TTM Technologies Inc (TTMI) 2019 Q3 法說會逐字稿

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

Welcome to the TTM Technologies Third Quarter 2019 Financial Results Conference Call.

Sameer Desai, TTM's Senior Director of Corporate Development and Investor Relations, will now review TTM's disclosure statement.

Thank you, Brad.

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 or uncertainties including the factors explained in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission.

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

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

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

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

Such measures should not be considered as a substitute for 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 is 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 third quarter 2019 conference call.

I'll begin with a review of our business strategy, including highlights from the quarter followed by a discussion of our third quarter results.

Todd Schull, our CFO will follow with an overview of our Q3 2019 financial performance and our Q4 2019 guidance.

We will then open the call for your questions.

In the third quarter of 2019, TTM generated revenues and EPS within the guided range.

Better than expected foreign exchange offset weaker-than-expected operating results.

Our operational efficiencies were hampered by labor challenges in our Aerospace and Defense and Cellular markets, as we work to manage increased demand from our customers.

Specifically, our North American facilities operating performance fell short of our forecast due to the tight North American labor market compounded by the summer vacation season which negatively impacted our output.

In cellular we faced yield challenges early in the quarter as we added and trained employees to ramp new cellular products.

While yield stabilized in September, the quarterly margin performance did not meet our expectations.

We are not satisfied with our third quarter overall results.

And we are therefore taking concrete actions to cut additional costs in our commercial facilities as well as addressing operational bottlenecks in our Aerospace and Defense business to adjust to higher demand reality.

Despite the challenges in the quarter, we generated solid cash flow from operations of $58.7 million in the quarter.

Looking into Q4, we faced softer sequential demand in the automotive and cellular end markets.

We will remain focused on operational excellence and financial discipline as well as our strategic goals of diversification and differentiation.

In particular, we will continue on our path towards differentiation in the aerospace and defense, and automotive end markets.

Overall market trends continue to support our efforts in the aerospace and defense end market.

Two significant areas for TTM, missiles and munitions and radar systems, are expected to grow the fastest.

With the continued adoption of AESA radar technology by all of the services and the conversion of next-generation gallium nitride for silicon germanium-based platforms.

The AESA radar market is expected to grow at an 18% CAGAR.

AESA stands for Active Electronically Scanned Array and represents the next generation technology for defense radars.

TTM is a leader in the design and manufacturing of RF subsystems and components for AESA radar systems and stands to benefit as defense programs upgrade from traditional rotating mechanical dish radar to fixed, solid-state AESA radar.

This technology allows our customers greater performance in range, accuracy and sensitivity, which in turn increases detection and defense capabilities.

An important example of this technology is the recent LTAMDS radar system award to Raytheon.

LTAMDS stands for Lower Tier Air and Missile Defense Sensor and is in LTAMDS and gallium nitride upgrade to the Patriot Missile Defense system.

Raytheon is using critical architecture designed by TTM in the LTADMS platform and TTM, an important contributor in the pilot production systems to be built over the next few years.

In addition, the overall environment in the aerospace end market remains strong with commercial aircraft at record backlogs and air travel continuing to forecast significant growth for the rapidly growing middle class.

While increasing defense budgets and procurement provide a nice tailwind to overall spending over the next few years.

Near-term strength is being driven by our strong program alignment with key defense program, programs which number more than 80.

Our A&D market book-to-bill ratio at the end of the third quarter was 1.48%, driving our A&D program backlog to a new record level $572 million.

A significant milestone for our aerospace and defense business.

And far exceeding the $504 million in Q2 of 2019 and $448 million in Q3 of 2018.

Our Aerospace and Defense, revenues grew 7% year-over-year in Q3, achieving a new record level.

We capitalized on positive market trends through our teams dual focus on supporting both customer build to print and designed specification requirements across a broad base of major defense and commercial programs.

We also announced during the quarter that Kathy Gridley would be joining the TTM executive team on September 3 as incoming Senior Vice President and President of the A&D business units and will formally assume the A&D leadership role at the beginning of next year.

Kathy joins TTM most recently from Northrop Grumman Corporation, where she was the Vice President and General Manager of their advanced Defense Services division, leading more than 5,000 employees worldwide.

Phil Titterton, currently TTM's Executive Vice President and President of the A&D business unit will transition to Executive Vice President and Chief Operating Officer for the Corporation.

Brian Barber, currently Executive Vice President and COO, will transition to an Advisory role, reporting to me with plans to retire next year.

I would like to thank Brian for his significant contributions to TTM over the years.

Moving on to our automotive business.

We continue to develop positions in new programs related to the megatrends of vehicle safety and autonomous driving, hybrid and electrical vehicles, advanced infotainment and increased connectivity requirements.

Our goal will be to support our existing customers as they adapt to this new world while also building business with a set of new innovative technology focused customers.

Because of the above macro trends, there continues to be a tremendous amount of innovation in the automotive electronics industry.

Our design activity remains robust, which bodes well for future revenues.

In the automotive market, customer engagement begins well before our product ramps.

In the quarter, we won 89 new automotive designs with a lifetime program value of $184 million, of which 15 were ADAS-related.

Designs that we are winning this year will contribute to revenues in future years.

Now I'd like to review our end markets.

For TTM the aerospace and defense end-market represented 24% of total third-quarter sales compared to 21% of Q3, 2018 sales and 28% of sales in Q2, 2019.

We expect sales in Q4 from this end market to represent about 27% of our total sales.

The cellular phone end market accounted for 19% of revenue in the third quarter compared to 17% in Q2 of 2018 and 6% in Q2 of 2019.

We experienced a better-than-expected ramp in Q3 as we maximize output in our facility despite yield challenges.

We expect cellular to represent 17% of revenues in Q4 as demand was pulled into Q3.

Automotive sales represented 17% of total sales during the third quarter of 2019, compared to 15% in the year ago quarter and 16% during the second quarter of 2019.

Automotive sales were better than expected in Q3 and grew year-over-year primarily due to strength in our E-M Solutions business.

Our PCB sales were flat on a sequential basis.

We expect automotive to contribute 14% of total sales in Q4 with the majority of the decline caused by a sequential decline in the E-M Solutions segment.

The Medical industrial instrumentation end market contributed 13% of our total sales in the third quarter compared to 14% in the year ago quarter and 15% in the second quarter of 2019.

We saw strength in our Instrumentation customers, there was more than offset by weakness in our industrial customers due to declines in global industrial demand.

For the fourth quarter, we expect this market to be 15% of revenues.

Networking/communications accounted for 13% of revenue during the third quarter of 2019.

This compares to 17% in the third quarter of 2018 and 17% of revenue in the second quarter of 2019.

Many of our Networking and Telecom customers declined year-over-year due to softness in service provider spending as well as impacts from the trade war between the United States and China as we stopped shipments of US made wireless components to Huawei.

In Q4, we expect this segment to be 14% of revenue as these trends continue.

Sales in the Computing storage peripherals end-market represented 12% of total sales in the third quarter compared to 14% in Q3 of 2018 and 15% in the second quarter of 2019.

We saw weakness in high-end notebooks due to an increased allocation of our capacity to cellular products and weakness in data center customers.

We expect revenues in this end market to represent approximately 12% of fourth quarter sales.

Next, I'll cover some details from the third quarter.

During the quarter our Advanced Technology business, which includes HDI, rigid flex, substrate and RF subsystems and components accounted for approximately 41% of our company's revenue.

This compares to approximately 40% in the year ago quarter and 36% in Q2.

The sequential and year-over-year increases were due to growth in our cellular end market.

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

Capacity utilization in Asia Pacific was 71% in Q3 compared to 80% in the year ago quarter and 56% in Q2.

Our overall capacity utilization in North America was 57% in Q3 compared to 60% in the year ago quarter and 60% in Q2.

The year-over-year declines in both North America and Asia-Pacific were due to softness in our noncellular commercial end markets.

Our top 5 customers contributed 38% of total sales in the third quarter of 2019, compared to 36% in the year ago quarter and 30% in the second quarter of 2019.

Our largest customer accounted for 20% of sales in the third quarter versus 20% in the year ago quarter and 10% in Q2.

At the end of Q3, our 90-day backlog, which is subject to cancellations was $529.3 million compared to $514.8 million at the end of the third quarter last year and $503.4 million at the end of Q2.

Our PCB book-to-bill ratio was 1.21 for the 3 months ending September 30.

I'd like to conclude by emphasizing TTM's commitment to operational discipline.

This year has been a challenging year in terms of revenue growth in our commercial end markets and we have experienced some execution challenges in the most recent quarter.

We are not satisfied in our performance this year.

And are committed to improving our profitability and operational execution.

We will continue to review our cost structure and reduce investments in areas where we do not have a differentiated product offering while continuing to invest in areas where we see growth and differentiation.

Our goal is for TTM to emerge from this period of softness and an even stronger position to service our customers, as their demand cycles improve.

We expect to benefit from secular trends such as 5G wireless technologies, increasing automotive content and increasing use of RF electronics in the aerospace and defense industry.

In the longer term, our strategic focus on diversification, differentiation and operational discipline will pay off for TTM, our investors and our customers.

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

Todd?

Thanks, Tom, and good afternoon everyone.

For the third quarter, net sales were $716.8 million compared to net sales of $755.8 million in the third quarter of 2018 and compared to second quarter 2019 net sales of $633 million.

The year-over-year decrease in revenue was due to declines in our networking and communications, computing and medical, industrial and instrumentation end markets partially offset by organic growth in our core aerospace and defense and cellular end markets.

GAAP operating income for the third quarter of 2019 was $36.4 million compared to $54.6 million in the third quarter of $2018 and $16.8 million in the second quarter of 2019.

On a GAAP basis, net income in the third quarter of 2019 was $15.9 million or $0.14 per diluted share.

This compares to net income of $27 million or $0.22 per diluted share in the third quarter of last year and $3.4 million or $0.03 per diluted share in the second quarter of this year.

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

Our non-GAAP performance excludes acquisition related costs, restructuring costs, certain noncash expense items and other unusual or infrequent items.

We present non-GAAP financial information to enable investors to accompany through the eyes of management and to provide a better insight into the company's ongoing financial performance.

Gross margin in the third quarter was 14.8% compared to 17.5% in the third quarter of 2018 and 13.6% in the second quarter of 2019.

The year-over-year decrease in gross margin was primarily due to lower volumes in our noncellular commercial end markets, unfavourable shift in product mix and to a lesser degree production inefficiencies.

Selling and marketing expense was $17.8 million in the third quarter, or 2.5% of net sales versus $18 million or 2.4% of net sales a year ago and $17.5 million or 2, 8% of net sales in the second quarter.

Third quarter G&A expense was $34.2 million or 4.8% of net sales compared to $35.5 million or 4.7% of net sales in the same quarter a year ago and $31.7 million or 5% of net sales in the previous quarter.

Our operating margin in the third quarter was 7.5%.

This compares to 10.5% in the same quarter last year and 5.9% in the second quarter.

Interest expense was $17.1 million in the third quarter, a decrease of $1.1 million from the same quarter last year due to payments we made against our term loan and lower interest rates.

During the quarter we recorded $5.6 million of foreign exchange gains.

Government incentives brought the total gain to $7.9 million or approximately $0.06 of earnings per share.

This compares to a gain of $2.2 million or approximately $0.02 of EPS in Q3 last year and $4.4 million or approximately $0.04 of EPS in the second quarter of 2019.

Our effective tax rate was 13% in the third quarter.

Third quarter net income was $38.9 million or $0.37 per diluted share.

This compares to third quarter 2018 net income of $55.1 million or $0.50 per diluted share, and second quarter 2019 net income of $21.3 million or $0.20 per diluted share.

Adjusted EBITDA for the third quarter was $103.5 million or 14.4% of net sales compared with third quarter 2018 adjusted EBITDA of $122.3 million or 16.2% of net sales.

In the second quarter, adjusted EBITDA was $82.9 million or 13.1% of net sales.

Cash flow from operations was a solid $58.7 million in the third quarter versus $80 million in the same quarter last year.

For the first 9 months of 2019, cash flow from operations was $181.8 million versus $121.4 million in the same period last year.

Cash and cash equivalents increased at the end of the third quarter to $316.6 million from $284.5 million in the second quarter as we accumulate cash for the repayment of our convertible bond, which will mature in December of 2020.

As a reminder, our convertible bond will become short-term debt on our balance sheet at year-end.

Depreciation for the third quarter was $41.7 million.

Net capital spending for the quarter was $25.8 million.

Now I'd like to turn to guidance for the fourth quarter.

We expect total revenue for the fourth quarter of 2019 to be in the range of $640 million to $680 million.

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

The EPS forecast is based on a diluted share count of approximately 107 million shares.

Our share count guidance includes dilutive securities such as options and RSUs but no shares associated with our convertible bond.

We expect that SG&A expense will be about 8% of revenue in the fourth quarter.

We expect interest expense to approximate $16.9 million.

Finally, we estimate our effective tax rate to be between 11% and 15%.

To assist you in developing a financial model, we offer the following additional information.

We expect to record during the fourth quarter amortization of intangibles of about $11.4 million.

Stock-based compensation expense of about $4.7 million.

Non-cash interest expense of approximately $3.5 million and we estimate depreciation expense will be approximately $42 million.

That concludes our prepared remarks.

And now we'd like to open the line for questions.

Brad?

(Operator Instructions) And our first question comes from Matt Sheerin with Stifel.

Just a couple of questions from me.

First one, just regarding the aerospace and defense market, which you've talked about having very strong bookings and backlog and good growth, but you also ran into some labor issues and it look like that came in below your forecast, but your guidance also implies as a percentage, certainly up with some other markets down but still good growth there.

So could you get into the reasons behind whatever headwinds you faced and what you're doing to overcome that?

Sure.

Thank you, Matt.

Yes, when we talk about, I mean, clearly, we're very encouraged by the bookings climate and being at a record program backlog level.

What that requires from TTM is not only ongoing investment in terms of capital equipment, which we've been very regular with, but also the addition of people as we bring in new capital equipment, new capability particularly we're providing now not only RF solution and the PCB solution, we're also doing more assembly work on the A&D side, bringing that package together for our customers.

And as we do that, of course, we add additional employees and bring additional employees the TTM.

I think as well known, it's a tight labor market out there as particularly in the summer months.

And so we were in ramp but not able to ramp as quickly as we were hoping for in the third quarter as we brought in those people.

So we now have brought in people, we're through that summer vacation obviously focused in Q4 on continuing to grow and that will be a regular cadence of growth as we push into next year, given the backdrop, again, given the strong backlog that we're positioned with.

So we're going to continue to ramp.

It's a slow and steady progress, but will continue to build up and grow with that strength that we have in backlog.

Okay.

And those orders we're basically just pushed into the fourth quarter.

And with through the ramp flavour, you're going to fulfil those orders, in other words, you're not losing market any share or anything because of that?

That's correct.

Yes, the programs.

And so what happens here is, there is always program timing and so we're doing a delicate dance here in terms of bringing some programs in, building ahead on particular programs, moving and then and making sure that we're keeping in lockstep with other components as we deliver the programs and we certainly while output fell short of our expectations.

I think we continue to hold our head up and deliver what we need to do to our customers in their key programs.

And that's what's really critical here.

So yes, we're not, we're certainly not losing share.

We're continuing to focus on our customers and delivering complete solutions for them.

Thank you for that.

My next question, just regarding the networking/communications segment, which has been down significantly.

You're not the only supplier to be calling out weakness both in telecom and networking.

But I also know there is Huawei piece there.

So could you help us sort of looking at that down mid-20% year-on-year.

What percentage was due to Huawei.

And then could you just parse out what you're seeing in terms of the networking side and the Telecom 5G side both near term and as you roll into next year?

Sure.

And you're absolutely right.

I think the we're not alone in terms of seeing the situation, seeing the weakness, if you think if you look at and again, we don't like it.

We usually don't comment on specific customers.

But what I can tell you is, overall, if you think about Huawei is being traditionally about a 4% to 5% of revenue type customer.

What we're seeing here is an impact on our wireless component business, which came to us with Anaren.

As you know the Anaren operating margins were approximately twice what traditional TTM operating margins were.

And so, if that impact that we're feeling in terms of bottom line impact.

If you think about the revenue, it's still less than 1%.

So you're looking at that 4% to 5%, dropping to 3% to 4% in that kind of range as a piece of revenue.

To talk more about the general situation in telecom and 5G, I think what we have seen is certainly that first wave of investment coming from China, some investment occurring in Korea, a little bit of investment in Japan for the Tokyo Olympics but these are early games.

And I think certainly what we're interpreting is happening right now is that some of our customers overbuilt, anticipation of that demand moving beyond China.

And right now are certainly are hitting a point where they're going to bleed off that inventory as we head into next year and I think we're going to latter half of next year we should be on to that next phase of the real ramp in 5G, sort of back to where we expected to be with 5G we've always thought it would be ramping this coming year.

I think we'll see that.

I think it will, it looks like it's going to be more towards the second half of the year than the first half.

Our next question comes from William Stein with SunTrust.

I wanted to dig in the automotive end market that was certainly bit unusual result relative to what I expected.

It looks like if I have my numbers right that would be the expectation would be my expectation for the September pretty materially when it comes on back down in the next quarter.

Do I have that right and if this continues to be the EMS business.

I know that's low-margin business for you.

I'm wondering if there is, as you consider the cost structure of the company, if you consider whether this really makes sense as they go forward business for the company to participate in?

Yes.

Thank you, Will.

So yes, as the item of the best way to look at really the automotive fees and how we've looked at it is to sort of pull out the solutions portion.

I think we had certainly strengthened this last quarter and then it's going to drop off next quarter and so that's one of the reasons we wanted to give some visibility on where the PCB sales into that end market.

And the PCB sales were sequentially really flat as we looked at specifically the automotive market.

And they will be down slightly as we look at the forecast for the fourth quarter.

So it definitely like you, I think you're right to focus on the PCB piece of that rather than the E-M solutions piece which moves around quite a bit.

In terms of the business, we continue to what we like about the E-M solutions business is it allows us to give a more complete solution to those customers who wish to see it and also particularly for startup efforts in automotive.

It's very helpful to have that assembled solution for our customers.

So while it is not a significant profitability contributor in and of itself.

Of course, the PCB sales would go into the business are helpful and more profitable and the business does give us an avenue to customers particularly in that automotive world.

That is helpful for us.

So that's where we continue to stand with the E-M solutions business for TTM.

Same thing for of course the business also services networking/communication customers on the same way.

So that's where we stand there, but hopefully that gives you a better feel for the automotive situation.

Okay.

Let me dig into cellular phone, if I can.

I guess, typically, well, Q4, the revenue pattern.

I think historically, doesn't have a very typical pattern.

Right?

I think as we progress through the quarter, the news flow out of Asia, suggesting that the large North American customer demand indications look constructed, so I'm a little bit surprised by the Q4 guidance in this end market.

I think that's your biggest customer.

I would have expected flat performance.

I think you're guiding it down.

And I'm wondering if you could tell me if I'm right in sort of my math and expectations of what's driving the sequential decline, if that's correct?

Yes.

So you're, it's a very good question.

This is actually the second consecutive year where we would be seeing that fourth quarter actually as we forecasting our fourth quarter, declining from the third quarter.

And as we've always said, we really build, in the third quarter we're very focused on maximizing output.

In this third quarter even with some of the yield challenges we had early in the quarter, we were still able to exceed our forecast in terms of our output and so therefore feeding into obviously providing more product to our customer.

As we look at the fourth quarter, as we had last year, I think in the world that we live in today.

I think it's wise for our customer base to be conservative in forecasting and to manage inventories carefully.

So we are looking at more of what I would call what looks to be real demand kind of requirements, and ultimately, we'll see how the sell through, what the sell through looks like when we get revised forecast in December.

So that is normal.

Right?

So what we're seeing is really a second quarter in a row where at the end of the third quarter, we're seeing forecast.

It looks like it's more conservative or down from the third quarter, but then ultimately it's that sell through the December input that we'll be looking to determine how are we really doing in the cycle and that will feed into this end of December sales and then in the Q1 and hopefully into Q2.

So that's really where we stand well.

So hard to say that this is, it's going to go on next year or I do think we're, it's a second year in a row where we have this data point that just points to a slightly more careful forecasting in the fourth quarter.

Our next question comes from Jim Ricchiuti with Needham & Company.

A question on the automotive market.

And I'm wondering if you could talk about the PCB portion as it related to what you were seeing geographically.

Was it fairly broad base the softness that you saw?

Thank you, Jim.

So yes, if you look at Automotive overall and what we saw in the quarter.

And if you think about it, I'll give more sequential and year-on-year, because I think it's more instructive.

We have in Asia; we saw a bit of an improvement in Asia.

In Europe, still pretty much balancing along the bottom and then more weakness in North America than we had seen before.

So quarter-on-quarter more down in North America.

The way I interpret that is that we, the diesel impact on our business continues in Europe, but we've sort of the impact has been felt and we're now dancing along the bottom.

I think in Asia, it's good to start seeing some gradual improvement, particularly in China.

Hard to call that a trend as yet, but it's good, it's a positive indication, I think in the US, we're just seeing this fall as our customers are experiencing some of the US Auto softness now.

And so that's sort of your geographic picture, (inaudible) fourth quarter.

(inaudible)

Yes, sure thing.

Fourth quarter we're expecting sort more of the same, I would say.

Tow, did you, are you seeing any or have you seen any disruption as it related to the recent GM strike?

Well, and that is so always hard for us to tell because we are generally selling into Tier 1 parts suppliers.

Right?

And so, we ship into a hub in inventory and then we experienced pull, that could be part of what we saw in the US this last quarter.

But it's difficult to tell.

Okay.

And not to try to pin you down beyond Q4.

But is there anything that you're seeing in the automotive market that would suggest that there is some change in the environment for you in the early part of 2020?

I would say 2020, I think it's still going to be a challenging year and really a year of ongoing transition, particularly in China and Europe as those markets really push towards EV adoption.

Long term, that's a terrific thing for TTM, content more than doubles on average with an electric vehicle, so that's terrific.

But this transition in terms of unit sales is I think going to be is going to continue to be challenging.

US a little bit harder to call it.

I think it is more tied to what happens with the macro economy in the US.

But what I can say Jim is certainly in regards to the Asia, the China market, and European market, it is good to see a little bit of improvement in Asia and the just for Europe sort of steady now at a lower, a very unsatisfactory level but at least stabilize.

So that's a good sign.

I just say that overall for next year, I think we're going to continue to see this market be challenging, as we go through that transition.

(Operator Instructions) We'll take our next question from Mike Crawford with B Riley.

You talked about inventories bleeding off, particularly relative to 5G, where maybe some of the bills got ahead of demand expanding from the first adopters.

But have you seen any changes recently in lead times that can indicate that any of that correction is running its path and we might see more of a run rate demand situation starting in Q1 or Q2 next year?

Thank you, Mike.

Yes, I think on the still again where it's difficult, based on customer forecast more than anything else.

I would say that they're going to be that there is certainly leaning on being conservative.

I think you've seen that with a couple of the public announcements as well.

I think they're looking at real demand starting towards the latter half of next year, we'll see what that means in terms of equipment build and whether they bring that forward or not.

But I think, at least for a couple of quarters here, we're expecting that inventory situated, still be working off that inventory.

Okay, thanks.

And then just on your footprint -- and it sounds like in the US with even bottlenecks you're fine.

Certainly, I think you can operate that at 50% utilization.

But in Asia, I think you'd probably rather be closer to 80% versus 71% in a peak quarter.

How far more lower would utilization have to slip say in Asia before you start to think about maybe consolidating footprint there?

Right.

Yes.

So you're absolutely right.

In a peak quarter, we really in Asia, we prefer to be operating in the 85% or above territory.

And so, from that standpoint, we're, this is, it's a concerning number to be at that 71%.

Remember that this is based on equipment that we have installed so, we may have bleeding -- based on bleeding capacity, which is the court process.

And so, we may have equipment but that sitting in a facility that's not operating.

But we would still call that capacity if you will.

So that's the basis for the calculation.

And so, what you're really talking about is what point would it make sense for us to actually close a facility.

And as we've looked at our markets, let me just talk a little bit about what we see longer-term here, but as we look at longer term in our markets, we are still seeing with 5G coming not only of course pick up towards the second half of next year in networking/communications, but we're seeing the impact of 5G, which we expect to be felt in the cellular phone side.

We expect that to be felt on the Internet of Things and the Medical and Industrial side of our business.

We expect that data requirements to be felt in the computing side of our business and we're already seeing a strength returning on semiconductor and semiconductor capital equipment, which lend credence to that and they are now bringing in capabilities that will be required for 5G on the semiconductor side and they're adding capacity and anticipation of that.

So again, as we look at that situation, we are going to be careful in terms of how we manage our footprint.

We will continue to cut costs from a labor standpoint, but we'll be very careful about managing the charters of our facilities and how they tie into those end market requirements.

Because, you know that return of the business is when it comes could come awfully quickly.

Okay, thank you.

And then last question, it relates to the point you made about data and your datacentre customers where, in your general remarks you talked about that being a little soft, but then conversely, I think in the last call you talked about the visibility improving in that sector.

And we all see what's coming in with 5G enabled data, that needs to be stored.

So has anything changed there regarding visibility or not?

Yes, excellent question.

So what has changed is just the steepness of the ramp a little bit of the less steep ramp then certainly we anticipated, but we're still looking at a ramp occurring here as we certainly as we go into Q1, Q2 of next year.

And that's good to see, it's been a long period of digestion here is as our customers designed a new equipment, platforms and looked at additional or more complex server requirements.

So just I would say that the difference is this business of that ramp and that has caused the higher demand to shift a little bit to the right.

Okay, great.

Well, thank you.

Thank you.

And we have no further questions at this time, I will now turn the conference back to Mr. Tom Edman for closing remarks.

Thank you.

And I'd like to thank you all for attending.

Just to summarize some of the points we made earlier.

First, we delivered earnings within the guided range, we generated solid cash flow despite some of the operational challenges that we covered.

Second, while we are facing a tough demand environment in some of our commercial end markets, we continue to execute well on our core strategies of diversification, differentiation and discipline.

And finally, I'd like to thank you, our investors, our employees and of course our customers for your continued support.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's call.

We thank you for your attendance and participation and you may now disconnect.