TTM Technologies Inc (TTMI) 2003 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 and that all participants are in a listen-only mode.

We will open up the conference for questions and answers after the presentation.

I would now turn the conference over to Ms. Stacey Petersen CFO of TTM Technologies.

Please go ahead, ma'am.

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

We are pleased with the continued improvement in our results.

If you had a chance to review the earnings release you already know that we generated solid sequential revenue growth, posted a profit and made significant progress with respect to the integration of the ACI acquisition in the second quarter of 2003.

Before were get ahead of ourselves, let me read 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 companies serve and other risks described in forms 10(K), 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 Stacey said we are pleased with our progress in the quarter, post ago profit with quarter over quarter growth in revenues.

In addition, the ACI acquisition has exceeded our expectations.

The integration of the acquisition is largely complete and has gone extremely well.

Our sequential revenue growth of 3.6% reflected our ability to capture market share and capitalize on cross-selling opportunities created by the ACI acquisition.

Our ongoing overall cost controls, the raw material cost reductions associated with our greater buying power and our efficient operations have enabled us to translate top line growth into bottom line profit.

First, let me elaborate a little bit on our success on the revenue line and then I will talk about the cost side of the equation.

During the second quarter we added 38 new accounts.

Clearly we have been and will continue to be the beneficiary of plant shutdowns in the industry.

We now estimate that approximately 40% of domestic printed circuit board capacity has been eliminated since 2001.

With the recent plant closures we are capturing new business opportunities.

We expect to see the majority of these new business gains during the fourth quarter and beyond.

In addition, we are getting new programs and a bigger share from existing customers, which include many names on our top ten customer list.

And we continue to win new customers.

We also realized business from cross-selling opportunities created by the culmination with ACI.

We have already qualified ore in the process of qualifying about ten new customers.

From a raw materials cost standpoint we obviously have much greater buyer power following the ACI merger, which essentially doubled our revenue.

We have used that buying power to negotiate significantly better prices for key raw materials and services.

During the quarter, our production reflected a higher value-added product mix.

Our average layer count increased to 14.6, up from 13.2 in the first quarter of 2002.

Products with 12 layers or more accounted for 65% of revenues this quarter, up from 60% in the first quarter.

Quick Turn represented 29% of revenues, up slightly from 28% from the first quarter.

The remaining 71% of revenues represent standard lead-time business.

As for customer concentration, sales to our five largest OEMs were 55% of revenues in the second quarter compared with 52% in the first quarter.

As you may remember in the past, we included both OEM and contract manufacturers in our list of top customers.

We have revised our reporting methodology to focus on the OEMs.

We believe this provides a better understanding of our business and serves as a better indicator of our potential by looking through the contract manufacturers to our OEMs and their end markets.

In the second quarter of 2003 our top five customers in alphabetical order were: Cisco, HP, IBM, Motorola and Sun.

We believe we are executing our strategy well, constantly focusing on sustainable top line growth and cost containment that together generate bottom line profitability.

Now let me turn the call back to Stacey who will fill you in on some details of the quarter and discuss the near term outlook.

Thanks, Kent.

In case you didn't see our release let me give you a few quick numbers.

Revenues for the second quarter of 2003 were $41 million.

That's an increase of 76% from the year ago period due to the acquisition of ACI.

On a sequential basis, which represents an apples to apples comparison, revenues increased 3.6%.

EPS for the second quarter were one cent.

This compares favorably with a year ago loss of three cents per share and a breakeven performance in the first quarter of this year which included a two cent per share extraordinary gain.

Gross margins improved 15.7% in the second quarter of 2003, up from 9.4% in the year ago period and 11.4% in the first quarter of this year.

This improvement reflected greater operating efficiency, greater labor and fixed cost absorption, lower raw materials costs and a mix shift to more technologically sophisticated products and more quick turn.

Let me provide an update on the ACI integration.

As reflected in the decline in the GA expense, which was down 1.7% sequentially, the integration of ACI is virtually complete.

The acquisition has certainly helped enhance our technology profile giving us cutting edge abilities to meet the needs of our advanced customers.

We are beginning to realize the cross-selling opportunities that were an important part of the combination's value.

Finally, ACI has brought us a broader geographic reach.

With ACI we've expanded our international presence to include inventory hubs in Italy, Scotland, Canada and Malaysia.

Now we have sales offices in Scotland England and Singapore.

This expanded presence brings us access to new customers and enables us to better serve existing one.

Switching to the BS, it keeps getting stronger.

We ended the second quarter with net cash of $22 million compared with net cash of $8.9 million at year-end 2002 and $16.1 million at the end of the first quarter.

Now let me turn to review of our business by type of services.

On a sequential basis volume as measured by average panels produced per day was about flat.

The average increased 3%.

As for the firm pricing we were able to offset the competitive price environment with a mix shift to more technologically advanced boards and more quick turn.

Before I move on to our third quarter outlook let me run through important statistics for the quarter.

Depreciation was $2 million.

Cash flow from operations was $6.9 million.

Net capital expenditures were $1.1 million and free cash flow was $5.8 million.

We define free cash flow as cash flow from operations less net capital expenditures.

Looking ahead to the third quarter of 2003.

Market conditions appear to have stabilized.

In fact, we sense some improvement in the tone of business.

For the third quarter we are estimating revenues of #42 to #44 million and we are estimating GAAP EPS of 1 to 3 cents.

Implicit in our guidance for the third quarter of 2003, we anticipate further GM improvement from about 16 to 19%, sales and marketing should remain at about 7% of revenues and we expect G&A expense of about $3.1 million.

Finally, as we said before we have excellent operating leverage.

Each incremental dollar of revenue should generate gross margins in excess of 50% and that assumes no mix change.

In reality our leverage is much greater in a recovery, which would probably involve a positive mix shift as our customers bring new products to market and price increases as well.

With that let me open the call to your questions.

Thank you.

The question and answer session will begin at this time.

If you are using a speaker phone please pick up the handset before pressing any numbers.

Should you have a question please press star one on your push button phone.

If you wish to withdraw your question please press star two.

Your questions will be taken in the order that they are received.

Please stand by for your first question.

Our first question comes from Mark Hassenberg with Nottingham.

Please state your question

Good afternoon.

In the quarter you started seeing some benefits, new customers from companies closing and also you said some cross selling.

The question is, how far are you in that process?

How much of the benefit of the cross selling and the closures do you think are appearing already, or is there a delay and more of that will be potential business going forward?

Mark, we have begun to see some of that activity come to our company in the form of purchase orders.

While I think most of the benefit for some of those plant closures will happen at the end of this quarter and into the fourth quarter and beyond.

I guess the reason for that is it takes awhile to ramp up, I assume there was some double ordering from safety stock if you will as customers transferred out of companies that were closing into our company.

So while we are beginning to see a lot of activity as a result of that and certainly our cross-selling activity is beginning to pick up, a lot of that benefit is still coming the latter part of this quarter and mostly into the fourth quarter.

Are you seeing a lot of new activity, not prototype activity but customers asking questions and potential customers calling on you and your salesmen getting more opportunities?

Yeah, we are seeing increased activity across the board, Mark, activity, a number of quotes are up, certainly our booking rate is up.

We have a lot of activity with regards to design questions.

We've had questions come from customers on capacity and what's happening with our capacity.

So there seems to be a general improvement in the overall tone in our industry and particularly with regard to TTM.

Thank you very much.

Thank you.

Our next question comes from John McManus with Needham and Company.

Please state your question.

Yes.

Good afternoon.

You could you elaborate there on the cross selling of some of the ACI customers and who were they and is this something you are just starting to see in the second quarter and you will see a lot more in the third and fourth quarters?

Yeah, John.

We won't mention any particular customer names.

I did indicate in the press release the script that there were about ten customers that we have qualified or are in the process of qualifying, or basically they are qualifying our facilities is how it works, and we've had several customers actually qualify our various facilities and place orders.

And that process, sometimes it happens rapidly and the cross sell scenario it seems to take a lot longer.

So most of the benefits from the cross sell are out there.

Some of the wins that we've had from plant closures, they are happening a little more rapidly with the qualification process but I believe that most of the booking activity is still in front of us, mostly-- probably into the fourth quarter.

Could you elaborate there on which closures that you are getting the most benefit from?

It would be the most recent closures that we've had in our industry, notably the Bureau and then Flextronics closing their facilities and then some coming from the closures before that, like the Toppan thing.

But most of the activity has taken place with the most recent closures.

Could you talk a little bit about the linearity in the quarter and what does July to date look like compared to, say, June?

We accelerated through the quarter, if you look at it on a book-to-bill basis we were up every month during the quarter.

At the end of the quarter overall we finished at about 1.03 on a book-to-bill basis.

However, keep in mind that we have capacity still available to us so a lot of what we have we were able to ship at the same time.

So we weren't building a backlog per se, while our backlog did grow towards the end of the quarter.

So we accelerated through the quarter and July remained stronger than June.

Last question from me, I think you indicated that your target GM in the third quarter is 19%?

No, through the course of the range we said 42 to 44 on the top line, our revenue line.

That would correspond to margins of 16 at the bottom end of the range and about 19 at the top end of the range.

16 to 19.

That's right.

Thank you.

Our next question comes from Keith Dunne with RBC Capital Markets.

Please state your question.

Yeah, hi Ken, hi Stacey, great job.

Customers over 10 percent, can you let us know if any of these IBM, Cisco, HP customers are over 10% and if you can quantify that?

Yeah, we had three customers this quarter that were over 10% Cisco, Sun and IBM.

Anyone over 15?

Can you kind of bracket it?

We typically don't disclose that for competitive reasons.

We can tell you, Keith, if this helps you, our top five was 55% and our top ten was 63 sales%.

Okay.

So that will help you get there.

You can obviously back into it.

There aren't any astronomically big customers like some have.

Without specifying the ACI cross sellers, are you able to tell us ACI top ten customers that have qualified you?

I'd have to go through that a little bit, Keith, but on the cross selling activity, most of the cross selling has been from ACI to traditional TTM, to traditional TTM customers.

So you are looking at most of the customers at ACI that were in the process or have qualified on cross selling.

Is it fair to say that there would be a number of them, the top ten of ACIs customers that have qualified you?

Is that a fair statement?

Yeah, that's fair.

I think there are a few already that are either very far along or have already qualified us so I would say in the range of four to five, somewhere in there, either far along or have qualified us outright.

You did an excellent job on DSO dropped four days and inventory turns went up another turn.

What can we think as we go forward especially when you have these inventory [inaudible], those kind of inventory turns are pretty great.

Can you talk about what the outlook might be?

I would expect it to go back to around the Q1 levels.

I think we had some excellent opportunities to manage our DSOs in this period but I would expect it to be around 43 to 45 days in DSOs, and inventory around 25.

We are going to take advantage when we can and bring some cash in but I don't think we could give you that every period.

When you say inventory 25, I'm not sure, are you saying $25 million of inventory.

No, inventory days.

I did DSO in days and then inventory days.

I thought you were talking turns and I gave you days.

Right.

I missed a few of the numbers.

I think you gave on the third quarter GM was 16 to 19, but can we expect SGA to stay, the GA to stay in the 28 range and 6.4% for selling?

Can you give us any color.

What we do, it depends on the mix of percent of sales, Keith.

We conservatively estimate 7% but that would dictate a mix shift.

So I would say anywhere between 6.5 and 7& is a safe assumption and GM at the range are 16 to 19%.

Is the GA flattish?

Yeah, GA is flat.

What I did on the call was $3.1 million but that also includes the $300,000 of the quarterly amortization.

You're accurate.

SG&A should be $2.8 million, we should have about $300,000 of the quarterly amortization for a total of $3.1 million.

As you start making money, should the tax revenue -- you booked at 33% with a profit, is that the kind of rate you should be booking when you have profit going forward is a 33% tax rate?

Actually going forward I would expect it to be a little higher if we continue profitability.

What's real tricky right around where you start to turn your profit, you are trying to book your effective tax rate for the full year so it really depends on where you turn out.

But we book it each quarter as to to where we think at that point time in time.

I am at 36%.

That's safe.

Okay.

You went too fast on the sales sites outside of the U.S., Scotland, I think England.

Where else were the other sales sites outside the U.S. now?

Gosh, we have inventory hubs, I will give you the hubs first because those were significant, did you get the hubs?

Italy*, Scotland, Canada and Asia.

Also we have sales office in Scotland, England and Singapore.

Okay.

You gave me the book-to-bill.

The other thing, material costs with the buying power, have we seen all those benefits yet or are there still more benefits as you are working through other inventory on the books, have we seen those benefits yet?

You've seen part of that but you should see more in the third quarter.

I think we should realize the full impact this quarter.

If the it's facility specific depending on what rates they had before so it takes a lot to work through that inventory.

Have we seen half of it or something?

A little bit more than half you've seen, maybe around 55 to 60%, but I would expect to get more in this quarter.

Terrific job.

Thanks very much.

Thank you.

Our next question is from Michael Walker with CSFB.

Please state your question.

Thanks a lot.

I wonder if you could segment a little bit your comments about slight improvements over the course of the quarter and into July?

With ACI still coming on line and the cross selling I think it's not quite apples to apples to look at the end market performance to get an idea of where the strength is?

When I talked about the strength over the course of the quarter looking at the book-to-bill, our book-to-bill ratio improving month over month, overall strength, we are seeing it pretty much across all segments of the marketplace.

We did see some nice pick up in the networking and communications segment.

I think our high-end computing was off a little bit.

We anticipate that to pick up towards the end of the year in the fourth quarter.

Computer peripherals is down.

There's some seasonality with computer peripherals so we are expecting an increase there in the fourth quarter.

But the majority of the strength came from the networking and communications sector.

Then the other segmentation I was wondering if you could provide is whether you are seeing the strength more in the form of just standard production orders or is it weighted more toward the quick turn or the design type of activity?

Actually we are seeing it in both.

I mean our quick turn percentage increased just 1% from 28 to 29.

So that was strong.

We are also seeing our standard lead-time arena, our lead time extended out about a week, so we've extended our standard lead time product.

We still have the quick turn capabilities remaining steady from 24 hours to the ten days that we determine our quick turn capabilities.

But that activity is strong, also.

We had an improvement in our new jobs that we tooled about 10% improvement this quarter over last.

So I think there's some activity on the new jobs front that usually represents some quick turn work and our standard lead-time.

We are seeing it across the board.

My third segmentation, is it mostly coming from new customers or new programs or is it coming more from existing customers?

There, again, with our cross selling and certainly with some of the plant closure wins, we count those as new customers but we go back and look at our existing programs that we have with our larger customers and there seems to be some up-tick within those programs also.

Sometimes it's within the networking there's some enterprise section that seems to be significantly improving.

So it's hard to pin all of those things down and segment them but it's definitely a fairly broad base improvement in overall activity.

Great.

Thanks a lot.

Thank you.

Ladies and gentlemen, as a reminder should you have a question please press star one at this time.

Our next question comes from Ben Ruff from JP Morgan.

Please state your question.

I was wondering if you could expand a little bit about the international locations that you stated in your prepared remarks.

Were those decisions that had you made to open those locations or had had those come with the ACI acquisition?

It was a combination of both.

We had had some foreign sales offices in the past but we also had imported also overseas.

We got an expanded boost with ACI.

I think we are getting a larger and larger network to serve the customers better and we got the ACI acquisition enhanced capabilities pretty significantly.

Is that an effort that's still under way, should we expect more international locations in the coming quarters?

Yeah, it's something we are constantly evaluating with our new customers needs to create customer access.

I was hoping you could talk a little bit more about the ten new customers that you said you had qualified.

Is there any way that we could chop that up into perhaps customer segments or industry segments?

Ben, keep in mind that we added 38 new customers in the quarter.

Okay.

The ten new customers I was referring to were basically cross-selling customers from ACI.

I see.

And a couple from TTM going to ACI.

But the majority of the work is coming from ACI to TTM at this point in time.

As we move forward, however, we look to move some opportunities we have into the ACI facility.

So you look at ACIs customer base it's the majority of the customer base that we are working on to cross sell with our high mix capability and our quick turn capabilities.

Thanks for clarifying that.

In terms of the 38 new accounts, can you characterize what industry segments they are predominantly in?

The 38, that breaks down the new ones to 33% in the high-end computing section, 28 in networking and telecommunications, 11% computer peripherals, 5% industrial/medical, 9% in handheld which is mostly quick turn, and then 14% in the other category as we work through that.

Thanks for those numbers.

Did I go through that too fast?

I caught it personally.

Let's see.

Longer term I was hoping you might be able to talk about the CAPEX expectations for the company?

With the acquisition of ACI and the accounting for that it makes it a little bit difficult for me to understand when we are going to need to replace that equipment longer term and when we would expect CAPEX to start perking up a little bit.

Can you talk a little bit about that for beyond the next quarter or two?

YTD we've spent $1.8 million on CAPEX and our budget for this year is about $6 million.

The majority of that budget has to do with technology improvements and reliability testing and just some replacement of the maintenance of our equipment.

Not a very heavy investment this year given our total sales.

If you go beyond this year and look at what we have in place, we have over 100,000 square feet of unused facilities at this point when you add it all together with all three of our facilities, and we have a significant amount of equipment that is in storage that we can bring on for capacity purposes.

So we are in pretty good shape, not only for the rest of this year but as we look forward into 2004 with CAPEX.

Now that doesn't preclude new technologies, new other inventions that come along that we will certainly invest in to keep ourselves abreast of the technology world.

But we are about $6 million for this year, Ben.

Okay.

I won't hold you to this number but your best guess on next year would be somewhere in that $6 million kind of level?

It should be a repeat of that 6 million plus some.

It's hard to say where we are headed but if we continue the turn we are seeing here and that continues into the fourth quarter that CAPEX number will go up.

And lastly, Stacey, could you talk a little bit about the G&A expense this quarter, and maybe break out what portion of the G&A was related to what you could classify as acquisition integration of the ACI?

Yeah, I think about $200,000 was integration and it was kind of flat going forward.

Okay.

Thanks so much.

Congratulations.

Thank you.

Ladies and gentlemen, as a final reminder, should you have a question please press star one at this time.

I'm showing no further questions.

Okay.

Thank you.

I will just some up.

We appreciate everybody's interest in TTM.

We are very encouraged with the results of the last quarter.

The activity is certainly on the increase.

We are looking forward to the next quarter or two.

So thanks for attending today and we'll talk to you in another quarter.

Thanks.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.