Ellen Davis Thomas T. Edman - Chief Executive Officer, President, Director and Member of Government Security Committee Todd B. Schull - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer and Secretary.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division Prabhakar Gowrisankaran - Canaccord Genuity, Research Division.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the TTM Technologies First Quarter 2014 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, April 30, 2014. I would like to turn the conference over to Ms. Ellen Davis with The Blueshirt Group. Please go ahead, ma'am..

Thank you. During the course of this call, the company will make forward-looking statements that relate to future events or performance. We caution you that such statements are simply predictions, and actual events or results may differ materially.

These statements reflect the company's current expectations, and the company does not undertake to update or revise these forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied in this or other company statements will not be realized.

Further, 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, general market and economic conditions, including interest rates, currency exchange rates and consumer spending; demand for the company's products; market pressures on prices of the company's products; warranty claims; changes in product mix; contemplated significant capital expenditures and related financing requirements; the company's dependence on a small number of customers and other risk factors set forth in the company's most recent SEC filings.

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

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

Thank you, Ellen. Good afternoon, and thank you for joining us for our first quarter 2014 conference call. I will begin with a review of our business, and Todd Schull, our CFO, will follow with his discussion of our financial performance. Then we will open the call to your questions. Let's start with the review of highlights from the first quarter.

Net sales in the first quarter were $291.9 million. Gross margin was 13.2%. Non-GAAP net income was $1.2 million or $0.01 per diluted share. Both revenue and our non-GAAP earnings excluding an unrealized -- excluded an unrealized noncash foreign exchange loss were within our guidance range.

In the first quarter, we experienced more than normal seasonality in our cellular phone end market as sell-through was lower in the quarter, following a strong fourth quarter. However, we were encouraged to see better-than-expected demand in the networking end market as activities related to the LTE 4G buildout in China accelerated.

First quarter revenue was down sequentially and on a year-over-year basis. After adjusting the year-earlier period to remove revenue associated with the SYE facility that we sold, revenue decreased 4% year-over-year.

The seasonal decline in demand for our advance HDI and rigid-flex PCBs used in smartphones, tablets and eReaders drove our product mix shift away from advanced technology PCBs. The lower mix of advanced technology products and decreased volumes resulted in reduced factory utilization levels and the decline in gross margins.

During the first quarter, our advanced technology work, HDI, rigid-flex and substrate, accounted for approximately 54% of our Asia Pacific segment revenue. This compares to approximately 68% in the fourth quarter.

Our blended capacity utilization in Asia Pacific was 62% compared to 90% last quarter, reflecting decreased utilization at most of our AP plants and the impact of the Chinese New Year holiday. We experienced a slight improvement in utilization levels in North America, which operated at 61% during the first quarter compared to 59% in Q4.

Now moving on to our end markets. Sales in our largest end market, networking/communications, grew to 34% of total sales compared to 27% in the fourth quarter of 2013. On a dollar basis, networking sales were flat sequentially.

As mentioned, performance in this end market exceeded our expectations, primarily due to accelerated activity surrounding China's 4G LTE network buildout. Excluding the impact from the sale of the SYE plant, networking sales were up about 9% year-over-year.

In the second quarter, we anticipate sales to increase, and for this end market to represent about 37% of sales as the 4G buildout in China continues to accelerate. After a seasonally robust fourth quarter, sales in the computing storage peripherals end market moderated in the first quarter.

Sales declined to 18% of total sales from 23% in the previous quarter as we experienced softer demand for PCBs used in touchpad tablets and servers. In the second quarter, we expect sales in computing to decline slightly and represent 17% of sales.

The cellular phone end market declined more than expected as total sales accounted for 15% of revenue in the first quarter compared to 24% in the fourth quarter. Following the seasonal strength experienced in the prior quarter, demand for smartphone products softened due to lower-than-expected sell-through, particularly in China, among other factors.

We expect sales in this end market to decrease further in the second quarter to 13% of total sales. Both the cellphone and tablet markets will be affected by seasonal lulls in the second quarter as our customers prepare for new product rollouts in the fall.

The aerospace defense end market represented 17% of total sales, up from 14% in the fourth quarter. Sales were down slightly due to lower defense-related bookings in late 2013. However, we have seen a positive booking trend emerge in the A&D space as our customers are finally moving forward with the critical programs in which we are well positioned.

We remain encouraged by the diversity of the programs we are involved in. We expect second quarter sales to be up slightly and represent about 17% of total sales. The medical/industrial/instrumentation end market contributed 10% of total sales, up from 8% in the fourth quarter.

As we anticipated, sales on a dollar basis grew modestly due to increases from a broad base of customers, particularly in the Medical segment. We expect second quarter sales to be stable and represent 10% of sales.

Sales in the Other end market were 6% of total sales compared to 4% in the fourth quarter, as we experienced increased sales from automotive and gaming customers during the quarter. We expect this end market to be stable and represent 6% of total sales in the second quarter.

Our top 5 customers contributed 39% of total sales in the first quarter of 2014 compared with 47% in the fourth quarter. In alphabetical order, our top 5 OEM customers were Apple, Cisco, Ericsson, Huawei and Juniper. We had one customer account for 16% of sales during the quarter.

Our book to bill and backlog has been improving since the first of the year. The increases have primarily come from our networking/communications and A&D end markets. At the end of Q1, our backlog, which is subject to cancellations, was $188 million, and our book-to-bill rate for PCBs was 1.03.

As a result of unfavorable product mix, ASPs declined in the first quarter. In Asia Pacific, ASPs decreased 11% from the fourth quarter. And in North America, ASPs declined by 3% from the fourth quarter. In summary, we are encouraged to see solid demand in the networking/communications end market and improving business levels in A&D.

That said, we expect the lower demand levels in cellular phones and computing to continue into the second quarter. Additionally, in April, we implemented an annual pay increase, similar to last year's level, of 8% in our Asia-Pacific facilities in order to remain competitive in the labor market in China.

With these factors, our outlook for the second quarter is for moderate improvement in sales and a similar gross margin level to Q1.

Consistent with the priorities I outlined on the Q4 call, we will continue to leverage our global capability to strengthen our position in the key end markets of networking/communications, mobility and aerospace and defense.

We remain focused on increasing our long-term factory utilization and yields through operational initiatives and a mixed shift towards advanced technologies, while improving our cycle time and yields for new products through improved prototyping practices and by reducing costs.

Looking towards the second half of the year, our scale and advanced technology capabilities position TTM well for customer product ramps. With these ramps, we expect to see the benefit from higher volumes and leverage from our operational initiatives. Now, Todd will review our financial performance for the first quarter..

Thanks, Tom, and good afternoon, everyone. For the first quarter, net sales were $291.9 million, a decrease of $74.2 million or 20.3% compared to fourth quarter net sales of $366.1 million.

As Tom said earlier, the sequential decline in sales was largely due to normal seasonality during the quarter, as well as softer demand in the cellular phone end market as we saw lower sell-through, following a strong fourth quarter.

GAAP operating income for the first quarter was $4.5 million compared to operating income in the fourth quarter of $29.3 million. On a GAAP basis, our net loss for the first quarter of 2014 was $3.8 million or $0.05 per share. This compares to GAAP net income of $11.3 million or $0.14 per diluted share in the fourth quarter of 2013.

The first and fourth quarter's result include $0.5 million and $10.7 million, respectively, of expenses associated with the early extinguishment of our 2015 convertible notes. The remainder of my comments will focus on our non-GAAP financial information.

Our non-GAAP performance excludes the amortization of intangibles, stock-based compensation expense, noncash interest expense and other unusual or infrequent items such as the gain realized on the SYE transaction last year, restructuring and impairment costs or costs associated with the early extinguishment of debt, as well as the associated tax impact of these items.

Additionally, we exclude non-operational changes in our tax expense such as impacts of retroactive changes in the tax law. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to provide better insight into the company's ongoing financial performance.

Gross margin in the first quarter decreased to 13.3% from 19.2% in the fourth quarter.

The seasonal decline in demand in Asia Pacific for our advanced HDI and rigid-flex PCBs, which drove a product mix shift away from our advanced technology product towards assembly, as well as lower volumes in North America, resulted in reduced factory utilization levels and a decline in gross margin.

Selling and marketing expense was $9 million for the first quarter or 3.1% of net sales compared to $9.2 million or 2.5% of net sales in the fourth quarter. First quarter G&A expense was $20.9 million or 7.2% of net sales compared to $27.2 million or 7.4% of net sales in the fourth quarter.

Interest expense of $3.7 million in the fourth -- first quarter compared to $3.8 million in the fourth quarter. Our effective tax rate in the first quarter was approximately 30.7% as compared to a rate of 29.3% in the fourth quarter.

The increase in the effective tax rate was due primarily to the expiration of certain tax provisions such as the R&D tax credit. First quarter non-GAAP net income was $1.2 million or $0.01 per diluted share. This compares to fourth quarter non-GAAP net income of $22.1 million or $0.27 per diluted share.

First quarter 2014 results included an unrealized noncash foreign exchange loss of approximately $3.6 million or $0.03 per diluted share due to the rapid depreciation of the Chinese RMB against the U.S. dollar.

Adjusted EBITDA for the first quarter was $29.1 million or 10% of net sales compared with fourth quarter adjusted EBITDA of $58.4 million or 16% of net sales. Moving on to our segment performance. The Asia Pacific segment had sales of $165.7 million in the first quarter, down 28.5% from $231.6 million in the fourth quarter.

Gross margin for the Asia Pacific segment was 12.9% in the first quarter compared to 20.6% in the fourth quarter. The decrease in gross margin was primarily due to a decline in volumes and an unfavorable shift in our product mix, which led to lower capacity utilization in our advanced technology plant.

The Asia Pacific segments first quarter operating income was $4.7 million compared to $26.8 million in the fourth quarter. The North America segment recorded first quarter sales of $126.6 million, down 6.2% from $134.9 million in the fourth quarter. Gross margin for our North America segment decreased to 13.7% from 16.8% in the fourth quarter.

The gross margin decrease was due primarily to lower volumes and a shift in product mix towards assembly. The North America segment operating income for the first quarter was $4.2 million compared to $7.2 million in the fourth quarter.

Cash and cash equivalents at the end of the first quarter totaled $318 million, a decrease of approximately $12.6 million from the fourth quarter. We incurred capital expenditures for the first quarter of approximately $28.8 million and made a required payment on our term loan of $48.1 million.

Operating cash flow in the first quarter, excluding payments related to the early extinguishment of debt, was approximately $46.7 million. As noted on our last call, in January, we closed the underwriters $30 million over-allotment of our $250 million convertible senior notes due in 2020.

We used proceeds to repurchase an additional $6.5 million of our outstanding 2015 convertible notes. Net debt was $286.3 million at the end of the first quarter, a decrease of $12.1 million from the end of the fourth quarter. Depreciation for the first quarter was $23.7 million. Now I'd like to turn to our guidance for the second quarter.

Typically, we experience significant seasonality with approximately 55% of our revenues being generated in the second half of the year.

Additionally, as we look at revenue in the second quarter as compared to the same quarter a year ago, keep in mind that the prior year second quarter included approximately $25 million of revenue generated by SYE, which has since been sold. With that background, we expect Q2 revenue to be in the range of $290 million to $310 million.

We expect non-GAAP earnings to range from $0.02 to $0.08 per diluted share. This is based on a diluted share count of approximately 83.8 million shares. We expect that SG&A expense will be about 10% of revenue in the second quarter. We expect interest expense to total about $3.5 million, and we estimate our effective tax rate to be between 28% and 32%.

To assist you with your financial models, we offer the following additional information.

We expect to record during the second quarter amortization of intangibles of about $2.2 million, stock compensation expense of about $2 million, noncash interest expense of approximately $2.5 million, and we estimate depreciation expense will be approximately $24 million.

Lastly, before we turn to your questions, I'd like to mention our upcoming conference participation.

We will be presenting at the Jefferies 2014 Technology, Media & Telecom Conference in Miami on Thursday, May 8 at 1:30 in the afternoon and at the JPMorgan 2014 Technology, Media & Telecom Conference in Boston on Wednesday, May 21 at 9:20 in the morning. A press release will be issued with further details on these events.

That concludes our prepared remarks. And now, we'd like to open the line for questions.

Operator?.

[Operator Instructions] And our first question comes from the line of Matt Sheerin with Stifel..

Just a question regarding your commentary about the weakness in handsets.

Is that big drop that you saw, is that specific to your one big customer there? Or did you see that across the other smaller customers that you have? And as you look into Q3 and Q4, given that there's a new product cycle coming, would you expect a fairly significant ramp in each of those quarters or will be a more back-end loaded?.

Sure, Matt. This is Tom. Let me respond first to what we saw in the last quarter. What we saw, particularly I'd say with the second tier and with our largest customer was that the anticipation of sell-through for handsets, particularly in China.

And there was a great -- it's an excellent buildup in January in preparation for Chinese New Year, and then a pretty dramatic falloff after Chinese New Year. We attribute that to perhaps the disappointing demand out of China.

But certainly, what we saw was a pretty dramatic drop off, and it was pretty well across the board with the exception of those customers, and there were a few of them who were preparing for new product introductions in the quarter. So hopefully that gives you a little bit of color there. Heading into Q3, Q4, always hard to anticipate.

I can tell you that our prototyping is on schedule. We're seeing generally a pattern similar to next year. So if I were to weight the 2, I'd say that Q4 could be a little bit stronger than Q3. But generally, a similar pattern to what we saw last year..

Okay.

And in terms of your market share with customers and large customers, you haven't seen any changes that you know of, and you're still confident in terms of your allocation?.

Yes. I think we're doing well in terms of allocation, particularly as we prepare for the next product cycle..

Okay. That's helpful. And looking at your overall cost structure, you talked about pretty low utilization rates, and I understand that in Asia, there's that seasonality and a big volatility quarter-to-quarter, given your exposure to mobility.

But looking at that 60% or so utilization rate in North America, are you looking at potentially taking any cuts to your infrastructure or any of the factories going forward here because it looks like you've been at depressed levels for a while now. Profitability is fairly depressed.

So are there things that you can do or are you looking at doing?.

So the answer is we're always looking at the footprint. We're always looking at how we're positioned in our markets and with our critical customers. But North America utilization number is always a little bit misleading because we're basing that largely on plating capacity.

What you find when you're dealing with a product mix that is markedly varied across our plants and involves a good portion of QTA as well. When you're dealing with that kind of product mix, your bottlenecks often are not in the plating area. So you'll find that it's very difficult for that reason to push up the utilization rates.

So always, I would suggest that we need to still be careful with the utilization rate number in North America and our estimation of that figure.

Having said that, we do look at the footprint, but we're also very well aware of the importance of our customers in North America, particularly on the A&D side and the fact that they often specify a specific facility for support.

And so you have to be very deliberate in how you communicate with them and very careful in North America in terms of customer impact..

Okay. Well, asking you another way, your margins in North America are well below your target.

So I guess the question is do you need these volumes to come back or are there other things that you can do to improve margins there?.

Yes. The biggest thing that we saw in Q1 and actually we're anticipating in Q2 is that the -- we're seeing that this pull from 4G China, and that brings a high level of assembly business to us, and our North America business unit includes our Shanghai assembly plant. So what you'll find is a tilt towards assembly that's slightly dilutive to margins.

And then on the other side, on our PCB side, we still have -- we have utilization availability in our Chippewa Falls prototyping facility for [indiscernible] and low volume facility for networking/communications. And I'd say that generally, the environment is improving there.

When we look at networking/communications, we're seeing real strength in telecom infrastructure, but we're also seeing signs of the return of stronger demand in the networking infrastructure area. That would benefit our PCB, our largest PCB plant in North America, which is Chippewa Falls. So as we go forward, that's what we're looking to improve.

Margins getting the utilization rate up in that facility, continuing to look at our footprint, how we can use this nice tailwind in terms of order volumes coming back in A&D to raise the utilization rates in our A&D facilities and ongoing pull in the assembly side.

So hopefully, that gives you the North America picture as we see it is one that certainly has prospects for improvement..

Our next question comes from the line of Prab Gowrisankaran with Canaccord..

This is Prab. I just want to see if you can add some color on the ASP trends that you're seeing. It looks like it declined 11% in APAC and 3% in the U.S.

Just some color in terms of how you see it trending? And is this normal seasonality that you're seeing?.

On the ASP side, on AP, starting in the Asia Pacific side, the trend, if you look year-on-year, there's actually been an improvement in ASP. That reflects the growing complexity of the conventional PCBs that we're building in Asia Pacific. But in the meantime, yes, we have -- we're absolutely affected by the seasonality.

And that pulls the ASPs down because the advanced technologies come with higher ASPs. So sequentially, the reason for the drop off is largely that advanced technology mix coming down. On the North America side, I already mentioned the fact that we were little bit light in terms of Chippewa Falls and utilization there.

Generally, that area, again, highly complex conventional boards comes with a little bit of higher ASP, and also we had a little bit of a drop off in QTA that also brought ASPs down. But they're much less seasonal factors as much as it was as a short-term effect on ASP and not a dramatic shift either..

Okay.

And the other question I had was in terms of the utilization trend, do you expect a similar trend in Asia Pacific like last year just based on the builds from the large customer and other customers? Or do you see any changes from last year?.

Yes. I think the utilization trends -- the changes to highlight the positive changes, again, the telecom infrastructure requirements have filled our conventional facilities in Asia Pacific as we -- particularly as we're looking into the next quarter. So we're looking at positive utilization trends there.

We also, as you remember, we divested of our SYE ownership and closed our Suzhou facility. So again, that's a positive development in terms of utilization rates on the conventional side.

So what you end up in Asia Pacific, as we go forward into the next quarter, is tracking utilization build in advanced HDI in particular, and that, of course, is dependent on customer ramp. And yes, we would expect similar trends there as what we saw last year..

[Operator Instructions] Management, we have no additional questions. Please continue with any closing remarks..

Okay. I'd just like to remind you that we do have 2 investor conferences coming up. The first is the Jefferies conference, and that will be in Miami on Thursday, May 8, and we're presenting at 1:30 p.m. and then the JPMorgan conference on May 21 and we're presenting at 9:20 a.m. We look forward to seeing you then. Thank you..

Ladies and gentlemen, this concludes the TTM Technologies First Quarter 2014 Earnings Conference Call. Thank you for your participation. You may now disconnect..