TTM Technologies Inc (TTMI) 2002 Q3 法說會逐字稿

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

At this time, I would like to inform you that this conference is being recorded and that 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'll now turn the conference over to Ms. Stacey Peterson, Chief Financial Officer of TTM Technologies.

Please go ahead ma'am.

Good afternoon and thanks for joining us for our third 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 but not limited to fluctuations in quarterly and annual operating results, the volatility and cyclicality of the various industries that the company serves and other risks 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 Kent Alder, our CEO.

Thanks Stacey.

As you probably know conditions in the electronics industry remained very challenging.

In fact demand contracted further on a sequential basis compared with the second quarter.

But while we are disappointed and the markets continued depressed state, we are pleased by our ongoing efforts to manage costs and we are proud of our financial performance relative to the industry and our peer groups.

But while we've aggressively managed our cost structure, need to invest in our business and future.

We captured approximately 31 new accounts in the quarter and we continued to invest in our successful time and technology strategy.

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

Quick turn boards increased to 45 percent of revenues in the third quarter of 2002, compared to 40 percent in the year-ago period and 44 percent in the second quarter of 2002.

The average layer count statistics reflect a slight mix with a 2-percentage point increase in business from the computer peripherals in the market.

We continue to experience softness in the Hi-Tech communications and high-end computing end markets during the quarter.

The average layer counts for panels was 8.6 for the third quarter of 2002 flat with those of previous year and the second quarter of 2002.

Boards with 8 layers or more remain flat representing 58 percent of revenues in the third quarter, compared with 57 percent of revenues for both the third quarter 2001 and also the second quarter of 2002.

Boards with 12 layers or more accounted for 24 percent of revenues in the third quarter of 2002, that figure is down from 28 percent in the year ago period and 27 percent in the second quarter due again to weakness in the Hi-Tech communication markets.

As per customer concentration, we reduced it during the quarter.

The percentage of business from our top ten customers decreased to 40 percent in the third quarter of 2002, compared with 53 percent in the third quarter of 2001 and 42 percent in the second quarter of 2002.

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

Before I turn the call back to Stacey, let me mention one more thing, which is our stock buy-back program.

As you read in the release the board has authorized the repurchase of up to 10 million dollars of TTM common stock.

With our strong balance sheet and net cash position, we have the luxury of evaluating under valued assets of which there are a lot these days given the depressed conditions in the electronics industry.

Of those under valued assets, we think our stock is the best use of our cash at this point.

On third quarter income levels such a repurchase would not have a material impact on earnings.

However, when we are again net income positive, the repurchase should be accretive.

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

Thanks Kent.

Rather than cover all the financial comparisons this quarter, I'll instead highlight the interesting trends and then I'll review expectations for the fourth quarter of 2002.

Obviously as you read in the release, our year-over-year comparisons remain negative due to deteriorations in market conditions.

But the sequential comparison demonstrates the progress we've made despite the environment.

Sequentially from the second quarter of 2002 to the third quarter of 2002 revenues decreased by only 12 percent, but while our top line declined sequentially, our performance improved at the operating and net income line.

That resulted from improved operating efficiency, lower raw materials costs, and lower labor costs due to the second quarter restructuring at our Burlington Facility.

In fact, we estimate that the production realignment enables us to lower our costs by greater than a million dollars for the quarter.

As a result, third quarter gross margins of 13.8 percent compared favorably with 8.4 percent for the second quarter of 2002.

And our operating loss was cut from one million in the second quarter of 2002 and this is excluding one-time charges related to that restructuring to 446,000 in the third quarter.

Sequentially, EBITDA increased 16 percent to 1.9 million for the third quarter of 2002.

That yielded a net loss of 359,000 compared with a net loss of 674,000 in the second quarter of 2002.

And on a per share basis, we did one cent better than we did in the second quarter.

Our balance sheet strengthened further.

We ended the third quarter with a net cash of 8.5 million compared with net debt of 8.1 million at year-end 2001.

And our cash position increased to 35.3 million at quarters end up from 24.5 million at year-end 2001.

We continue to proactively manage all assets of our business including our working capital.

We reduced day sales outstanding to 43 days from 45 days in the third quarter of 2001.

In addition, we have 25 million 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 a quick review of our business by type of services; on a sequential basis overall daily volume declined 14 percent in the third quarter while average prices were up slightly.

Breaking that down for quick turns the third quarter volume declined 11 percent sequentially while prices declined slightly by just one percent.

For standard lead-time products volume declined 17 percent sequentially while prices inched up by about a percentage point.

Before I move on to the fourth quarter outlook let me run through some important statistics that we report each quarter.

Depreciation was 2.1 million; cash flow from operations was 1.8 million for the third quarter of 2002.

Capital expenditures were 4 million and free cash flow was negative 2.2 million both of which requires some additional explanation.

In addition to our ongoing capital expenditures, we spent 3.8 million in the third quarter to purchase a building adjacent to our Redmond facility.

We see this as a valuable investment in our future.

The current configuration of Redmond has always been footprint (ph) constrained.

We have been eyeing the property located right next to our Redmond Facility for a couple of years.

When it became available, we took the opportunity to invest in the plant, which will enable us to further optimize production to an improved workflow at Redmond.

Looking ahead for the fourth quarter of 2002, we project revenues in the 19 to 22 million dollar range.

GAAP earnings per share between break-even and a loss of 3 cents and cash earnings per share between the profit of 1 cent and loss of 2 cents.

When we first (ph) provide some good details for this forecast within a range we are essentially projecting flat revenues for the fourth quarter compared with the third.

We believe we can hold gross margins flat, even if our revenues come in at the lower end of our range.

Sales and marketing should remain at about 7 percent of revenues for the fourth quarter.

Again when we return to more normal environment, we expect that to come down to about 5.5 percent.

For G&A, it has been running about 1 to 1.1 million for quarter, we expect it to increase by about 250,000 dollars going forward, beginning in the fourth quarter.

This is to exclusively to be increased in our D&O (ph) insurance claim.

Fortunately, due to our success that are continuing including efficiency and lowering cost.

We believe we can more than offset pressures such as the D&O (ph) leave increase and we have excellent operating referring (ph) at the current product mix each incremental dollar of revenues should generate gross margins in excess of 50 percent.

With that let me open the call to your questions.

Thank you.

The question and answer session will begin at this time.

During using the speakerphone please pick up the handset before pressing any number.

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

If you wish to withdraw your question please press one followed by three.

The question will be taken in the order that it is received.

Please standby for your first question.

Our first question comes from Jesse [inaudible] from Needham & Co. Sir please state your question.

When could you start buying back stock and then what increments could you buyback?

What are the board rules for that?

Yeah, that was disclosed in our press release.

There are no predefined increments, we can do build good markets purchases and block purchases and we start buying as early as the end of this week.

Can you tell me who are the top five customers and perhaps the top ten customers were?

Well, we generally go to the top five in no specific order, which is ATL, VS systems, Compaq, Selectron, and Micron Technologies making price to about 29 percent of our sale.

I am sorry ATLV, Compaq, Micron, and....

Selectron.

And did the 35 customers you have; you won last quarter at significantly to revenue this quarter.

What is your revenue projection for the 31, you won this current quarter?

The 31 customers we have at this quarter contributed about 400,000 dollars for the top line and we anticipate that they will continue to grow as we capture the market share and penetrate each one of those customers.

Let me tell you something about our top 10 also we have a nice group of about 30 customers and very a kind of alternate, some of them taking turns in the top ten depending on what happens within that quarter.

We got an excellent [Inaudible] of customer's former basis and we continued to add customers each and every quarter.

That's great.

Last question for Stacey, I like to tell you, told us what your assumptions were both into the guidance, could you tell us what your pricing assumptions are?

Or perhaps the volume assumptions built into those revenues and gross profit level?

Yeah.

The pricing assumptions are first class with third quarter.

The volume is effectively flat to the [Inaudible] in the middle of the range to be flat.

So it could be at the bottom of the range it would be down, slightly probably around 5 percent up, up above that much from the top end.

Right.

Thank you very much.

Our next question comes from Scott Robertson from Investec.

Sir, please take your question.

Yes.

Scott Robertson with Investec.

Stacey, quickly a question on, when you were talking about for each incremental dollar dropping 56% gross margin on the bottom.

Were you talking about each incremental dollar over the midpoint of the guidance range you gave?

Even over the midpoint, it could be; that's right, because what we have right now is about, you know, obviously 20 to 25 percent capacity and additional capacity in our labor force, but what we are seeing is even with some upside, we have a lot of thick components of our cost, so labor would be effectively fixed.

Obviously, some are fixed overhead such as depreciation.

So, basically there is a lot of operating leverage due to economic conditions in the market and our capacity utilization level.

If you are to assume flat revenue with Q3, could you improve the gross margin in Q4?

There is potential to do that for the forecasting assumption, I would suggest to keep it, you know, mouth flat with where it is , but I think we have some opportunity.

We have gotten a lot more efficient.

We continue to optimize on the Burlington of Redmond facility.

So, I think we have some upside.

Okay, and just one quick question on the building that you did buy.

Any plans to immediately start reconfiguring or going into this building, or is this more for the future?

We are underway right now to put the plans together for that facility.

The good thing about the building next to us is about 40,000 square feet, and it gives us the opportunity to actually improve our cost structure and optimize our operations and gains and efficiency so, as we put the plans together for that building, we have the luxury of putting a time table together that would actually match our top line.

So, you know, It's a nice opportunity for us to continue to improve our operations as we look at the three facilities that we have.

Okay great.

Thank you very much.

The next question comes from Abel Beyene of Thomas Weisel Partners.

Please state your question.

Thanks.

Good Afternoon.

I just want to clarify the gross margin guidance, I was in and out of the call?

Can we assume that the high-end of revenue guidance will result in higher gross margins in Q4 or you think you could perhaps view the potential for improvement?

Yeah.

Here's what I will do at the bottom in the range, I'll make it around 10 percent half in the range I'll make it about 17 to 18 per cent and that will also flow through the bottom line guidance stated out.

Apologize if you have already done this. but have you gone over your end-market breakdown for the quarter?

The end-market breakdown remains thoroughly unchanged.

We had a little part in the computer peripheral segment.

These were the orders received from Micron Technology but other than that the breakdown in the end-market segment remains fairly consistent quarter over quarter.

And earlier on the call you talked about improving the efficiencies low labor cost to restruction and also savings on raw materials.

Can you talk a little more about what's going on there?

I think the labor savings that we referred to there as we restructure our building and facility consolidating into Redmont.

We were able to reduce our workforce by about a 130 individuals and then as we continue to negotiate material cost savings with our major material suppliers we were able to obtain some concessions on raw material costs.

And as we restructured between Redmont and Burlington and also involved Santa Ana in some of the issues there.

We were able to not only reduce the labor force but also improve our operations in gains and efficiencies.

And last question on restructuring, are you satisfied in what you have done this far and do you anticipate any further restructuring?

Well, we are satisfied with the results of the restructuring.

Are we satisfied that we can do more.

I think we were always going to be looking at our business and how we can improve that.

So, we will continue to look to ways to be more efficient reduce our cost structure and improve our operation.

That is fine, but what I am asking you is can we anticipate another charge early in '03 if things continue to deteriorate, or do you think size your business with that in mind?

We will keep that in mind.

This one I think we will positively bear in mind.

Okay.

Thank you.

As a reminder, if you should have a question please press one followed by four on your pushbutton phone at this time.

Our next question comes from Mr. Ben Ruff of JP MOrganplease state your question.

Good afternoon.

May be we can talk a little bit about the competitive enviornment and how your customers are getting to view you in light of your financial condition.

I will get to that rest of the [Inaudible].

Thank you.

I hope every body can hear me now.

The market again is continues to give us some challenging times here.

I think we are, relative to our competitors with our strong balance sheet I think that customers look at that as a real plus and they view that balance sheet and dealing with TTM if they are dealing with the customers that they are secure with in the long run and they wouldn't have to make a change at some point in time.

So the balance sheet that we have is looked upon very favorable from our sales and customers and I think will enable us to continue to capture market share as we go forward.

I agree, because I think its both the you know financial stability of a supplier that some of our customer looks for but also the ability to continue to deliver a product on time and a quality product.

And I think when you are in a difficult financial position you have a difficult time continuing to be able to invest in your business, train your work force and be able to deliver the product.

So I think it's both continuity of the supplier and that ability of that supplier to perform.

We've exceeded I think all of our competitors in that area.

I might add to that a comment with Asian competition that comes up we don't feel any Asian competition now.

It's more of a nuisance and that goes back to the time element and our high mix and the specialized technology that we have.

And I think customers begin to recognize that that's our strength and because of that they continue to rely on us.

So I think we are well positioned and gained a reputation that will be unsurpassed in the industry.

In previous calls you talked about developments, but EMS customers.

Anything to report this quarter?

Our business from EMS customers is about 30 percent Ben, and I think we have an excellent program that allows us to penetrate and capture works and work side by side with EMS providers.

And, as you know we are a pure printed circuit board company, so we don't compete with our EMS customers we are partnering and teaming with them to capture the OEMs that they serve.

So we have a nice program.

I might mention to, that Jay Bell did come through our Redmond facility and conducted a day and a half audit and put us on the approved vendor list in a very broad way.

So we anticipate good things to come out of that.

And that's a milestone for us because they had previously disqualified our Santa Ana division.

Great.

Thanks a lot.

Nice job.

Our next question comes from Jesse (ph) with Needham.

Please state your question.

Yeah, I was actually going to ask you about Jabil [ph].

So are you forecasting a Jabil [ph]ramp now in your fourth quarter?

No, we are not building in that kind of a bite into the projection.

And, you know, you gave us some great detail on Micron.

I was wondering if you could give us similar detail speaking specifically on the sequential decline in dollar terms in networking and perhaps industrial, medical.

In industrial and medical, I think that as a percentage is pretty solid and may be has stayed constant throughout the quarter.

Yeah.

A flat percentage of the sale.

Yeah, for this quarter versus the second quarter.

Second quarter is what 28.5 percent?

Second quarter...

Yeah, with a half a percentage difference.

All right.

Which is about 900,000 dollars.

That is why.

Okay, I guess that is too minute.

That is general business condition.

I think across all of our sectors that we have talked about before there's not been growth in the end market and there was also depression in like the higher-end market.

So, I think this is all very consistent with what you are seeing in the industry in those end markets.

We are not seeing any particular ramping in any area or the coverage.

I think that should be general macro economic malaise.

I see.

Would it be a fair assessment that the top ten customers were slightly weaker than the rest of the customers?

I wouldn't say slightly weaker.

Remember, we added new customers also.

I don't think I have any relative comparison for that.

Added 400,000?

That was the number?

I believe to the top 20.

But I think in general I should see a lower condition.

Are there any observation on any particular customers that were weak?

I don't think there was any issues with any of our customers.

Or if you are looking at, kind of narrow window time frames of three-month segments, there might be some shift with the end-market mixed, any number of those orders come in and when we ship those orders and so forth.

But, overall the programs that we are involved with, with our EMS providers, some of them are soft and some of them are average and some are up a little bit.

So, you add all that up over a quarter then you get the results that we have had.

We feel pretty positive in that.

The customer base that we have and our ability to penetrate customers and penetrate work within customers.

Fair enough.

My other questions are answered.

Thank you so much.

Our next question from Mark Hassenberg.

Please state your question.

Yes.

Good afternoon.

I am not sure if it's specifically significant but the business overall, the industry overall is weak, and the quick-turn business seems to be doing slightly better.

Are you sensing any acceleration in activity on quick turn from your customers or possibly signaling some improvement in the future?

I wish I could answer in the affirmative but we really have not seen any signs of that.

Okay.

And then pricing, you know, it came down and then sort of stabilized in the industry and despite the weakness in the industry it seems to be stable and even picking up slightly, is that just because we have had a cost level right now or people are just losing too much money to continue to be, you know, competetive on the pricing side?

I think that people are doing some irrational pricing and I think that's where we are going and there might be pricing at which, at levels that they are losing money even on a marginal basis.

I think that's why we have seen so much price pressure.

I think it's pretty much flatten down but I think the issue as you could see a little bit of pressure continue, financially weak competitors have to do pretty dramatic things to stay in business and meet their loan covenants.

So I am cautiously optimistic on this point but I still think there could be semblance of pressure as we see market dynamics such as capacity come offline, financial instability of competitors and that sort of things and I think we have heard that on conference calls of some of our competitors in terms of the pricing environment they see.

Right.

And Mark I might add to that gist in a more of a general, general sense.

If there is any ever a time when the quick-turn model has been under stress, it has been the last couple of months due to the extra capacity in the industry and the low slow down of the overall marketplace and the fact that TTM is able to continue to leave the industry and post (ph) profit on a cash basis in this quarter, I think it speaks very highly for our business model.

In the last conference of 2Q, a chart that showed the amount of capacity that have been taken out of the identified capacity that has been taken out in the industry, have you updated that at all.

Do we know where we are right now?

There have been other shops that have come offline Mark.

We have an update of that over the last month or two but since our last presentation, there has continued capacity, has come offline.

We estimated that to be about 30 percent.

I would say as probably coming around 35 percent.

35 and then you have the mothballed facilities and some of those in the longer mothballed being shut down entirely so, you are looking at 30 to 40 percent overall and the overall capacity and that's a real positive thing for companies like TTM with our strong balance sheet and who have also been in the right market segment with a quick- turn and the high mix and the technology.

And I think one thing what we are seeing for is, you know, I think nobody else can say exactly when the markets are going to turn.

The positive thing that you do see is market closes are at work.

The capacity is coming off, less, you know, cost structural oriented competitors are struggling, we are making penetration into new customers, new accounts.

So I think our dynamics are in place and yes the next question is what is the timing of that and I think that's still too difficult to predict.

Okay.

All right.

Thank you very much.

As a final reminder, if you should have a question, please press one followed by four on your pushbutton phone at this time.

Our next question comes from [Inaudible] of Citigroup.

Please state your question.

Good afternoon, we are hoping that at some point demand will recover and your revenues will start growing again.

The question is what is your production capacity expressed in revenue dollars and then what would be the normal EBITDA margins at those levels and third related question - what would be the DNM's CAPEX at those levels of revenues?

I will talk about it, it maybe capacity wise.

Up in Redmond, given our strength staffing, we are running about 75 percent of capacity in Santa Ana.

It is more like 60 percent.

Given the equipment that we have on hand, Redmond is running to about 55 to 60 percent and Santa Ana is running about 40%.

So, we overall are probably less than 50 percent on a capacity basis and - we have some numbers on how that interprets, I think the new ...

EBITDA margin?

Yeah.

It is EBITDA

Yeah our EBITDA margins kind of like the whole operating leverage argument they move pretty quickly to.

So, here is level, we will get up easily until the mid-to-high 20.

Pretty quickly and maybe even entire 30 percent, you know, at the full capacity utilization level because it's just like we talk about the operational levels on the gross margin side all the way down to the net income and EBITDA, It grows just as quickly.

And again, just mention and remind everybody that while we have been very active and looking at our cost and efficiencies, we still have the infrastructure of our company employees and we can grow that top line very rapidly as the market recovers and take advantage of the leverage we have build into our system and I think it is again a good testimony to the fact that we are in this down cycle still lead the industry and go back in time and look at our performance in the market was gloomy we lead the market there.

So, I think we got tremendous upside as the marketplace recovers and then as we continued to capture market share, I have given the apparent market conditions.

Thanks and if you were to be at those level, what would be the maintenance CAPEX to sustain?

Our maintenance CAPEX for next year will probably be about 3.5 to 4.5 maybe 5 million dollars.

That's purely maintenance.

We've done a lot of maintenance CAPEX and we've done a good job of putting in place right now in our facility the equipment that we will need for 3 large capacity expansion.

That just said our [Inaudible] base is relatively low on an equipment basis.

So it would pretty much to see maintenance CAPEX.

And particularly in Santa Ana where we have invested in the facility here and the equipment.

We have tremendous amounts of capacity to move when the market moves.

Thank you, very much.

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

I want to thank everybody for your time and interest in TTM Technologies.

I am sure you can witness the improvements and continuous cost savings that we were achieving.

We will continue to manage our business to meet these market conditions.

We are well positioned with our balance sheet to withstand this downturn and we were also positioned to take advantage of the operating leverage when the market recovers.

So, thanks again for joining us.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.