TTM Technologies Inc (TTMI) 2002 Q2 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the TTM Technologies second quarter conference call.

At this time I would like to inform you that this conference is being recorded for rebroadcast and all participants are in a listen only mode.

At the request of the company we will open up the conference for questions and answers after the presentation.

I would now like to turn the conference over to Ms Stacey Peterson, TTM's Chief Financial Officer.

Please go ahead mam.

Good afternoon and thanks for joining us for our second quarter conference call.

Before we get started and I turn the call over to Kent Alder our CEO, I would like to make the following statement.

During the course of this call, we will make forward looking statements subject to known and unknown risk and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risk and uncertainties include, that are not limited to fluctuations in quarterly and annual operating results, the volatility and sequicality of the various industries that the company owns, and other risk described in TTM's Form 10-K, Form 10-Q, and other reports and statements as filed with the Securities and Exchange Commission.

The company assumes no obligation to update the information provided in this conference call.

Now let me turn the call over to our CEO, Kent Alder.

Thanks Stacey.

As I am sure everyone on this call is acutely aware, business conditions in the electronics industry remain very difficult during the second quarter of 2002.

Compared with the first quarter of 2002, demand contracted further and while our average price levels actually increased slightly in the quarter, on a sequential basis, we saw some renewed pricing pressures towards the end of the second quarter.

For the second quarter of 2002, we reported a loss of 3 cents per diluted share.

On a cash basis we posted a loss of 2 cents per diluted share, excluding restructuring charge associated with the production realignment, the loss would have been 2 cents per share and the cash loss would have been 1 cent per share in line with our previously issued guidance.

Moreover we continued to aggressively manage the business to meet market conditions, specifically during the second quarter, we reconfigured production among our three facilities.

As part of the realignment outer layers previously produced in Burlington will be shifted to Redmond and Santa Ana.

In conjunction with the realignment we booked a pre-tax restructuring charge of 907,000 dollars in the second quarter.

We expect significant benefits from the realignment.

We have enhanced our efficiencies and reduced our costs by eliminating the overhead and management structure associated with maintaining outer layer production in Burlington, we will reduce our fixed costs, and the layoff of approximately 130 employees primarily at our Burlington facility will further reduce our labor costs.

These changes which will be complete by the middle of the third quarter are expected to result in quarterly cost savings in excess of one million dollars, once the work force reduction is complete.

At the same time the realignment should not reduce our long-term capacity, or hurt our ability to respond to an industry upturn.

At the same time that we managed our cost structure, we continued to invest in our business and future.

We captured approximately 35 new accounts in the quarter, and we continued to invest in our successful time and technology strategy.

During the second quarter, our production continued to reflect a high value added product mix.

Quick-turn boards remained essentially flat at 44 percent of revenues in the second quarter compared to 45 percent in the year-ago period and 44 percent in the first quarter of 2002.

The average

account statistics reflect a slight mix shift with a relative increase in the percentage of our business from the computer peripherals end markets.

We continued to experience softness in the higher tech communications and the high-end computing end markets during the quarter.

The average layer count per panel decreased to 8.6 for the second quarter of 2002 down from 8.9 for the previous year, but it was up sequentially from the first quarter of 2002 when the average layer count per panel was 8.5.

Boards of eight layers or more represented 57 percent of revenues in the second quarter of 2002 compared with 66 percent of revenues for the second quarter of 2001 and 55 percent of revenues in the first quarter of 2002.

Moving up to boards with 12 layers or more, this segment accounted for 27 percent of revenues in the second quarter of 2002.

That figure is down from 29 percent in the year-ago period and in the first quarter of 2002.

As for customer concentration, we reduced this further during the quarter.

The percentage of our business from our top ten customers decreased year-over-year from 46 percent in the second quarter of 2001 to 43 percent in the second quarter of 2002.

And it declined sequentially from 45 percent in the first quarter 2002.

For the quarter, no single customer made up more than 10 percent of sales.

Now let me turn the call back over to Stacey, who will further discuss business conditions and the outlook.

Thanks Kent.

I will start by highlighting our financial performance for the second quarter.

Then I will review expectations for the third quarter of 2002.

First, let me start with year-over-year comparisons.

Revenue decreased 24 percent from the prior year to 23.3 million dollars in the second quarter of 2002.

Second quarter gross margins of 8.4 percent compared with 25 percent for the second quarter of 2001.

Gross margins fell year-over-year due to lower fixed costs and a challenging pricing environment.

We posted an operating loss of 1.9 million dollars compared with operating income of 3.8 million dollars for the second quarter of 2001.

EBITDA decreased 86 percent to one million dollars compared to 7.4 million dollars in the same period in 2001.

We posted a net loss of 1.3 million dollars compared with a net profit of 2.2 million in the year-ago period.

The reported cash loss per share were two cents in the second quarter of 2002.

Adjusted for the restructuring charge, it was a loss of a cent.

This was down from cash earnings per share or nine cents in the year-ago period.

In terms of sequential trends, we have adjusted the second quarter of 2002 to exclude the restructuring charges for purposes of comparability.

Sequentially, revenues decreased 2 percent.

Second quarter gross margins up 8.4 percent compared with 9.9 percent for the first quarter of 2002.

Gross margins fell sequentially due to lower fixed costs in

and labor cost pressure, the latter of which we addressed with our recent restructuring.

Our operating loss of one million dollars excluding the restructuring charge compared with an operating loss of 200,000 dollars in the first quarter of 2002.

Adjusted EBITDA declined 21 percent to 1.9 million for the second quarter of 2002.

The adjusted net loss of 700,000 dollars compared with a net loss of 300,000 in the first quarter of 2002.

And the adjusted cash loss per share of one cent, prior to the restructuring charge compared to breakeven levels in the first quarter of 2002.

Our balance sheet strengthened further due to positive free cash flow from operations.

We ended the second quarter with a net cash of 10.7 million dollars compared with a net debt of 8.1 million dollars at year-end 2001.

And our cash position increased to 39.4 million dollars at quarters end, up from 24.5 at year-end 2001.

We continued to proactively manage all aspects of our working capital.

We reduced day sales outstanding to 44 from 51 in the second quarter of 2001.

Overall, our cash conversion cycle improved by 19 percent to 38 days compared to the same period last year.

In addition, we have 25 million dollars of unused capacity on our line of credit.

That gives us the financial flexibility to pursue a variety of business opportunities.

Let me turn to review of our business by type of services.

On a sequential basis, overall volume declined 4 percent in the second quarter, while average prices were up slightly.

Our Quick Turn business accounted for

percent of revenue consistent with the first quarter of 2002.

We continued to see an uptick in the average order size and the number of new jobs per day were unchanged during the quarter.

Looking ahead, for the third quarter of 2002, we project revenues in the 20 to 23 million dollar range and cash earnings per share between a profit of one cent and a loss of one cent.

We will open the call for your questions.

Thank you.

The question and answer session will begin now.

If you are using a speakerphone, please pick up the handset before pressing any numbers.

Should you have a question, please press one followed by four on your push button telephone?

Should your wish to withdraw your question, please press one followed by three.

Your question will be taken in the order it is received.

Please standby for your first question.

Your first question comes from Mark Haffenberg, please state your affiliation followed by your question.

Please stand by for your first question.

Your first question comes from Mark Hassenberg.

Please state your affiliation followed by your question.

Good afternoon.

Talking to various companies in the

area, some of them are complaining or highlighting increased competition from the Asian markets whereas others feel that the, that the markets that they are addressing are fairly free from Asian competition.

Can you describe your business and whether or not you are having effects from Asian competition and why you might not be having it?

Thanks Mark, I think earlier on in the last year or two, the Asian competition was there, we have basically with our business, transitioned most of the work that would be susceptible to Asian competition out of our facility.

We continue to execute our time, technology, high-mix strategy that is more isolated from Asian competition.

So, most of the effect of the Asians, we have already been through and we're pretty well positioned now, just looking at our customer base, we feel like, from our internal perspective, we're pretty much at a bottom and have some tremendous upside now with our existing customer base and we continue to, as you can see from the numbers, diversify our customer base, no customer in excess of ten percent.

So, we expect that that trend will continue.

Your original strategy was quite different than most of your competitors, where you had, you know, Quick turn and then prototype and then volume production and you really had three different facilities that mixed a little, but were primarily dedicated to each type of business and you hope that that would allow you to follow your customers to each stage and offer them something that your competitors couldn't.

Has anything happened here in the past year or even the last quarter that makes you think that that strategy might not be the right one going forward and that maybe you need to consolidate your facilities or downsize any of the actions beyond what you've done so far?

Yeah, Mark, that one-stop shop strategy, we still execute that strategy when the product goes through the production, the R&D or the prototype stage we are there, when it goes through the ramp stage we are there, and if it's high mix type product, we follow that all the way through the product life cycle.

If it is a high volume type product then that's the work that was susceptible overseas and we don't participate in that portion of the work.

So, we execute that strategy effectively if it's a high mix, high technology with a lot of time element attached to it.

And with that change now, we have consolidated the outer layer capabilities of our Burlington facility into Redmond and Santa Ana.

So, we have restructured our business significantly reducing our cost structure to match the marketplace that's available and that will allow us to continue to execute this strategy but execute it in a more efficient, more cost-effective way.

Thank you, very much.

Fine performance in this environment.

Thank you Mark.

Thank you, your next question comes from John McManus.

Please state your affiliation followed by your question.

Yes, Needham and Company.

Can you take further cost out of Redmond and Santa Ana without hurting your core capabilities?

Yeah, John, we are, I mean, our philosophy is that we are going to be the leader in efficiency and cost effectiveness and maintain our ability to serve our customers in the most effective way.

So, we are constantly working at ways to improve our efficiencies and the latest move that we've made to consolidate into the outer

into the two facilities, I think we will have over a million dollars of cost savings a quarter attached to it.

And we're still not happy that we're as good as we can be.

We think that we can continue to improve with more efficiencies in our processes, we think we can reduce our material cost sum going forward.

So, we will still continue to improve our operations and we won't be able to do that without damaging or impacting our ability to service customers.

We continue to basically reinvent our company to match what the marketplace has given us.

We continue to service our customers with improved technical sales, with improved service overall.

So we provide value added to our customers.

We were not the price leader by any means and we work hard to be able to keep our prices up and we feel like in return to that we have got to give our customers value.

And so we are getting cost effective on one hand and providing the services that the customers need on the other hand.

So we are working hard on both ends to make this company the best that it can be and I think we're making good progress and we look forward to continuing to make our company more effective.

Could you tell us what the sequential unit or panel growth was and what the sequential pricing degradation was in the quarter?

Sure, John.

Actually our panel production went down about 3 percent sequentially.

And our average prices were up 1 percent.

Could you give us a feel for what SG&A expense and G&A expense might be in the third and in the fourth quarters, when the full impact of the savings take place?

Yeah.

On a normalized basis, just the G&A itself, I'll break it into a couple of things for you.

Selling expense will probably continue to be about 7 percent of sales.

Further the commission rate make up 4 percent.

We have a pretty high fixed cost structure in there, because our customers service unit is included in our sales.

For

percent selling, G&A should be about 1.1 million.

And now we also have an amortization of intangibles, and that's a little over 300,000.

So that should help you build the whole SG&A or operating expense section of the income statement.

Could you tell us there, what cash flow from operations was in the quarter?

Sure, it was 1.9 million dollars and free cash flow was about a 150,000.

So free cash flow was after our investing activities.

Okay, so CAPEX was about....

It was about 1.5 million.

Okay, and depreciation?

Depreciation 2.4 million.

Okay, and one last question.

Could you tell us who your top five customers were and maybe what percent they were of revenue?

I can run down the top five and we'll do this in alphabetic order.

The top five were ATL Ultrasound, Compaq, Jabil

,

Technology and Solectron.

The top five were 30% of our revenues.

Thank you very much.

And next question comes from Michael Walker, please state your affiliation followed by your question.

Thanks, it's Credit Suisse First Boston.

Two questions, actually a clarification and a question.

I guess you did say that ASPs were up slightly.

That is despite you said, the pricing pressure late in the quarter, so down priced that.

So, most of the quarter ASPs were up somewhat more significantly?

Yeah, they were up, I wouldn't say somewhat more significantly, we started to see pricing in future months come down a little, it wasn't a lot.

But there is also pricing pressure depending on the volume that you're going after.

Okay, and then my follow-up is to what degree do you think the overall pricing improvement during the quarter was due to some consolidation on the part of your OEM competitors?

I think the pricing, our pricing was basically, we have some product mix that helped us with our pricing, our Quick Turn pricing.

Well, it was off about 8 percent, our standard pricing was basically up, about flat.

So overall we were up a percent.

A clarification.

Quick Turn was up 8 percent and standard pricing was down slightly

percent.

Okay, so the Quick Turn pricing was up 8 percent.

This is my final one then.

Are you perceiving yourself as winning some share or some business away from a couple of competitors domestically who have been shuttering operations?

We are pretty actively recruiting new customers constantly with our Quick Turn capabilities that allows us penetrate new accounts.

We added 35 new customers during the quarter.

We have added 79 year to date.

I am not sure how many of those exactly came from customers or competitors who have shuttered facilities.

I think that some of the advantages we have is with our Quick Turn capabilities, our technical sales, our overall customer service, and our strong balance sheet.

I think, that's something that customers continue to look at your financial health and, I think, that's been an asset for us and we will continue to be an asset in the future.

Your next question comes from Ben Ruff.

Please state your affiliation followed by your question.

I am with JP Morgan.

A few questions.

Since the Compaq-HP merger, have you received any clarification on where you will stand in there or supply day?

We haven't received any notification.

I am not sure that they are aware internally.

I can tell you that all of our work we get from Compaq now comes through the Quick Turn source, which is the product of the program managers and program engineers and we deal successfully with 20 or 30 different program managers and that's where our work comes from.

We have been able to service that quite effectively and feel that that work is secured, if it was maybe into the purchasing arena, it might be a different situation, but we feel pretty positive about our position there with the Compaq-HP merger and in fact hope that HP can take a look at our service there with Compaq and be able to expand our opportunities there.

Any expectations that you will have another 10 percent customer anytime in the next fiscal year at least?

I see the conclusion of 2002, I mean.

I think we will continue to diversify our customer base and as we set right now and continue to add customers, I believe that, right now my best estimate would be no, but we will continue to diversify our customer base.

In affect to follow up on John's question.

Just a little bit about the timing of the restructuring.

You mentioned that the third quarter, you would be complete with the restructuring.

Should we anticipate that half a million dollars of cost reduction would be embedded in the third quarter?

Do we get instant return on that or will that be, you know, coming over time?

It will be completed by the middle of the third quarter, so half a million is a good estimate.

Okay.

Great.

And my last question, could you venture against on where pricing goes in the third quarter?

What we forecast then is we forecasted approximately flat with the end of June, which is just slightly off our quarterly average.

So it seems to be effectively flat.

And maybe if I could quickly follow up, what goes into that estimate that you have.

I would presume that you have a pretty short backlog, anything that you could add to that?

Sure.

We do have a little bit longer backlog at our revenue facilities and we work closely with our sales and marketing teams and also try to understand the code activity and what we are seeing out there.

Thanks.

With the combination, we just really have kind of integrity with the customers, what our sales folks are looking at, our cash rate accruals and then finally during some backlog.

Okay, great.

Thank you so much.

Your next question comes from Scot Robertson.

Please state your affiliation followed by your question.

Yes, Investec.

Quick question, is there anything less to take out of Burlington or is everything you can, been done up to this point, in the near term, for your near term goals?

Are you talking about cost structure?

Cost structure.

What we have left in Burlington is our inner layer and drill departments and as those are in place as they move product into the Redmond and Santa Ana facilities, there is some upside in our overall operation.

We left those in Burlington, simply because that's the most cost effective way to produce the number of inner layers and cores that we had available as well as drill.

So, as we move forward though, we will continue to look at our operations in Burlington, but I think, there are always ways to become more efficient.

So we will continue to look at that, but now we look at Burlington in conjunction with our other facilities and how we can reduce cost overall and make all three facilities as effective and as efficient as possible.

Also Scott, one thing that was keen in our decision is we wanted to keep our overall capacity the same and to be prepared for an upturn.

Well, that leads to my next question.

Do you still think you can support roughly 135-150 million dollars on your current structure?

We estimate that where we are out right now, we have about a 25 percent upside with the existing structure that we have in place.

Okay. 25 percent upside from?

From where we are currently at after the restructure and the

that took place.

I think

about the more into that range that you just pointed out.

Okay.

If you look at it now just the run rate we are at right now.

Okay.

Great.

Thank you.

Your next question comes from Abel Beyene.

Please state your affiliation followed by your question.

Hi.

It's Thomas Weisel Partners.

Could you tell us what your book-to-bill was in this quarter?

It was just slightly over one, about 1.02 for the quarter.

And I just want to go back and clarify that when you talked, you said about pricing earlier, you said Quick Turn pricing was up eight percent sequentially, volume was down one percent, and overall it was up one percent?

That is exactly right.

Is that correct?

Yeah, that's correct.

And a couple more.

The line of credit, I didn't hear what you said.

How much do you have available on that?

We

undrawn on it and we have a 25 million dollar availability.

And lastly just going back to pricing.

Could you, I know that it has been asked over and over again, but maybe tell us where you start seeing the most pressure?

Was it at a particular area of your business and also could you talk about what you've seen thus far in July, I mean in the first month of this current quarter?

In the first month of the current quarter?

Yes.

It was about flat with June levels.

It was about a flat pricing environment.

I think we will see more pressure on the standard side of the business or the volumes, if you will.

On the volumes.

Okay.

Thank you very much.

As a reminder, ladies and gentlemen, if you should have a question, please press one followed by four on your telephone at this time.

Your next question comes again from Ben Ruff.

Please restate your affiliation followed by your question.

Hi again.

J.P. Morgan.

Just a quick clarification on the restructuring charge.

Was that all cash and would you expect any charge in the next quarter?

No, we don't expect any charges going forward and that will be all cash.

Yes.

Right.

Okay.

That's all.

Thanks.

Your next question comes again from Mark Haffenberg.

Please restate your affiliation followed by your question.

Nottingham Capital.

When the business started to get more difficult, you took some steps to change your sales and marketing approach going to the outside.

How successful in hindsight has that been?

The number of new customers that you've added, how effective has the outside sales force been to that?

What has that done to your cost structure and the down turn and will it be a positive on the upturn?

Yeah Mark.

You know, we are pretty solid with our strategy there.

We continue to feel positive about our sales force and their ability to attract new customers.

We added 35 this quarter and we think that there are opportunities that we haven't tapped out there that we are working on that we will be able to enhance our customer base.

So, you know, looking back, it is nice to look back and this is one of those times where I can say we made a solid decision there.

We are happy with that decision and I think we will continue to execute this strategy moving forward.

I think on diversification, the number of new customer ads, we have added 200 customers since the end of the year 2000, which is more than a third of the customer, you know, over half of the customers, 50 percent greater than we had before.

So I think we've got more customers.

We are more diversified and I think it will really reap the benefits, when the market recovers.

And we do all that without adding to our cost structure.

That's right.

For me, that's the best

that's been able to reach our sales goals without adding to our cost structure.

Thank you.

If there are no further questions, I will now turn the conference back to Mr. Alder to conclude.

Thank you.

I appreciate everybody's time here today and appreciate your interest in TTM.

I think it's obvious have not been able to see any evidence of a sustained recovery.

Visibility is still limited.

We are not letting that impact us in a negative way.

We are working very hard to continue to reduce our cost structure.

We are managing very aggressively our business to meet the market conditions.

And I think, with our cost structure being one of the lowest in the industry, we will continue to reduce that, and our balance sheet being one of the strongest in the industry and having the right strategy, which is the time and technology.

We are well prepared for the future and certainly well prepared for an upturn.

So, I appreciate everybody's interest.

Thank you.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.