you are looking at maybe a percentage-and-a-half kind of impact on our margins.

Obviously, I think by virtue of our size, we are able to try to mitigate that as best as we can.

We think we have some advantages in that vis-a-vis some of our competition.

And also, the other part in this is not just a pricing issue, it's a supply issue.

And our relationship with key suppliers is important in ensuring that we have the supply of material for our customers, where other companies perhaps who have not quite the length and breadth of relationships that we have may have greater challenges in being able to do that.

So yes, it's a little tougher for us.

It's not overwhelming from a cost standpoint.

We're certainly working on all of our -- pulling -- looking at all the leverage we can pull to extract cost-reduction benefits out of our operations to mitigate it.

But that's reflected in our guidance and in what we're looking at going forward.

That's very helpful.

Thanks so much for answering the questions, and best of luck this year.

Paul Chung, JPMorgan.

This is Paul Chung on for Coster.

Thanks for taking my questions.

So thanks for the details on first-half margins.

But in terms of second half, in particular 4Q, was the jump in operating margins more a function of scale or more structural from the synergy and cost improvements you mentioned?

And could you see similar margins next year if revenues kind of stay constant?

Certainly we would expect to have a very strong fourth quarter.

If you look at our history, if you just plot of our operating margin over the last several years, you'll see the seasonal pattern.

And what we have been doing over the last couple years is raising the overall slope of that each year.

Do I expect to do better than 11.5% in Q4 of 2017?

That's a little far off.

That's a pretty strong number.

It's hard to pinpoint at this point because we're not close enough to it in terms of actually seeing what our demand picture will be that quarter.

But it will probably be the best quarter of our year.

It traditionally is, as we launch new products in our consumer customer base.

So I would expect to see a similar pattern.

Now, if I'm up 2% in Q1 year over year, am I going to be up 2% in Q4 year over year?

Probably not.

I don't have the same synergy tailwind.

That's pretty well played out in fourth quarter in terms of year-over-year comparisons.

So I think you're seeing more of an ongoing number there in Q3 and Q4 in 2016 that you might see something more similar in 2017 to be more of a volume story or other things that might come into play that we can't predict at this point.

I think you will see the biggest improvements year over year is going to be in the first half of the year when we still have some synergy tailwinds on a comparative basis.

And we also have a situation where in 2016, the first half of the year was pretty challenging from a revenue standpoint because of the inventory overhang that Tom was talking about earlier.

Right.

Okay, thanks for that.

On aerospace and defense, has your outlook on revenues and margins changed based off the new administration's signaled intentions.

[Is the] firm competitively positioned against peers as well?

So a few important points there.

Number one, I do think that the backdrop is positive, and it has been positive.

As the defense budget has increased over the last couple of years, that has certainly benefited our customers and has allowed them to bring critical programs forward for us.

To the extent that the Trump administration has brought in -- has been looking at a supplemental budget for defense, that again is encouraging and something that we are keeping our eyes on.

And of course, we will see what happens from there in terms of the go-forward spending in defense.

I do think the overall climate is pretty favorable.

In terms of our positioning, we remain the largest North American printed circuit board manufacturer and the largest in the aerospace and defense market.

And so as our customers bring forward programs and as we service them, our full intent is to continue to improve our ability to provide, to meet their requirements.

And so that's the focus there.

We continue to see positive or hear positive comments from our customers in regards to critical programs that we have been working with them on, and we will see how that plays out.

But certainly the overall environment, I think, is positive there.

Great.

And then lastly, can you give us a sense for how the firm is prepared to deal with tax reform proposals in the US?

Looks like with utilization rates in North America at 51%, the firm may have excess capacity to flex with.

How would you say the firm is positioned relative to your peers in respect to the issue as well?

I'll just chime in a little bit.

I think Tom touched on this earlier.

We have the largest footprint and the most amount of capacity in the US of any printed circuit board company.

So if there is demand that's going to come back to the US that requires capacity, we are probably best positioned to do with that, particularly in the near term, because it takes a while to put facilities in place and so forth.

When you look at our utilization, be careful with that.

Because in North America, our business model is a little different than it is in Asia.

We are primarily a high-mix, low-volume business model in North America.

And so your utilization -- really your available capacity that could be used for production is not what it might appear when you're looking at the numbers.

It's not 50%; it's going to be a much smaller portion of that.

But we have bricks and mortar.

We have shift expansion capability.

There's things we can do if that was to happen.

But that's a long ways off.

I think there's a lot of variables that play into that.

The electronics supply chain is not very large in North America, quite frankly.

And so for that to change, for us to change one small piece of that equation, it's going to require a lot of other changes in the supply chain.

And I would encourage you to watch that for signs of what's going to happen.

In terms of the tax structure and proposals there, there's a lot of interesting ideas floating out.

You see the headline numbers of 20% tax rate or 15% tax rate.

But the devil is in the details, and what we don't know is a lot of, okay, if that goes down, what's the offset?

Will we lose interest expense deductibility?

What's going to happen with CapEx and depreciation expense?

There's a lot of questions yet to be answered on that.

So I'm not sure what that impact will be in the near term until we see how some of these questions get answered.

In terms of the import-export issue, in terms of, I don't know, a tax on imports, by and large what we sell in the US we build in the US.

And what we sell offshore we tend to deliver offshore.

So we are not sure that that has a direct impact on us.

Now obviously, we'll have to watch what happens to our customers farther up the supply chain and understand what happens there ultimately.

But in terms of immediate direct impacts, I don't see too much from that particular discussion topic that's out there right now.

Great.

Good job, guys.

Thanks.

Sean Hannan, Needham & Company.

Congratulations on the strong quarter and guide here.

I have a question; my first question is around cellular.

Wanted to see if you guys could help us to understand a little bit more the components of being able to grow at or above that market rate.

Now, you have some Asian-based customers you've built relationships with.

They have early calendar year launches.

Not sure how that's progressing incrementally versus the prior year.

If you want content or programs or if you are just riding their presence within the market.

And then the large customer you have in the space, if your assumptions at present are to follow typical trends or is there any specific enthusiasm with a new platform that could be later in the year.

I know some in the supply chain have some pretty healthy expectations through their communications with that OEM.

So all in, I'm just trying to get an understanding of how these factors build up for you as you take a look at that market.

So overall, and this is true of every year, you can divide the year into two halves.

The first half of the year, what we generally see is the Christmas -- pre-Christmas introductions have been completed.

There's a general two-quarter wind down, Q1, Q2, and the preparation for the ramp that will occur in Q3, Q4.

That's for our -- certainly the largest customer.

From a Greater China or Greater China and Korea standpoint, what we do in the first half is actually more similar to what we do in the second half.

Because generally there is a first-half introduction and a second-half introduction.

So two model introductions per year.

And so we will be actually ramping for some product in Q1 and Q2 and ramping for additional product in Q3-Q4.

That business represents about a quarter of what we do in the cellular phone end market, and that's remained relatively constant for the last year.

We continue to work hard on expanding our presence in Greater China, but that's a function of how quickly our customer base moves to some of the newer technology requirements.

As we look at additional -- the Q3-Q4 ramp, as I mentioned earlier, we are in prototyping stage with our largest customer.

That starts a year ahead.

I've read what you've read in terms of certainly the excitement that's out there about the new product.

What we are very focused on is meeting their technology requirements, as I covered earlier, and ensuring that as lines and spacing shrink that we are able to keep pace with that and successfully prototype and ramp.

The good news there is that we do have a substrate plant capability, as you know, that is for us a means of testing technologies and has served as a great platform for us as we test there and then those technologies move into larger-sized requirements with PCBs.

So if that gives you a picture, I think what we are positive about in the first half, as Todd mentioned, is the fact that inventory levels do look to be lower and our year-on-year compare compared to last year, therefore, certainly looks to be favorable.

And then Q3-Q4 piece of this, we are going to continue to work as we prototype.

And we'll certainly update you as we go forward over the next quarter on how that's going.

So am I interpreting correctly?

It sounds like we have the viewpoints of the market and your opportunity to grow that segment of your business as it stands today.

But that there is perhaps some cautious optimism that it could be even a little bit better?

Well, let's put it this way.

Model change years.

And the way to think about it is model change years when our customer base goes through a relatively significant product change, product transition.

Historically, and we don't have a lot of history to work with here, right, but historically, that would lead to better sellthrough.

And in our facility, that leads to improved utilization.

Then it becomes a function of our ability to yield, and that's what we are really heads-down -- in this next two quarters, we are heads-down focusing on that yield, the ability to ramp successfully, meet those requirements.

So that product -- significant product change is generally a good thing.

That's what we've seen historically in the full five years that we've had in this business with a smartphone.

Fair enough; very well put.

On the automotive side, now, you folks have a great position there, right?

Great long-term market; there are clearly long design cycles.

So you feel pretty comfortable in terms of your competitive positioning.

But ultimately, I figure you should see some more competition over time, and it's an attractive market.

Can you give us some updated viewpoints around how or when that view is maybe reasonable for the competitive dynamics to maybe start stepping up or becoming a little bit more difficult?

What type of runway do you think we have and what are you looking for?

Yes.

So for TTM in automotive, what we are really focused on is the breadth of offerings.

And if you look at the automotive industry, there is always a desire in the customer base to consolidate the suppliers.

And that's a trend that has been out there for years.

In the printed circuit board industry, we are sort of the first to come to the table with that full breadth of capability that they are looking for.

And that, for us, is what we are focused on.

And that's why it's so critical -- and of course, we try to give you some visibility into what we are working on with the new technologies so that you gain an understanding of not only our position in conventional printed circuit boards, which really is the basis for our strength in automotive.

But also the new technology capability that we are bringing in, with the radar, the RF capability, the HDI capability, and rigid-flex.

And it's that combination of capability across the board that is critical for us as we look at a competitive market.

The market today is already competitive.

There's not a question.

We have a listing of competitors in this business.

If you -- mainly out of Taiwan, but also out of Japan.

And that competitive universe is something that strategically we are dealing with by focusing on the full spread of technology capabilities, and working very closely with our customers and their engineers as we meet their requirements.

So to give you the answer, Sean, it's competitive now.

I expect it will be competitive tomorrow and the next year.

We have a very strong strategy that we embarked on post-acquisition, and I have confidence that that's going to -- that that strategy will continue to pay off for us in automotive.

Sure, understood.

Thanks very much for taking my questions here.

Ethan Steinberg, SG Capital.

Thanks for taking the question.

Congrats on the great results.

I just want to clarify something.

The sequential guidance of down about 13% at the midpoint.

That's about what we were down last year when we had all that pressure from cellular that's not going to be down nearly as much this year.

And that also the backlog this year is only done about 5% coming out of Q4.

So I want to understand a little bit: is that just conservatism?

Or is there something else that's pulling it down that much sequentially?

There's a little bit of noise in the sequential comparison.

So in the fourth quarter, it was a 14-week quarter for us.

So you had one extra week of production and potential revenue shipments.

Now, we estimate that that was worth about $29 million in revenue.

So if you were to try to normalize for that, we figure we are down sequentially -- on the surface, it looks like 13%, but if you normalize for this 14-week factor, you are probably down right around 9% sequentially.

Okay?

So that's better than it was last year.

And you still see a drop in cellular, but the cellular drop is not as dramatic as last year.

Right?

Our expectations all along was that we've had two very interesting years in 2014 and 2015 -- or 2015 and 2016.

2015 was a very strong year with a not too big of a drop-off.

And then 2016, as we've talked about, and Q1 was a very dramatic drop-off intercellular business because of the inventory overhang.

This year is kind of somewhere in between those two years.

At least, that's what we are expecting going into the quarter.

And so to have that kind of a drop and still, based on our diversification, not having too significant a drop overall and growing in most of our markets year over year, I think is a pretty good sign.

So yes, the backlog looks good and that's an encouraging sign.

And some of that is a factor of timing of bookings.

But I think the guidance we've given is out there at that $595 million to $635 million kind of range for Q1.

Are you assuming or expecting anything different as far as what the backlog coverage is to the revenues?

Because, yes, as you said, it's down a lot less than even that 9% sequential revenue.

So I'm just trying to figure out is that conservatism or is there something else about what has coming out of backlog and timing in the quarter?

I think our bookings for the quarter -- we're maybe going into the quarter a little better in our beginning bookings than historically.

As a rough rule of thumb, we used to be kind of like 50% to 55% booked when we started a quarter in January 1. But this year, we are probably a little bit higher than that.

And the other factor there is because Chinese New Year was early this year, we were starting to see -- there's always a buildup ahead of Chinese New Year in orders.

Customers sort of -- in the month prior to place their orders.

So I think we saw some of that going on towards the end of the year.

And that certainly impacted that backlog figure.

How is the cadence of orders been year to date?

We are really commenting on Q4 results, not going into Q1.

All right.

Thanks, guys.

Great job.

It appears there are no further questions at this time.

I will now turn the conference back to management for any additional or closing remarks.

Okay, great.

Thank you very much, and I'd like to thank everybody for joining the call.

Just wanted to close by summarizing some of the points that we made earlier.

First, TTM delivered strong results in the fourth quarter of 2016, beating the high end of our non-GAAP EPS forecast as well as consensus.

That's largely due to solid growth and strong operational execution.

The results for the quarter capped off what we view as really an outstanding year as we reached record revenues and free cash flow after successfully integrating Viasystems.

During the quarter, we used our cash flow to repay additional debt, bringing total repayments for the year to approximately $218 million and reaching our leverage target of 2.0.

So finally, I'd really like to thank, first and foremost, our employees for their contributions during the last year.

And then to thank our customers and our investors for your continued support.

Thank you and goodbye.

Ladies and gentlemen, that does conclude today's conference call.

Thank you for your participation.