TTM Technologies Inc (TTMI) 2003 Q1 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to TTM's First 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 would now like to turn the conference over to Stacey Peterson, Chief Financial Officer of TTM.

Good afternoon and thanks for joining us for our first 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 risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are 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 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 and welcome to our quarterly conference call.

As you saw in our earnings release, Advanced Circuits performed better than expected during its first full quarter as part of TTM.

ACI operated profitably and generated positive cash flow.

The integration is progressing well and we are already seeing cross-selling opportunities, which we expect to capitalize on in the next few quarters.

However we experienced some seasonal in our quick-turn business, which is typical of the first quarter.

And we saw overall weakness in our end markets.

Nonetheless, on the cost side of the equation, we continue to make real progress.

The production realignment and subsequent closure of our Burlington, Washington facility completed in 2002 produced the full $1.7m in quarterly cost savings.

We have also realized a part of the $450,000 quarterly cost saving from the recent headcount reductions at Redmond and we are on track to enjoy the full amount in the second quarter.

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

Due to the acquisition of ACI, our average layer count increased from 8.6 to 13.2 in the fourth quarter of 2002.

Products with 12 layers or more accounted for 60% of revenues this quarter, up from 26% in the fourth quarter.

This quarter, our quick-turn represented 28% of revenues again due to the acquisition of ACI, which focuses on high technology and standard lead time boards.

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

Thanks Kent.

I will start with revenue, which increased 67% year-over-year due to the ACI acquisition.

Gross margins were 11.4% in the first quarter of 2003 compared with 10.9% in a year-ago period and 12.4% in the fourth quarter of 2002.

We experience some margin pressure due to reduced overhead absorption and temporary production and efficiencies associated with our Burlington closure and consolidation into the Redmond facility.

We booked a restructuring charge of $203,000 in the quarter to reflect the previously announced headcount reductions at Redmond.

We also had an extraordinary gain of $824,000 associated with the ACI acquisition.

The fourth quarter extraordinary gain was based on the preliminary assessment of the fair value of the net-assets required.

We refined those estimates in the first quarter and realized another extraordinary gain.

Switching to the balance sheet, it keeps getting stronger.

We ended the first quarter with net cash of $16.1m compared with net cash of $8.9m in year-end 2002.

Before I move on to our second quarter outlook, let me run through some important statistic for the quarter.

Depreciation was $1.9m.

Cash flow from operations was $7.8m including a $5.7m tax refund during the quarter.

Capital expenditures were $704,000 and free cash flow was $7.1m.

Looking ahead to the second quarter of 2003.

While we are not assuming any improvement in the overall business conditions in PCB industry demand, we are seeing what appears to be some slight seasonal improvement in the quick-turn business and we believe we can grow in the form of market share gains.

We are projecting second quarter revenues of $39m-$41m and GAAP earnings per share at breakeven.

Implicit in our guidance for the second quarter of 2003, we anticipate gross margins in the range of 14%-17%.

Sales and marketing should remain in the 6.5%-7% range and we expect our G&A expense to be about $3.3m and that conservatively includes some expenses related to our ACI acquisition.

Finally, let me remind you of one important factor; our X1 operating leverage.

All of our cost cutting has not impaired our ability to respond to an industry upturn.

As business improves at the cost product mix, each incremental dollar revenue should generate gross margins in excess of 50%.

With that, let me open the call to your questions.

Thank you madam.

The question-and-answer session will begin at this time.

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

Should you have any question, please press "*" "1" on your pushbutton telephone.

If you wish to withdraw your question, please press "*" "2".

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

Please standby for your first question.

Our first question comes from John McManus with Needham & Company.

Please state your question.

Thank you.

The quick-turn business; did the quick-turn business benefit there from either competitors like DDI Corp. or Multek (ph)?

Yeah, John.

We were continuing to think perform well with our competitor.

I think we continue to capture some business that we wouldn't otherwise capture because of our strong financial position.

I think that's real asset.

We continue to find more customers.

Looking at the strength of our balance sheet, and wanting to partnership with strong companies in the long run.

So I think that's real positive for us, the strength of our balance sheet as we look to capture markets relative to competitors.

Also, John, one thing that we've seen is an increase in qualification activity for may be some of the advanced [circuit] you may have been referring to or some of the plant closures that recently happened.

And so there has been an increase in qualification activities, mostly associated with that as in quick-turn cross selling opportunities from ACI.

Is there any way of kind of roughly quantifying this, I mean, in the sense there, what I mean are we talking about -- on an $11m base, we are talking about $1m -- $0.5m?

John, it's really hard to quantify and we don't really draw lines between us and our competitors.

We're really focused on doing the best job that we can for our customers no matter who we compete against.

Multek with the closure there we did see some wins because of that closure.

You commented about the opportunities in cross selling.

Could you talk a little bit about -- more about who they may be and are you assuming that's not so much affecting this quarter or the first quarter but more on the second quarter and beyond?

Yeah.

I think John there is a cross selling that has taken place.

It's rather long -- little longer process and realize some advantage in this quarter because there are plant qualifications by our customers and so forth.

We got a lot of qualifications in the channel now underway and we've had several side visits from customers that mainly traditionally ACI customers that are looking at our Redmond and our Santa Ana facilities.

We are working on some cross selling to go the other way.

It seems like a little bit of low hanging fruit is coming from the work that is more suited to our traditional TTM from ACI and I'd prefer not to talk about specific names and specific customers though.

John, in terms of timings, I think what you will tend to see is more of a benefit at the end of second quarter and starting in the third and even fourth because it takes a little bit timing to get qualifications.

In the process takes about a quarter once you get customer in your plan.

And could you talk about -- some of the other board companies have been complaining about increases in materials, whether it is the copper foil, laminates etcetera.

Could you talk a little bit about price increases to you and can you pass these on?

John, I don't know where the other individuals are seeing some of the price increases.

I think we are working very closely with our material suppliers and with our integration process, we are able to go back to our suppliers and reduce some of the costs, and so we have not seen material price increases.

And with our integration of the facilities and having more volume, we are able to consolidate some of our supplier base, such that we are actually going to reduce our cost from our material standpoint.

Last question, if you could comment about units there and ASPs for the quarter and also some idea of how that might have varied between ACI and the quick-turn and the old TTM business?

Sure, I mean, that's -- this is a tough one because we don't disclose, you know, separately on a plant-by-plant basis.

Also, as time goes on, because of the cross selling and the way we shift work among the plants, it's really difficult to quantify what's coming from ACI versus of course the traditional TTM business.

And what I will do is I will try to give you a sense -- I will give you some statistics and then I will try to give you a sense of overall market trends.

In terms of average panel prices for the quarter, our panel prices went up probably around 7%-8%.

I think that statistics is very misleading though because that's due to the ACI acquisition, and they had some higher rear count work with higher prices too.

And So, I don't want to be too misleading on that.

But what we really believe doing on in the underlying market is we believe, probably standard pricing for standard [audio gap] product based on our experience on what we heard from competitors is probably down around 2%-3%.

And in the quick-turn business with the seasonal weakness in the first quarter was probably roughly down around 10%.

So, it makes sense John, I want to make that distinction because our statistics are going to be very skew because of the acquisition.

And on the unit basis--?

Similar type trends, I would say we went up year-over-year about 86% on a unit basis, that's I mean quarter-over-quarter -- sorry sequentially and that's due to the ACI acquisition, most of that is standard lead time work but our quick-turn volume also went up.

What I think I am seeing in the market because those are a misleading again, I would think quick-turn was down talking to customers and competitors around about 2%, 3% in volume, once again seasonal weakness, probably standard in the range of 5%-7% volume weakness in the quarter.

Thank you.

Our next question comes from Ben Ruff with JP Morgan.

Please state your question.

Hi everyone.

Could you break out your -- any top or any 10% customers for this quarter?

Yes Ben, we had two customers that were above 10%, that was Celestica(ph) and Solectron(ph) and again that goes back to the ACI acquisition.

A lot of our work that goes to Celestica is the IBM product and the work that goes to Solectron is Cisco.

So, we had those two customers that were Celestica at 18%, Solectron at 17% of our volume.

And I guess, there is more number -- our top five was 53%, our top ten 66%, top 25 is actually 77%.

Little more concentrated with regards to the new TTM and the acquisition of ACI.

Right, thanks for that.

I appreciate your comment about ACI tracking ahead of plan for this quarter.

Could you may be drill down a little bit and talk about, how the reorganization of the sales forces has gone and also the -- whether there is opportunities for more further improvement within that -- on going to that internal operation and also may be talk about the connections with the information systems from that plant?

Yes sure Ben, you know, we are really pleased with the way integration of the two companies is going from all functions from the sales aspect, operations, finance, HR, IT.

I think we have hit on all cylinders there as we have integrated the acquisition.

From an operation standpoint you know, that takes -- we have integrated the initial companies, and then you start to look at the best practice between the facilities and start to moves the best practices around.

That takes a little bit longer to do that, but we have made great progress there.

We have actually Mark Kenny, (ph) who is our Vice President of Technology is heading that up in moving the best practices and consolidation our material suppliers, and he has made great progress in the first quarter.

I guess your other question with regards to the sales integration, you know, the team is pretty much integrated and we move pretty rapidly there eliminating conflicts and making sure that the customers were serviced, that eliminate the duplication on so forth and again that is an area where we have got the team put together.

The cross selling opportunities again are still out there for us.

We think there is more to take place that will help us capture market share and really improve our service to the customers.

You know, looking at TTM with our three specialized integrated manufacturing facilities that allows to services our customers better by matching their needs with the right facility and allows us to run each facility cost effectively and then provide the circuit board needs for the customer.

And so, I think we have got a great company with our three integrated facilities now and some more opportunities out there with the cross selling.

And then to just quick flavor of our [inaudible], in terms of integration, we are completely of at Honeywell systems.

We have got it on payroll, we own benefits of all of the cost benefits that you would expect to realize, like reduced overheads and things like have already come in, started to come in to the financial statements into the first quarter.

While we are on different financial systems, we have common financial reporting, so we talk the same language across the plants, we manage cost very well and are able to really communicate and act pretty quickly in terms of management reporting.

So I would say it is going very, very well in all areas and in the terms of system, support and to get ahead of schedule.

Then I will just follow-up with that to -- we found ourselves on the back a little bit here, but I think we have done a excellent job and our whole team has -- we had a transition agreement with Honeywell for three months and we were off with most of the components fairly rapidly, and so we are completely off with that transition agreement and from an HR and IT finance perspective, we are doing well standing on our own feet and its gone extremely well.

Okay, and with the excess cash on the balance sheet, I was wondering if you could give us an update on the share repurchase program.

Has that been suspended or is that still active and also do you anticipate dipping your tail in water of acquisitions any time soon again?

The share repurchase program is still out there and active, we had approval from our Board, that that is indefinite at this point.

So right now we are not -- we haven't been active in the market for purchasing, we are holding on to the cash.

That is not mean, we will not be, and in terms of acquisitions we are constantly evaluating opportunities.

We have got ACI, we are able -- we are adjusting that quite well.

There has to be once again a strategic type opportunity in market that will get into particular customers.

It is not for obviously for capacity, and we feel that we have got a pretty good mix of products that specialize in the niches that are going to be very profitable in North America.

So if we find something that will fit that mix, yes, and we are always looking, because this is the kind of environment where that strong balance sheet will allow you to capitalize on opportunities.

Okay, great.

Nice job.

Thank you.

Our next question comes from Mark Heisenberg (ph) with Nottingham capital.

Please state your question.

Yes, Good afternoon.

I am sorry; they are announcing something on the train.

The quick turn business seasonally that has turned down in the first quarter, particularly in January.

Looking at March with all the Iraqi issues that are going on, did it come back the way you expected or was the quick-turn business particularly impacted by Iraq?

Just, you are right Mark, with the seasonality and we experienced that in the month of January.

Our February and March increased over January, they were pretty close to about the same level of production.

Our April is actually slightly ahead of our March run rate.

So this seasonality did come back, it dragged on a little bit into February.

As far as having Iraq affect us, you know, it's hard to tell, but I -- it's not a good thing, but there's nothing I can say that, that directly impacted our business.

Okay, thank you very much.

As a reminder ladies and gentlemen, should you have any further questions please press "*" "1" on your pushbutton telephone at this time.

Our next question comes again from Ben Ruff of JP Morgan.

Please state your question.

Hi, I was expecting somebody to hit this already about capacity utilization, are you comfortable breaking it out amongst the facilities or overall?

Well, I think Ben over with our traditional Santa Anna and Redmond facilities, we're running around the 50% mark or a little higher than that in Chippewa Falls simply because we've been able -- we've consolidated the three facilities into one of their products through the acquisition.

One of the good things we've been able to do is through some product - we got some efficiencies and some more productivity expand our capacity there.

But we're running a little higher at Chippewa Falls than the 50% rate.

I guess the good news with all of our facilities we have tremendous upside in all facilities, and I think a good point to mention here is that we, as you know, we're, we're very cost oriented.

We want to maximize our profitability, preserve our balance sheet in every way, so we're looking it confidently looking at ways to reduce our cost and improve our business, which we've been able to do in all our facilities, which is very helpful.

But in that process we have not damaged our ability to respond if there is a recovery.

Okay, So Chippewa Falls that you were talking are within 10% of -?

Ben, just a range would be 65%, you know, plus or minus percent, plus or minus five.

Okay, could you talk about your segments and maybe mention any points of strengths or weakness within it?

Yes, in the market segments, you know, from our custom based networking.

For the first quarter network and communication was 34%, high-end computing 41%, industrial and medical 11%, computer peripherals 10%.

Following that with our ACI acquisition, again there's more concentration in the networking and the high-end computing.

Those two categories are up from the prior quarter and were down with the other categories again because of the ACI acquisition.

During the first quarter, we added 43 new customers and the good news, I guess, we had a little different breakdown between the in-market segments with 21% of the new customers coming out of the industrial and medical category, and then the high-end computing 22%, and network and computing 21%.

So if that trend continues we'll -- I think it will have a little more diversification amongst our in the market concentration.

Could you talk a little bit more about the, I mean, new customers, are these folks who [inaudible] of TTM Technology or they were using other suppliers or they're just new people to the printed circuit board market, can you help us understand what that really means?

Well, I think -- I think Ben as always we're bringing new customers on and being in the quick turn and the high mix environment, a lot of the customers are of a small nature with some of them starting to, you know, that could grow and develop into bigger customers.

There are some customers on there that were just starting down the runway with and we think over a period of time we'll be fairly significant customers and then there's another significant group, I guess, whether that are of the smaller nature, will increase our business, but we'll probably be more of the high mix environment, just typical of the Redmond and Santa Anna type environment.

Our Redmond -- out of those 43 we did not gain any customers for Chippewa Falls in the other -- so it's mainly focused in Redmond and Santa Anna.

Thanks again.

Our last question comes from Jesse Pichel with Needham & Company.

Please state your question.

Yes, good afternoon.

You mentioned cross selling, what comes first, some quick turn to IBM, Cisco, and Sun or selling high layer count and volume to Philips or Compact?

Well at this point it's the first scenario where the quick turn and the high mix work is being cross sold into the Santa Anna and Redmond facilities.

Any idea what those three blue-chip customers are spend the year in quick turn?

Not really.

Yes, I mean we have our ideas but we don't have any information that I would base a comment on.

Thank you very much.

Now I am showing some more questions, our next line comes again from Mark Heisenberg (ph) with Nottingham capital.

Please state your question.

Yes it's too early that, you know, implement the best practices but as you have looked at the companies over the, two companies over the past quarter what type of things have you discovered that you think would be particularly helpful going forward?

Yes, Mark I think as we look at just to the ACI operations, into registration system that is a very nice and we are moving that registration system up into our Redmond facility.

We worked at panel sizes.

We are consolidating some panel sizes so that we have commonality amongst all the facilities.

We like some of the SPC practices here in the Santa Ana facility and moving those to the other facilities and there is probably you know a longer list of numerous things that I could go into.

But if you look at our three facilities that have their own strengthens as we move the strengthens of those three facilities around I think overall TTM stands to benefits fairly significantly.

And like I mentioned with our material suppliers again we are consolidating some suppliers so that we have common materials amongst the three facilities.

So that when customers look at us, we operate very close to being one company with similar practices looking at our quality systems, our process controls all of those operational things and I think let's continue to see benefits with more efficiency, reduce cost, improved operations as we move forward.

Also Mark, another thing that we really have been able to get to is we have a lot larger scale and fully based there was a lot more depth.

So if you think about any one of our organization from HR, finance, IT, operations, sales, we can kind of bring the best of both world for what [inaudible] I had and what we had.

So we have a lot more breadth and depth in almost position in the company that has these functions.

All right.

Have you updated that charge you had of what's happened to capacity in the industry it almost being taken off?

We have not -- that charge still shows about 35-40% and of the capacity come off -- out offline throughout the industry for 2001-2002.

That's right.

There was probably another couple of percents that have come up with [inaudible] and almost another drivers.

Right.

Thank you very much.

Our next question comes from John McManus with Needham & Co. please state your question.

Yes, the inefficiencies that you had in the closing Burlington and moving into Redmond.

As I assume those are functional?

Yes that's correct gentleman, we look at you know the Redmond's facility has taken a little more of the hits with the reduction in the softness that we are experiencing in some of the movement to Asia and as we have adjusted accordingly and downsize the operations -- by eliminating the Burlington, Washington consolidating the Redmond and had some further layoffs, we are through that and do not have anymore anticipated reductions there.

And as you do those kinds of things in your operation you get a little bit what inefficiency, you always make an adjustments.

But you are correct that those are currently behind us.

Now the example of that is, we have that moved, for example, we glide down from Burlington to Redmond.

We started up with that line and you have to start that - its like adding a whole design to your facility, you got to get that thing up and running and get it running efficiency and firing on all cylinders [inaudible].

And of the $450,000 worth of savings, the full savings we received in the second quarter how is that spilt there between cost of good sold and SG&A?

Almost all of the cost to good sold.

And the G&A estimates for the second quarter of $3.3m is that an ongoing number or is that there a expenses in there which are peculiar to the second quarter and will not be in as you went into the second half?

Yeah, I would not expect those expenses to continue at that level beyond the second quarter.

I would say it'd probably be about more like $3.1m on an ongoing basis as opposed to $3.3.

And, do I assume that you'll have a kind of net interest income in the second quarter?

No but, I would probably model this more about like a 50,000 -- 60,000 interest expense.

And you indicated -- you indicated the mix of new customers, you indicated that the industrial medical was, I guess was a little over 20%?

It was about 20% -- 22%, John.

The new customer -- and to give you some perspective as 43 new customer we invoiced about $700,000 from those new customers during the quarter.

So it's not a -- when you look at our $40m, it wasn't a big percentage of our overall quarterly business.

But I think it was a good trend to capture some customers outside of the concentrated high end computing and communication segment.

And you indicated that the -- you've seen a little bit more firmness there in April, is there any indications there or may be you kind -- where that's coming from and why?

I don't believe it -- I don't believe, John, there's any specific segment or any particular customer other than some of the big -- just firmness probably across the -- little bit across the board.

And, you know, our company has its particular customer base; other companies have theirs and so I think with our customer base we trend up and that's a good sign.

Thank you very much.

Our next question comes from Rob Duson (ph) with Brazilia (ph.).

Please state your questions.

Hi, guys, good quarter, keep it up.

Thank you.

Stacey, what do you think your earnings power at $60m quarterly sales run rate?

No, I think it is about that level because we should have gross margin.

I'd like to think about what kind of margin could I generate, giving you the latter model all the way through the income statement.

At that kind of level we should have gross margins above 20%. probably even pick maybe 23% -- mid 20%, if you are up that high, with the incremental margins being so high.

And that's pretty conservative assuming the constant product mix, no price improvement or anything.

We have done a lot to reduce our cost, I think those margins with the leverage we got would go pretty significantly.

Yeah, we mentioned they move pretty fast.

I mean within the range we have given now Ron, you know it moves from 14%- 17%.

So it's not hard to see being in the kind of low mid 20s.

So are we talking about roughly 12 cents in earnings a quarter?

I think, it could be.

Okay.

Is it fair to say that cash earnings could be considerably higher because your capital spending needs are curtailed, now that you bought ACI?

Yeah, our -- I mean we had the luxury of kind of picking and choosing some equipment with some of the closures.

Some of the equipment we bought recently have come from other auctions where we are paying 10-15 cents on the dollar.

And then our CAPEX needs are not -- the requirements are not as high because of the investments we have had in past years.

I mean this quarter, it was $700,000 I believe that we invested this quarter; next quarter it is a little closer to the $2m level as move some best practices around.

But for the year, we probably be around $6m in CAPEX.

Okay.

Let's talk about cross selling opportunities for a moment.

For every dollar of quick turns that you have, what type of volume dollar do you think you can generate from those customers that you have on the quick turn side?

That's a challenging question to answer to -- some of the customers we have when we do the quick turn that's sometimes what we do with customers is simply the quick turn portion.

Other customer we service them with quick turn and the high mix arena.

And it's so diverse amongst our customer base I I don't know how to answer that question exactly.

Also I think what's about answering the question is, we don't like to cross sell as did we quick turns, its not just the quick turns for protos that you want, you want to see a little market recovery to get the ramp.

So, I mean there is potential to get some pretty significant opportunities, but I think a lot of that would be contingent upon generally product starting to ramp, which we are not seeing yet.

But we do know that as we do the quick-turn, we do solidify customers with TTM and that as opportunities come up with their other needs in printed circuit boards, we are able to capture those opportunities also.

And I think the story we have on our business model and the strategy that we present to our customers and execute on is a solid strategy that's enabling us to win business, whether it's quick-turn, high-mix, high technology, ramp -- all segments of the market place, we have the needs to meet customers.

So, we are in an excellent position to take advantage of that.

I just have a little hard time putting a dollar amount of the follow on work to the quick-turns. [MSOffice1]

Well I think the point that is that you can get I would say a modest amount of improvement from just exist -- customers, cross selling, and getting their quick-turn opportunities that are moving the quick-turn or some other kind of business [inaudible] over to like our Redmond facility.

But what really can get pretty powerful for you is we've got a [inaudible] of an end-market demand, we should see some ramping and then those products moving to maturity and we could get the first cycle of it.

So, I think it's pretty exiting without recovery, but with recovery it can be -- it's more -- it has a different -- it's not a straight line trend, it's more of an exponential type trended ramping.

Great thanks a lot.

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

Okay thank you.

I want to thank you everybody who joined us today on the conference call.

Hope you got a flavor for TTM and who we are, where we are headed with our company, just a few comments.

We are very aggressive and understand the necessity of reducing our cost structure and we work on that on a daily basis.

So, we think that we need to be the low cost provider here in North America.

We continue to expand our customer base and drive our top line.

As you know we are able to do this and still enhance -- not only protect our balance sheet but enhance sheet and strengthen it.

I believe that's a key component in this cyclical industry.

As the industry stays down for a period of time, TTM is an excellent position to continue to capture market shares as some of the weaker players maybe struggle and go out.

And at the same time, we reduced our cost structure; we have also preserved our upside.

So, we believe our model is solid, we will continue to invest in our time, technology, high-mix strategy; and we are looking forward to the future very positively.

And with that thank you for your time.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.

[MSOffice1]