Q2 2019 Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by welcome to the TTM technologies second quarter 2019 financial results Conference call.
During todays presentation, all parties will be in listen only mode. Following the presentation. The conference will be open for questions and instructions will be given at that time.
Samir defy P.T. I'm senior director of corporate development and Investor Relations will now review P.T. IME disclosure statement.
Thank you Amanda 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 tempt 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. any other filings we with the <unk> Securities and Exchange Commission. These forward looking statements are based on managements expectations and assumptions that the date of this presentation TTM does not undertake any obligation to publicly update or revise any of these statements whether as a result, you information future events or other circumstances, except as required by law.
Please refer to the disclosures regarding the risks that may affect TTM, which may be found any reports on Form 10-K , 10-Q 8-K, the registration statement on form S. Four and the Companys other FDIC 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 was filed with the FCC and is available on <unk> website at Www Dot T M Dot com.
I would now like to turn the call over to Tom Edman TTM Chief Executive Officer. Please go ahead Tom.
Thank you Samir good afternoon, and thank you for joining us for our second 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 second quarter results.
Todd Schull, our CFO will follow with an overview of our Q2 2019 financial performance and our Q3 2019 guidance. We will then open the call to your questions.
As expected the second quarter proved to be a challenging quarter for TTM.
However, due to the efforts of our employees.
Optimize operational performance and the continued strength in our aerospace and defense end market, we were able to minimize the impact of commercial demand softness on our operating margin.
Delivering non-GAAP EPS was at the high end of the guidance range.
Our district diversification and discipline helps us through challenging quarters, such as this one.
In addition, we generated strong cash flow from operations of $86.1 million in the quarter.
Looking forward, we see Q2 is the low water mark of the year and our forecast for Q3 factors and a strong rebound in the cellular end market, which will bring improved profitability.
We remain focused on operational excellence and financial discipline as well as our strategic goals of diversification and differentiation.
In particular, we continue on our path towards differentiation in aerospace and defense and automotive end markets.
Overall market trends continue to support this effort in the aerospace and defense end market.
The President and Congress agreed on a two year budget deal, providing the department of defense the budget of $738 billion in 2020, and $740 billion and 2021.
Which results in growth over the already healthy 2019 budget of $716 billion.
Two significant areas for TTM missiles, and munitions and radar systems are expected to grow among the fastest.
With the continued adoption of AI Isa radar technology by all of the services and the conversion of next generation gallium nitride based platforms. The I use a radar market is expected to grow at an 18% CAGR.
Hi, Lisa stands for active electronically scanned array and represents the next generation technology for defense radars.
PGM is a leader in the design and manufacturing of RF subsystems and components for our Isa radar systems.
And stands to benefit as defense programs upgrade from traditional rotating mechanical this radar to fixed solid state Aisa radar.
This technology allows our customers greater performance in range accuracy, and sensitivity, which in turn increases detection and defense capabilities.
In addition, the overall environment in the aerospace end market remained strong.
With commercial aircraft at record backlogs and air travel continuing to forecast significant growth for the rapidly growing global middle class.
We continue to win important programs in aerospace and defense, bringing our overall program backlog to a new record level of over $500 million.
A significant milestone for our aerospace and defense business.
Backlog has risen 12% year over year and 144% over the past two years.
We continue our aggressive alignment on critical programs, which now number more than 80.
Our aerospace and defense revenues grew 8% year over year in Q2 also achieving a new record level.
We capitalize on positive market trends through our teams dual focus.
Supporting both customer build to print and designed to specification requirements across a broad base of major defense and commercial programs.
We have seen the first fruits of revenue synergies that we have discussed before with key wins for our sub assemblies on a on a major land based radar system.
And a major satellite system.
RF engineering expertise for Mandarin combined with operational capabilities of ppm will allow us to secure future business and what we see as over $1 billion of program value opportunities available to GTM Eni Isa related applications.
We further strengthened our technology position in the aerospace and defense market with the recently announced acquisition of assets and technology from I. three electronics.
A core differentiator of the acquired technology is the ability to create very fine lines and spacing.
Which is becoming an increasing requirement for new programs across defense and commercial end markets.
We believe this technology will allow us to address key future growth opportunities for advanced applications, and our defense markets with the ultimate goal of providing differentiated technical support and value add solutions for our customers.
Notwithstanding near term global demand weakness in the automotive sector. We continue to develop positions in new programs related to the Mega trends of vehicle safety and autonomous driving hybrid and electrical vehicles advanced infotainment and increased connectivity requirements.
Unfortunately, these business development efforts have not been able to compensate for global demand softness in automotive.
And particularly in diesel which has impacted our base business and has caused significant short term pain for certain parts of our global customer base as the world begins to transition 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 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 a product ramps.
In this quarter, we won 57, new automotive designs with a lifetime program value of $94 million of which 22, where Ada es 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 DPM, the aerospace and defense end market represented 28% of total second quarter sales compared to 23% of Q2, 2018 sales and 27% of sales in Q1 2019.
Total program backlog at the end of Q2 was $504 million.
Versus a backlog of $450 million in Q2 of last year and $487 million in Q1 of 2019.
We expect sales in Q3 from this end market to represent about 25% of our total sales.
Networking communications accounted for 17% of revenue during the second quarter of 2019.
This compares to 17% in the second quarter of 2018, and 18% of revenue in the first quarter of 2019.
While we saw strong growth in Fiveg related revenues many of our networking customers declined year over year due to softness in enterprise and cloud spending.
In Q3, we expect this segment to be 14% of revenue.
Automotive sales represented 16% of total sales during the second quarter of 2019.
Compared to 19% in the year ago quarter, and 17% during the first quarter of 2019.
Automotive sales were weaker than expected in Q2 and down year over year due to the declines in global demand across all regions.
We expect automotive to contribute 15% of total sales in Q3.
The medical industrial instrumentation end market contributed 15% of our total sales in the second quarter.
Compared to 15% in the year ago quarter, and 15% in the first quarter of 2019.
We saw strength in our medical customers, there was more than offset by weakness in our industrial and instrumentation customers due to declines in global industrial demand and weakness in the semiconductor capital equipment market.
For the third quarter, we expect this market to be 13% of revenue.
Sales in the computing storage peripherals end market represented 15% of total sales in the second quarter compared to 15% in Q2 of 2018 and 13% in the first quarter of 2019.
We saw strength in high end notebooks.
There was more than offset with weakness in data center and semiconductor customers as cloud spending has been a digestion phase and the semiconductor market remained soft.
We expect revenues in this end market to represent approximately 14% of third quarter sales.
The cellular phone end market accounted for 6% of revenue in the second quarter compared to 8% in Q2 of 2018 and 7% in Q1 of 2019.
We expect <unk> cellular to represent 17% of revenues in Q3, as we begin our seasonal production build prior to the release of new smartphone models in the second half.
Next I'll cover some details from the second quarter.
During the quarter, our advanced technology business, which includes HD rigid flex substrate and RF sub systems and components accounted for approximately 36% of our company's revenue.
This compares to approximately 32% in the year ago quarter and 33% in Q1.
The sequential and year over year increases were due to growth in our computing and aerospace and defense end markets.
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 56% in Q2 compared to 71% in the year ago quarter and 55% in Q1.
The year over year declines were due to softness in our commercial end markets.
Our overall capacity utilization in North America was 60% in Q2 compared to 61% in the year ago quarter and 60% in Q1.
As our ASV end market continued to drive strong utilization levels in North America.
Our top five customers contributed 30% of total sales in the second quarter of 2019 compared to 27% in the year ago quarter.
And 29% in the first quarter of 2019.
Our largest customer accounted for 10% of sales in the second quarter versus 9% in the year ago quarter and 9% in Q1.
At the end of Q2, our 90 day backlog, which is subject to cancellations was $503.4 million compared to $534.9 million at the end of the second quarter last year and $438.3 million at the end of Q1.
Our PCB book to Bill ratio was 1.07 for the three months ending July Onest.
I'd like to conclude by emphasizing tpms commitment to operational discipline.
Last quarter I expressed some concerns about the safety of the recovery of our commercial business in the second half.
As well as our plans to review, our overall cost structure and manufacturing footprint.
While we expect a strong recovery in our cellular business and Nikin Q3, other end markets, such as automotive and networking communications remained at depressed levels.
As a result, we implemented reductions in force in Q2 that generated $13 million of annualized savings.
And we will continue to ensure that our overall cost structure and footprint is aligned with demand realities.
Our goal is for TTM to emerge from this period of softness in an even stronger position to service our customers as their demand cycles improve.
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 second quarter.
Thanks, Tom and good afternoon, everyone.
For the second quarter net sales were $633 million compared to net sales of $716.9 million in the second quarter of 2018 and compared to first quarter 2019, net sales of $620.2 million.
The year over year decrease in revenue was due to declines in our commercial end markets, partially offset by organic growth in our core aerospace and defense end market.
GAAP operating income for the second quarter of 2019 was $16.8 million.
Compared to $31.7 million in the second quarter of 2018 and $17.5 million in the first quarter of 2019.
On a GAAP basis net income in the second quarter of 2019 was $3.4 million or three cents per diluted share. This compares to net income of $84 million or 65 cents per diluted share in the second quarter of last year, and a loss of $3.3 million or three cents per share in the first quarter of 2019.
The results for the second quarter of last year included the release of a tax valuation allowance of $74.6 million related to the purchase of Anaren.
The remainder of my comments will focus on our non-GAAP financial performance.
Our non-GAAP performance excludes acquisition related costs restructuring costs, certain non cash expense items and other unusual or infrequent items.
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 second quarter was 13.6% compared to 17% in the second quarter of 2018 and 14.6% in the first quarter of 2019.
The year over year decrease in gross margin was primarily due to lower volumes in our commercial end markets and ramp related inefficiencies associated with a major product launch in our cellular end market.
Selling and marketing expense was $17.5 million in the second quarter or 2.8% of net sales.
Compared to $18.1 million or 2.5% of net sales a year ago, and $18.4 million or 3% of net sales in the first quarter.
Second quarter, DNA expense was $31.7 million or five.
Net sales compared to $34.4 million or 4.8% of net sales in the same quarter, a year ago, and $31.6 million or 5.1% of net sales in the previous quarter.
Our operating margin for Q2 was 5.9%.
This compares to 9.7% in the same quarter last year and 6.5% in the first quarter.
Interest expense was $17.4 million in the second quarter, an increase of zero point $6 million from the same quarter last year, essentially due to higher interest rates as the full quarter effect of incremental term loans associated with the acquisition of Anaren was offset by a $144 million of debt repayments since last year.
During the quarter, we recorded $2.2 million of foreign exchange gains.
Government incentives brought this total gain to $4.4 million or approximately four cents of EPS.
This compares to a gain of $6.2 million or approximately five cents of EPS in Q2 last year and a loss of $3.6 million or approximately three cents in the first quarter of 2019.
Our effective tax rate was 12.2% in the second quarter.
Second quarter net income was $21.3 million or 20 cents per diluted share.
This compares to second quarter 2018, net income of $52.3 million or 48 cents per diluted share.
And first quarter 2019, net income of $16.4 million or 16 cents per diluted share.
Adjusted EBITDA for the first quarter was $82.9 million or 13.1% of net sales compared to second quarter 2018, adjusted EBITDA of $115 million $115.9 million or 16.2% of net sales.
In the first quarter, adjusted EBITDA was $78.5 million or 12.7% of net sales.
Cash flow from operations was a strong $86.1 million in the second quarter.
Compared to $55.6 million in the same quarter last year.
For the first six months of 2019 cash flow from operations was $123 million compared to $41.4 million during the same period last year.
Cash and cash equivalents increased at the end of the second quarter to $284.5 million from $235.2 million in the first quarter as we accumulate cash for the repayment of our convertible bond, which will mature in December of 2020.
December depreciation for the second quarter was $41.2 million.
Net capital spending for the quarter was $34.7 million.
Now I'd like to turn to guidance for the third quarter.
We expect total revenue for the third quarter of 2019 to be in the range of $690 million to $730 million, we expect non-GAAP earnings to be in the range of 35 to 41 cents per diluted share.
EPS forecast is based on a diluted share count of approximately 106 million shares.
Our share count guidance includes securities such as options in our shoes, but no shares associated with our convertible bonds.
We expect that SDMA expense will be about 7.4% of revenue in the third quarter.
We expect interest expense to total about $17.3 million.
Finally, we estimate our effective tax rate to be between 11 and 15%.
To assist you in developing your financial models, we offer the following additional information.
We expect to record during the third quarter amortization of intangibles of about $11.4 million.
Stock based compensation expense of about four point million dollars $4.8 million.
Noncash 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 will be participating in the Needham Industrial Technologies Conference in New York City on August 14th.
The Jefferies semiconductor hardware and communications infrastructure summit in Chicago on August 28.
The Deutsche Bank Technology Conference in Las Vegas on September 10th.
And the Deutsche Bank leverage Finance conference in Scottsdale on September 24th.
That concludes our prepared remarks, and now we'd like to open the line for questions Amanda.
Yes. Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure your mute function is turned off.
Signals from Jamie Clement.
Again press Star one to ask a question then we'll pause for just a moment everyone an opportunity to signal for questions.
And we will take our first question from Steven Fox with Cross Research. Please go ahead.
Sorry about that thanks, good afternoon.
A couple of questions from me if I could first of all can you just sort of clarify you mentioned some inefficiencies with the cellular ramp is that something thats ongoing into the quarter has that been resolved.
And then I had a couple of follow ups.
Hi, yes, so what what happened there Steve this is Tom.
The the ramp just started a bit earlier than we had.
In our forecast and because of that of course, you're starting at a really I would call. It pilot kind of production quantities are very early in the ramp and so thats the kind of inefficiency that we saw usually.
As we look at our forecast we would.
Be ramping that that ramp would occur really in our Q3, just started a little bit early this year and thats why its a little bit more visible in terms of inefficiencies there but were full on now into into wrap with a focus on optimizing yields.
In the third quarter and Thats whats incorporated in our guidance.
That's helpful. And then that leads into one of my follow ups, which is when I look at the.
Outlook you mentioned.
Cellular being 17% of sales in the current quarter. So is that reflective of now being on sort of the progress of regular ramp that we've seen in that market.
The last few years or is there any other peculiarities you'd point out.
No very very similar certainly in the third quarter in that in that the focus is on optimizing yields.
And on that cellular ramp.
That will continue as you know in the third quarter fourth quarter will be continuing the ramp usually just around that December timeframe is when we first get some visibility into.
Sell through.
So.
So thats the situation this year as it has it has been in the past.
Great. That's helpful and then lastly.
Just from a big picture standpoint, you mentioned your PCB book to Bill is now one of those seven obviously there is lots of puts and takes in there depending on what your how orders are relative.
To sales and by market can you maybe provide a little bit of color. How you got to that level and maybe whats going on under the covers there. Thank you.
Yes sure.
Sure the the.
Interestingly, if you look at.
At Aerospace and defense and then the bulk of our commercial markets. What you are seeing in aerospace and defense is just a piece as I mentioned, we have that program backlog of $504 million only a small piece of that of course is in is in what we are calling.
Official backlog, which is really.
Hey, it's a short term look.
90 day backlog so a piece of that comes in what you're really seeing there is the back in the back half ramp in cellular that's what is the moving piece in terms of of that backlog.
During the quarter the rest of the rest of the markets in a relatively relatively flattish in terms of bookings so.
So as in the past is that is that falling ramped primarily with a little bit of other consumer business that is contributing to.
To the buildup.
Great Thats very helpful. Thank you.
Thank you.
We will take our next.
We will take our next question from William Stein with Suntrust. Please go ahead.
Hi will.
That's your will is there a William you may be on mute.
[noise].
Hey, sorry, guys had a mute problem there.
This is Jim years on for will Stein.
Where does the company stand today with regard to its financial and management readiness to engage in another acquisition.
[laughter].
Yes so.
Let me.
It would be very very clear on that one where you know the primary focus for the company continues to be.
On managing our balance sheet very pleased with the cash flow.
We generated in the quarter I think thats, a great indicator of the discipline.
That.
Certainly Todd brings to add to the organization, but also our operational management.
And and how they're executing and for TTM, even when our markets are a bit more challenged so tremendous job there.
Generating cash flow now that cash flow in turn we are focused of course, and we will continue to invest in our business.
But we will also pay down our debt as a priority and prepare as Todd indicated.
For our convert.
Coming due next year late next year so.
Those that managing the balance sheet is priority number one so I guess, that's the answer for you that you know we will of course, we are always looking for.
M&A opportunities that fit into our strategy, but the priority for the company.
He is on managing that balance sheet paying down our debt.
Great. Thanks for the answer.
You guys kind of touched on this.
In other end markets I'm, just wondering if you can give us an update with regard to traction in cross selling anaren.
In the automotive end market.
Oh sure Yeah. So on on the commercial side, you're right, we highlight of the aerospace and defense progress there.
And largely because they're there and as we had expected.
We have no immediate traction with with the Anaren.
And and the engineering activities, what we're doing on the commercial side.
It's tended to be a little bit longer term because there were taking RF.
Capabilities, the Anaren brings us.
And we're now bringing.
Those capabilities to several areas optical networking being one.
And then.
The automotive area being another where.
We're seeing customers struggle with with higher frequency requirements.
And starting to look outside for support.
And so what I can tell you is that we continue to gain traction there.
It is a longer term.
Effort for us.
And in May in the meantime, we are benefiting of course from a component RF component position that Anaren brought us.
For immediate opportunities in Fiveg.
And on the predict particularly on the antenna side.
For Fiveg Buildouts so.
Certainly continue to see the benefits from the entering combination there.
Awesome. Thanks, so much guys appreciate it.
Thank you.
We will take our next question from Matt Sheerin with.
Please go ahead.
Yes, yes. Thank you just another question regarding the automotive.
Segment.
You've been down double digits year over year for four quarters now, but it looks like based on the guidance.
You're seeing sort of a flattening or a little bit of sequential growth.
Are you getting a sense that orders are starting to bottom here.
I know you talked about some some headwinds diesel being one of them I know you've got some exposure to China and China E V. But how do you see that playing out are we going to be bouncing around the bottom here for a while or whether there are signs that.
Things will start to come back.
Yeah. Thanks, Matt.
So you're right I think if you know if you look sequentially Q2 to Q1, we were down slightly and automotive.
Sure look year on year the numbers.
Of course were substantially down in automotive.
If we start to look forward, yes, as we as we're guiding Q3, we're looking at.
A little bit of that.
Of.
Improvement in automotive.
And what I would attribute that primarily to is just.
Inventory work through at this point.
In terms of end market demand.
Continue to see a lot of softness out there.
And.
And frankly I think there is I think this is a.
Certainly overall in terms of automotive unit demand I think we are going to be in a soft period.
For for an extended period of time now how long is that hard to hard to.
For me to estimate, but I think I think this is a longer term situation of course, what we will continue to see is growth in what we call or other automotive market, which is really where we see the activity related to aid that.
Economists vehicle and some of the activity.
And continuing to see that grow as a percentage of automotive so.
As we go forward now that we are sort of bouncing along the bottom as we've said on on unit sales.
Our our goal is to start.
To continue to gain traction.
In that growth area. So that you start to see you know that sequential growth come back in automotive.
Okay, and then on the cellular business, where you're seeing huge uptick in September .
And I know that you and I appreciate you probably have a ton of visibility into the December quarter, but in prior cycles Youve had growth sequentially in September and December but in other cycles, you've been down in December So are you getting a sense.
And in terms of your visibility and maybe the bookings number where you should expect to see at least some sequential growth in December .
Yeah, So I think I.
And particularly given last year's experience, it's a it's hard to forecast at this point that.
You know as I said the Q3, we're very focused on yield optimization Q4 or early in Q4, we have some visibility, but then it.
Really the rest is determined by by sell through and so.
What what I guess.
I think I believe it's encouraging to.
To say that what we are seeing or believe we are seeing is is more.
Disciplined sort of inventory management on the part of our customer base, which.
Which would.
Mean that yes, we might we might be flattish on Q4, but that would bode well for Q1 Q2.
Up next year as we can as we finish out the cycle.
As you remember this past cycle was particularly difficult because.
Q4.
Which was down from Q3, but then really we still had a big inventory their major inventories in the channel that affected Q1 and Q2 so.
We are again, you know hopeful that.
That that everyone that we've all learned the lesson that the inventory management disciplines in place that.
They will help.
Helped by the supply chain in this particular cycle.
Okay, Alright, thats it thank you.
Thank you.
Well take our next question from James.
Rich Tony from Needham and company. Please go ahead.
Thank you good afternoon.
I'm wondering if it looking at the range of revenues.
For Q3 is that range.
Skewed toward any particular vertical I guess cellular being the bigger wildcard.
Thanks, Jim Yes, so certainly if you look quarter on quarter, that's where you're going to see the big one.
His cellular.
You know there as we've just covered this a little bit we're looking at a little bit of an uptick in automotive.
That's and then as a very slight.
Uptick in aerospace and defense and computing frankly, the aerospace and defense situation is.
This is the summer period, so were more constrained by just our ability to.
Push product out the door.
Anything else and that's why you'll see a big year on year improvement in Q3, but sequentially little bit harder to generate that improvement.
But if you look sequentially you know I'd say that again, the big mover is cellular.
And then you know a little bit of an uptick in automotive as well.
And then thinking about auto aerospace and defense looking out to Q4 seasonally.
That is that a stronger quarter, where you would see that business.
Pick up a bit or maybe if you could just talk a little bit about the seasonality in that portion of the business yeah.
You know its interesting as the aerospace and defense is they.
From an order standpoint, you're absolutely right, we would usually expect as we sort of close out a calendar year that there will be an uptick in bookings not always the case.
But certainly there's a push to sort of close up purchase orders and get get those purchase orders in the hands of the supply base.
So we do see that but from a revenue standpoint, yeah were relatively consistent if you look at the revenues.
You know.
And what will be of course seeing is as we've been.
Adding capability and adding capacity our ability to push out more product.
You know out the doors is what's enabling us to continue to grow.
In aerospace and defense and so you'll you should see a steady.
Buildup from that standpoint in terms of our revenue capability, but but thats really what you'll be seeing rather than than a cycle that would be tied to the end market.
And then Tom just one final question for me on the auto vertical.
Looking at the Q2 performance.
You talk to the customers I'm sure is that how is that how is the tone change says you've kind of had recent discussions with customers and maybe you know is it mainly in Europe or is it pretty broadly based across geographic regions.
Yeah. So.
Great question, I think I think the.
The interesting thing this past quarter, whereas in the previous quarter, we had seen pronounced weakness in Europe and in China.
What we saw in this past quarter was was the weakness was broader so we saw North America come into his as a.
An area, where we saw softer demand.
And.
And so that was a I would say a new.
A new development as as I've been talking to customers, what what what I'm hearing is.
More.
Caution around the longer term situation in terms of unit sales.
And.
And the and the belief and I'm, certainly a subscriber and listen to this that that.
You know that there is now certainly in Europe and in China.
A brought a longer term conversion that that is occurring towards towards the electric vehicle towards alternative.
Energy vehicles and primarily that.
But but also hybrids and that now is becoming because of that shift.
There's certainly we're in this period of positive that consumers are being forced to make decisions on.
What type of vehicle they need to buy in the future and whether it makes sense to buy a traditional.
Internal combustion engine based vehicle or or to push into some of the new technologies.
And I and I am hearing from the customers that they are now feeling that that really is a you know that that is going to be that structural shift is now commencing which is why you know again short term I think we're going to see some challenges in terms of this transition.
But in the longer term feeds into higher and higher electronics content, and therefore more and more value in terms of PC. These views per vehicle.
So.
That's why our emphasis has been really on developing continuing to support.
The what.
Again, a sort of a new set of customers that were seeing around autonomous vehicle around easy.
And and even some sort of internet of things type customers that are pushing into automotive applications. So.
From that standpoint, the development activity is very exciting I think the.
Shift in and customer and consumer behavior is right now is causing that damper on demand but.
But you know.
Bodes well for the longer term.
Got it thank you.
Thank you.
We will take our next question from.
Maynard with Macquarie Macquarie.
Thank you.
What was the biggest impacts in the sequential decrease in the gross margin in the quarter was it primarily product mix, maybe if you could walk us through what the biggest factors were.
From a sequential perspective yeah.
Yes, I think the.
Two things one obviously, there's been some some volume fluctuations so that.
If we had a little bit of growth in India and Thats. Good news, but some of the commercial markets were softer and so that created some challenges.
The other issue is one that Tom talked to I think in our first question and that really regards the.
The ramp and the timing of the ramp.
And our new and our annual product launch cycle that we do in cellular.
Last year that ramp really didn't get going in earnest until more in July this year. It started more in June and so you saw costs in Q2.
That we didn't have in Q1.
And that's an on boarding of labor.
Thats yields and productivity kind of challenges that are very typical in our ramp. It was really just kind of a timing issue.
I was probably the biggest the biggest difference.
So if I look at your guidance for next quarter and I just look at take all the mid points it looks like your.
Gross margin guidance is maybe 16% 16.2%.
It is I guess, how much of that is utilization versus the.
Sort of reversals of some of the other other issues that you had in Q2.
Well and have big strokes here I would venture to say that about 75% of that improvement is sequentially is volume driven.
Okay, we had an extreme situation with challenges in utilization calm quoted some of our Asia utilization numbers. The last two quarters they've been in the fifties, which is extremely low for our Asia footprint.
You are seeing a big recovery and there's there's some good flow through from that so that's driving about three quarters of the improvement and then we expect to improve on yields as we go through the quarter and so that's that's some of the the the the bounce back from what we've talked about in Q2.
Okay, and then sort of bigger picture, if I look into next year on the automotive side, you've got tightening emissions standards.
If I just look at your share across the Oems. If we were to let's say go for one one decline on IC in one increase on on E. V is your share commensurate on both sides.
That that you feel like it would be.
An incremental benefit because of the content increase or.
How should we think about sort of that that transition that happens and then your share within that.
That's a fascinating question.
The.
And the reason I say that is because there's so much movement in TV right now.
And and and so.
I would come back at you answered the question of who's who's going to win.
Because I think that's that's critical.
Given the volume Thats out there I would I would say that where you're probably right. It's sort of a one one to one in terms of share position.
For us overall.
But what we have our eyes on is how is that business going to.
Shift over time, where who is going to be the winner in China is a big one.
And how do we build position in China.
So thats a.
That's certainly an area of focus for us the other big question is what happens with the tier ones and.
And how did the tier ones.
Evolved in terms of their positioning on TV right now, they're very strong it was either relatively strong in Europe .
Less so perhaps in the U.S. and certainly less so in China.
So we our goal is to certainly maintain our position there with the tier ones.
And build a position outside of North America.
In terms of TV presence in China.
So that's a that's certainly going to be a an ever changing situation, you're absolutely right. The dollar content per PCB will benefit.
Will benefit us and were looking you're looking at again upwards of $200 per vehicle on average within easy versus 70 in the seventies.
On average for a standard vehicle so.
Definitely PCB content benefits us the drive for US now is to make sure that that again that we continue to grow that that what we call the other.
Customer mix and maintain our position at the tier ones.
Okay, and then on the free cash flow side with the exception of last year, you've had actually a pretty good track record.
Of generating as much free cash flow as you do in net income.
And it sounds like Youre your.
Trying to manage.
And improve the cash flow. So im just curious if you think you can actually generate above.
What your net income this year will be.
So free cash flow is obviously combination or the net of cash flow from operations and less our capex investment.
We've been we've provided generally guidance on our capex expectations.
We still expect to be in that one.
50 to 170 range on cash Capex in 2019, and that's inclusive of that three acquisition that Tom mentioned, so we've absorbed that in our kind of normal Capex plan.
When you look at our cash flow from operations, we are focused on improving our working capital metrics.
That has been a focus of ours for several years now.
With the when we acquired Anaren, they had a different working capital model and processes and we've been working to digest that and to try to bring additional discipline to that.
And we are starting to bear a little bit of fruit, but that is tough ground. There that that's a million little thing to try to improve working capital. There is no big home runs there and we're making progress some of that I think is reflected in our results in the second quarter and we continue to focus on that as a company.
On a regular basis here as part of our operating model.
Steve to quote an exact number I'm not really in a position to do that.
But certainly we would expect we when you look at cash flow from operations. We've had a good first half of the year compared to last year.
And typically we see seasonality in our cash flow from operations.
So as the second half ramps up.
Any given quarter it can fluctuate, but if you look over a couple of quarter period of time, you should see an uptick there and cash flow from operations and then if you deduct the your estimates there from a deduct the capex from that you would get your cash flow estimates.
We don't really provide cash flow from operations guidance. So I can't give you a specific free cash flow.
Number from a guidance standpoint.
Got it Okay, and then last one just on the HDD side.
I think you were working on optimizing.
Constrain capacity and getting other lines validated by the customers. You also made an asset acquisition when the machine you're I think is going to be relocated to the chip what plans I guess any update there.
On leaving someone that backlog in the business because it sounds like there won't be any sort of step function increases to the capacity, but maybe if you can just give us an update on how that's going.
Yes so.
That's the first one is.
I think as you said is not incremental it's more a part of our optimization of capacity.
And so.
Should lead to a steady improvement in our capacity and aerospace and defense.
And that's a function of moving.
Work effectively between our facilities and making sure that the.
That we have that we are cross qualify across facilities for for any given program.
And that in turn allows us to optimize utilization in those facilities. So we continue to make progress there I think as I pointed out last quarter, we've been really.
I'm really pleased with where the cost our customers' willingness and two.
To allow us to do that.
Hi, good to do that kind of move I think thats, a nice statement confidence from our from our customer base.
So we're going to continue to do that and that will help us in terms of adding incremental.
Capability.
As we continue to increase our capacity there.
In terms of the acquisition three asset acquisition you have the the timing right well, we're going to be again. This is a relatively small.
Acquisition.
Of of assets.
Try primarily targeted at that finer line.
Circuitry required requirement miniaturization requirement in our customer base.
And we will be moving that capacity and those assets to our Chippewa Falls, Wisconsin facility early next year. So we would start to see the capacity.
Yes, again limited capacity, but some some benefit there.
In Q late in Q1 of next year and into.
Q2, but the primary what that what that acquisition.
It really does.
It is giving us capability in the U.S. for.
A more robust and reliable approach to finer line circuitry requirements from our customer base.
As our customers continue to miniaturised and their requirements. So very excited about the capability from a revenue standpoint limited immediate contribution, but you'll see overtime, how critical that that kind of capability is for us.
Great. Thank you.
Thank you.
And well take our next question from.
Question with JP Morgan.
Yes. Thanks for taking my question can you give us some sense of what business you are and you are not doing with wild way.
And then expand from that too.
You to sort of comment on the possibility that you have somewhat disadvantage now in China or in terms of.
Integration its local supply chains given.
It's almost all of the corporation.
HM Okay, the y way piece.
So as as you as you remember that probably has traditionally.
In one of our top five customers and from a standpoint of contribution to revenue somewhere in that 4% to 5%.
Revenue kind of range.
The.
Fortunately, the bulk of our product and supply.
To walk away has come out of China and out of our facilities in China based on site on materials and so we've been able to continue.
Shipments of our printed circuit boards are backplane assemblies.
And even some of our components that come out of China.
And so where we have been.
I have not been able to continue to ship has been our components coming out of the U.S.
And they are we are we are in the process and have applied for an export license.
And so certainly we hope that we would again be able to commence shipping.
But that's not incorporated into our guidance so from a revenue standpoint, very very limited.
Fact, there.
And the good news is we continue to take care of our customer.
And and the bulk of our product we've been able to continue to ship.
If you look at.
The effective so.
Our production in China for other customers.
In China.
You know I. The TTM approach here is to put our customers front and center and two and two can you really focus on meeting their requirements China customers outside of while we are relatively even relatively limited for.
TTM.
But we havent, we certainly havent seen a change in behavior. There we continue to.
To sample and support our customers.
There in China.
From our facilities, there and and will continue to to make that a real folk so.
So that gives you gives you the answer Paul.
Yes sure.
Can I just go back to sort of product questions on those as well.
I mean, I'm wondering if it's possible the as you can see in the log for voice of our systems.
The auto manufacturers, so slowly kind of milk those product lines.
So Mike massive investments in new features and stood stop to swivel pivot toward some.
The vehicles from hybrids have the innovation really since lumos.
Is that a possibility soon is that a problem. So if that's the way they kind of manage this transition.
No I think I think that is a possibility.
I think the.
There is a view or at least I've heard.
From customers lately, there's certainly a view among some of the tier ones as they they will emerge as the leaders in.
In continuing to service their customers on the internal combustion engine side.
And that would be for us.
Ongoing legacy business that we will continue to manage while they pivot then back to building starting their own.
Building their own capabilities on the on the side.
And so that's what.
Effectively what we're doing is is.
Continuing to support our customers.
Particularly and again the traditional structure has been our primary cuts primary customer base, where those tier one part suppliers continuing to support them as they work on development activities in the TV.
And even if that will support them through through the life of those programs.
As as they continue their strategy on supporting their customer base.
So it doesn't I think that bad that is absolutely yes.
Conceivable.
And and we will be in a good position to support those customers.
Okay. Thank you.
I would now like to turn the call back over to Tom for any further closing remarks.
Thank you.
Yeah, I, just like to close by summarizing some of the points that I made earlier.
First we delivered earnings at the high end of the guided range and generated strong cash flow. Despite weakness in our commercial end markets 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 our employees, our customers and our investors for their and your continued support thank you and goodbye.
This concludes today's call. Thank you for your participation you may now disconnect.