Good day, and welcome to the TTM Technologies Q1 2019 Earnings Call. At this time, I’d like to turn the conference over to Sameer Desai, Senior Director of Corporate Development and 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 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, 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 that measures provided 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 first 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 first quarter results.

Todd Schull, our CFO will follow with an overview of our Q1 2019 financial performance and our Q2 2019 guidance, we will then open the call to your questions. First and foremost, I would like to thank our employees for their contributions during a challenging quarter for TTM Technologies.

Both our revenue and non-GAAP EPS were within the guided range, despite some material weakness in two of our end markets. Excluding a negative $0.03 impact, due to foreign exchange, EPS would have been $0.19, towards the high end of guidance, while revenue was below the midpoint of the range.

We achieve these results because of our diversification, strong operational performance and financial discipline. We saw solid growth in our aerospace and defense end market that partially offset weakness in our commercial markets of automotive and cellular.

We generated solid cash flow from operations in the quarter of $36.9 million and continued the repayment of our term loan. While our forecast for Q2, reflects continued softness in some commercial end markets, particularly in cellular and automotive.

We remain focused on operational excellence, financial discipline, as well as our strategic goals of diversification and differentiation. We continue on our path towards differentiation in the automotive and aerospace and defense end markets.

Notwithstanding near-term global demand weakness, we view the automotive end market as a core growth driver due to increasing electronics content and the adoption of advanced technologies. We see four key megatrends driving automotive PCB content growth.

Number one, vehicle safety and autonomous driving; number two, increasing adoption of hybrid and electric vehicles; number three, advanced infotainment; and number four, increased connectivity. As we are seeing today, the longer term transition driven by these trends may cause some short-term pain for our global customer base.

As the world transitions away from the internal combustion engine. 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 trends, there continues to be a tremendous amount of innovation in the automotive electronics industry. Our design activity remains robust, which boards well for future revenues. In the automotive market, customer engagement begins well before our product ramp.

We won 44 new automotive designs in the first quarter, of which 21 were ADAS related. This compares to 37 total design wins in Q1 of last year and 53 total designs won in the fourth quarter of 2018. Designs that we are winning this year will contribute to revenues in future years.

I am also proud of our employees efforts that serve our aerospace and defense customers. Our organic aerospace and defense revenues grew 5% year-over-year in Q1, achieving a new record level and with Anaren, our revenues grew by 34% year-over-year.

This strength is a result of our team’s dual focus on supporting both customer build to print and designed to specification requirements, across a broad base of major defense programs. As I’ve mentioned before, the addition of Anaren moves TTM higher up in the value chain, allowing us to engage with customers earlier in the design cycle.

Our customers can now rely on TTM to deliver a completely designed RF solution, to meet their needs. Now, I’d like to review our end markets. For TTM, the aerospace and defense end market represented 27% of total first quarter sales, compared to 19% of Q1 2018 sales and 23% of sales in Q4 2018.

Total program backlog at the end of Q1 was $487 million, a new record versus a pro forma backlog of $427 million in Q1 of last year and $481 million in Q4 of 2018. We expect sales in Q2 from this end market to represent about 27% of our total sales.

Networking communications accounted for 18% of revenue during the first quarter of 2019, this compares to 15% in the first quarter of 2018, and 18% of revenue in the fourth quarter of 2018.

Dollar sales were up on a year-over-year basis, due to the inclusion of Anaren, where we enjoyed robust, wireless infrastructure related sales for early stages of 5G development. In Q2, we expect this segment to be 18% of revenue.

Automotive sales represented 17% of total sales during the first quarter of 2019 compared to 21% in the year-ago quarter and 16% during the fourth quarter of 2018. Automotive sales were weaker than expected in Q1 and down year-over-year due to the softness in global demand, particularly in Asia and Europe.

We expect automotive to contribute 19% of total sales in Q2. The medical industrial instrumentation end market contributed 15% of our total sales in the first quarter compared to 15% in the year-ago quarter and 14% in the fourth quarter of 2018.

We saw strength in our larger medical and industrial customers and weakness in our instrumentation customers. For the second quarter, we expect this market to be 15% of revenues. Sales in the computing storage peripherals end market represented 13% of total sales in the first quarter compared to 13% in Q1 of 2018 and 13% in the fourth quarter of 2018.

We saw strength in high end notebooks but weakness in data center and semiconductor customers. We expect revenues in this end market to represent approximately 14% of second quarter sales. The cellular phone end market accounted for 7% of revenue in the first quarter compared to 16% in Q1 of 2018 and 14% in Q4 of 2018.

The sequential decline was primarily due to weaker demand and inventory reductions by our cellular customers. We expect cellular to represent 6% of revenues in Q2 as we continue to see inventory digestion before new model releases in the second half of the year. Next, I’ll cover some details from the first quarter.

During the quarter, our advanced technology business which includes HDI, rigid-flex, substrate and RF subsystems and components, accounted for approximately 33% of our Company’s revenue. This compares to approximately 35% in the year-ago quarter and 38% in Q4.

The sequential and year-over-year decline were driven by softness in the 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 55% in Q1 compared to 78% in the year-ago quarter and 73% in Q4. The sequential and year-over-year declines were due to softness in our commercial end markets. Our overall capacity utilization in North America was 60% in Q1 compared to 57% in the year-ago quarter and 57% in Q4.

As our A&D end market continued to drive strong utilization levels in North America. Our top five customers contributed 29% of total sales in the first quarter of 2019 compared to 33% in the year-ago quarter and 35% in the fourth quarter of 2018.

Our largest customer accounted for 9% of sales in the first quarter versus 16% in the year-ago quarter and 17% in Q4. At the end of Q1, our 90-day backlog which is subject to cancellations was $438.3 million compared to $479.6 million at the end of the first quarter last year and $458.4 million at the end of Q4.

Our PCB book-to-bill ratio was 0.84 for the three months ending April 1st. I’d like to conclude by emphasizing TTM’s commitment to operational discipline, while our visibility is limited, we are preparing for the possibility that some of the weakness in our commercial markets continues into the second half.

As a result, in addition to our normal cost reduction efforts to address the softness we are experiencing in the commercial markets, we are reviewing our overall cost structure to ensure that our manufacturing footprint aligns well with the demand realities across our end markets.

Our goal is for TTM to emerge from this period of softness in an even stronger position to service our customers as their demand cycle improves. 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 first quarter.

Todd?.

Thanks, Tom and good afternoon everyone. For the first quarter net sales were $620.2 million compared to net sales of $663.6 million in the first quarter of 2018 and compared to fourth quarter 2018 net sales of $711 million.

A year-over-year decrease in revenue was due to the declines in our commercial end markets partially offset by the inclusion of Anaren and growth in our core aerospace and defense end market.

GAAP operating income for the first quarter of 2019 was $17.5 million compared to $30 million in the first quarter of 2018 and $42.8 million in the fourth quarter of 2018. On a GAAP basis, we incurred a loss in the first quarter of 2019 of $3.3 million or $0.03 per share.

This compares the net income of $10.1 million or $0.09 per diluted share in the first quarter last year, and $52.5 million or $0.42 per diluted share in the fourth quarter of 2018. As a reminder Q4 included a tax related benefit of $43.6 million, due to the release of a valuation allowance.

The remainder of my comments will focus on our non-core – excuse me our non-GAAP financial performance.

Our non-GAAP performance excludes acquisition related costs, certain non-cash expense items and other unusual or infrequent items, such as the gain on the sale of our Viasource business this quarter, as well as the associated tax impact of these items.

Additionally we exclude non-operational changes in our tax expense, such as the release in the fourth quarter of the tax valuation allowance. We present non-GAAP financial information to enable investors to see the company through the eyes of management, and to better provide insight into the company’s ongoing financial performance.

Gross margin in the first quarter was 14.6% compared to 13.4% in the first quarter of 2018 and 17.5% in the fourth quarter of 2018. The year-over-year increase in gross margin was primarily due to the addition of Anaren and growth in our core A&D end market, partially offset by lower volumes in our cellular end market.

Selling and marketing expense was $18.4 million in the first quarter or 3% of net sales, versus $17.3 million or 2.6% of sales a year-ago and $18 million or 2.5% of net sales in the fourth quarter.

First quarter G&A expense was $31.6 million or 5.1% of net sales, compared to $27.4 million or 4.1% of net sales in the same quarter a year-ago, and $33 million or 4.6% of net sales in the previous quarter. Year-over-year increases in selling and marketing and G&A expenses were due to the addition of Anaren.

Our operating margin in Q1 was 6.5%, this compares to 6.7% in the same quarter last year and 10.3% in the fourth quarter of 2018. Interest expense was $17.8 million in the first quarter, an increase of $7.4 million from the same quarter last year, due to the incremental term loans associated with the acquisition of Anaren and higher interest rates.

During the quarter, we recorded $4.9 million of foreign exchange losses. Government incentives brought the net loss to $3.6 million or approximately $0.03 of EPS. This compares to a net loss of $1.1 million in Q1 last year. Our effective tax rate was 14% in the first quarter. First quarter net income was $16.4 million or $0.16 per diluted share.

This compares to first quarter 2018 net income of $28 million or $0.26 per diluted share and fourth quarter 2018 net income of $55 million or $0.52 per diluted share. Adjusted EBITDA for the first quarter was $78.5 million or 12.7% of net sales, compared with first quarter 2018 adjusted EBITDA of $83.2 million or 12.5% of net sales.

In the fourth quarter, adjusted EBITDA was $117.4 million or 16.5% of net sales. Cash flow from operations was $36.9 million in the first quarter versus a use of cash of $14.3 million in the same quarter last year.

During the quarter, we also repaid an additional $30 million of debt, bringing our total repayment of debt to $114 million, since we acquired Anaren – $144 million since we acquired Anaren. Cash and cash equivalents at the end of the first quarter, totaled $235.2 million versus $256.4 million in the fourth quarter.

Depreciation for the first quarter was $41.6 million. Net capital spending for the quarter was $28.4 million. Now, I’d like to turn to our guidance for the second quarter. We expect total revenue for the second quarter of 2019 to be in the range of $610 million to $650 million.

We expect non-GAAP earnings to be in the range of $0.15 to $0.21 per diluted share. The EPS forecast is based on a diluted share count of approximately 106 million shares. Our share count includes dilutive securities, such as options in our issues, but no shares associated with our convertible bonds.

We expect that SG&A expense will be about 8.3% of revenue in the second quarter. We expect interest expense to total about $17.8 million. Finally, we estimate our effective tax rate to be between 12% and 16%. To assist you in developing your financial models, we offer the following additional information.

We expect to record during the second quarter amortization of intangibles of about $12.5 million. Stock-based compensation expense of about $3.9 million, non-cash interest expense of approximately $3.5 million and we estimate depreciation expense will be approximately $42 million.

Finally, I’d like to announce that we’ll be participating in the JPMorgan Global Technology Media and Communications Conference in Boston on May 14th. The Macquarie Technology Media and Telecom Corporate Day in New York City on May 21st. The Barclays high yield bond and syndicated loan conference in Colorado Springs on June 6.

The Stifel Cross Sector Insight Conference on June 11 in Boston and the NASDAQ Technology Conference in London on June 13th. That concludes our prepared remarks and now, I’d like to open the line for questions.

Operator?.

Thank you. [Operator Instructions] And our first question comes from Matt Sheerin with Stifel..

Yes. Thank you and good afternoon. Just a question regarding the cellular business. It looks like that revenue number for June is going to be the lowest for that segment since 2014. How much of that is just weakness at your top customer versus any share gains, any changes in content.

And as you look and I know there’s still a lot of visibility, but typically, you start to see some signs of bookings or backlog going into the second half with typical seasonal lamps.

And any indication that things have bottomed here and that you should start to see at least some sequential growth in the second half?.

Hi, Matt. Sure. Let me answer this one. So, we’re of course, on the tail end of a cycle on the cellular side. And that Q1 and Q2 production levels usually determined by the sell-through that our customers experience on the consumer side.

I think this has been a cycle, where our major customer certainly has not seen the kind of sell through that they were hoping for. I think inventories have been high in the channel, and really Q1 and now Q2 as we forecast Q2 as well, we’re going to be really down to very low production levels as our customers’ assembly chain works through inventory..

So, that’s really what we’re forecasting is going to occur in Q2. As far as the back half of the year goes, we’re still in very good shape on prototyping for the new cycle on the cellular phones, Q3 looks to be a forecast very similar to what we’ve seen in past years, where we’ll be pretty much building everything we can.

The production output will be determined by yields, but this next cycle we’re looking at really again, a lesser technology shift with the new phones and so our goal is going to be to optimize yields in that third quarter and then continue to build into that fourth quarter ramp.

So, nothing different there in terms of what we see in the back half of the year as compared to past ramps..

Okay. Just off of the lower base I guess..

Yes, correct..

And then you also talk Tom, about wanting to utilize that very high-end substrate like PCB technology that you use for smartphones for other end markets.

How – where are you positioned there? Are we talking about opportunities within the next year or two and what end markets?.

Okay. Yes. So within cellular, we are seeing this technology substrate like PCB is really what it allows our customers to do is to get down below 30 microns in terms of lines and spacing. So, much denser circuitry requirements and that general trend is going to proliferate through other end markets.

Within cellular, beyond our largest customer, we’ve already now started to see adoption for high-end phones that will certainly be enhanced by 5G. We expect that as with the new chipsets that will be required for other applications with 5G including Internet of Things type applications and certainly automotive.

We’re going to start to see lines and spacing again, moving down below that 30 micron level. So, there certainly are promising trends in terms of longer-term adoption in automotive, in networking communications and in the MII area, where again, a lot of the Internet of Things goes into industrial type applications.

So, you’re going to start seeing movement of those requirements and again, all of that being enabled by the new chipsets that are coming or being required by the new chipsets that will come with 5G. So that’s sort of where we sit today, Matt..

Okay. All right. Thanks a lot, Tom..

Thank you..

Thank you. Our next question comes from Maynard Um with Macquarie..

Hi, thanks. On the auto side, you were down, I think 20% year-over-year versus the market down around 7% in Q1.

Are you exposed to any particular segment or you exposed more to the luxury segment or you fairly broad based? And given kind of the secular trends toward more electrification, I guess why is there such a large disconnect and when could we see that gap maybe start to narrow?.

Sure. Thanks, Maynard. The – on the auto side, as we’ve gone through and certainly, what we’re talking about here is, primarily the demand for conventional printed circuit boards, which is approximately 21% from a revenue standpoint of what we ship in the auto area.

And as we look at that area that where we have seen particular year-on-year weakness has been in Europe, and our European shipments, and particularly, being impacted by our customers’ exposure on the diesel side.

And so that combination of course, they go together European demand and diesel demand being down, certainly, we had an impact in terms of our shipments.

The other impact and that we’ve talked about continues to be the case in Asia, probably, where that particularly in China and there, we have seen year-on-year weakness and quarter-on-quarter weakness as well in Q1 versus the prior quarter. So, those are the two regions, where we have particular concern.

I think if anything – the one positive takeaway in terms of those regions is that, we did see the downdraft on the European side ameliorate a bit on a quarter-to-quarter basis.

And so what we had been looking at for the quarter was our expectation that the European side would have worked through a lot of the inventories that they had, hasn’t occurred as quickly as we had expected.

But as we start to look towards the back half of this year, but certainly, we would expect that the – on both the European and Asia inventory hubs that inventories would be worked down. So, we’d start to see real demand levels again. So that’s where I would see shipment expectations as we sort of go through the course of the year.

The – as you pointed out, the electrification of the automobile is an ongoing trend and one where the 19% of our advanced technologies really go into that area and then a little bit of our conventional production. And I certainly agree with you that the longer-term trends continue to be very promising.

But on a – from a total unit standpoint, still is small. And so that’s why you’re seeing a larger impact from the conventional board side in terms of that downdraft and again, particularly, Europe on a year-on-year basis..

Got it. Okay that’s helpful.

And then when you talk about reviewing the cost structure, can you just maybe talk about what segments or areas of the business you can see some of that cost structure improvement and I kind of ask that question given that some of your segments are obviously, going to see some upcoming big growth drivers maybe next couple of years.

So, I’m wondering how you’ll look to balance cost optimization versus making sure you still have that infrastructure to fulfill that potential growth? Thanks..

Yes. Very well said. And exactly, how we analyze our footprint and obviously, with 29 facilities, we are always looking at our facilities, we’re looking at how they’re performing, we’re looking at their utilization rates and we’re looking at the customer base in the charter of those facilities.

So, what I can tell you is it’s part of our DNA to look at where we can become more operationally efficient, how we can really maximize our operational performance even when facilities are down in terms of utilization rates. That involves a lot of labor movement between facilities.

It means that we put a lot of emphasis on our supply chain and how we’re handling our material purchases and then the maximization of yields for what we are producing, absolutely critical.

So, as we look across our footprint and we started looking at longer-term structural requirements, we’re going to take that same – we will take that same discipline to the process.

As we look at our footprint, we look at how forward that is the facility, what is the charter of the facility, what is the customer base and how could that customer base be transferred. So obviously, a very important process for us to follow in.

And really, what we are highlighting here is that we are looking at that – we are looking at that footprint in terms of longer-term requirements of our end markets and customer base for exactly the reason that you’ve highlighted.

So that if anything we come out of the soft period with a stronger, more capable footprint that can be optimized from a technical standpoint to meet customer needs..

Thank you. [Operator Instructions] Our next question comes from Steven Fox with Cross Research..

Hi. Sorry about the background noise. I guess, just following up on that Tom. I’m trying to understand all of that in the context of where your utilization rates are right now..

Yes..

And the expected improvements.

I mean, can you give us a hint on where you think they could go in the second half, so that you’re not coming back and writing down assets or inventory or something like that? I mean what’s the comfort level, given all the comments you made so far?.

Sure, Steve. Yes. And when we’re talking utilization rates, really, I’m highlighting our Asia utilization rates, as you know, our North America facilities, high mix low volume facilities; utilization isn’t a great measure to look at those facilities with.

But as we look at our Asia facilities, where we’re comfortable operating and certainly, when we’re in that Q3, Q4 period, Steve. We need to be above the 80% level with those facilities. As you know, we’ve – in years past, we’ve been able to move them up above 90 and be in even the 95% range.

So, being above 80% is sort of a marker of where we like to operate our facilities. Clearly, we’re suboptimal right now. We know that cellular will be coming back strong in Q3, Q4. So, those facilities will be certainly optimized as we come into Q3.

So, it’s really about the other parts of our commercial business and looking at the longer-term trends in those end markets and how that then impacts utilization rates..

Great. That’s helpful.

And then just real quick in terms of the auto weakness, are you saying that on the electromechanical side of the business, I know it’s small, but that wasn’t weak and it was all board related or are both of those functions weak?.

And primarily board, we had – we were down a little bit on the EMS side, but nothing to highlight. And as you said, it’s not a major part of the business from a revenue standpoint. So really, really, primarily that broad area..

Great. Thanks very much..

Sure. Thanks..

Thank you. And we have no further questioners at this time. I would now like to turn the conference back to Mr. Tom Edman for closing remarks..

Thank you very much. I’d just like to close by summarizing some of the key points that we made earlier. First, we did deliver earnings in the guided range and we generated solid cash flow for the first quarter. And that was in the phase of relatively weak commercial environment.

Second, we are – while we are facing a challenging first half of the year, we continue to execute well on our core strategies of diversification, differentiation and discipline. And finally, I’d like to thank our employees, our customers and all of you, our investors for your continued support. Thank you..

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect..