TTM Technologies Inc (TTMI) 2003 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 call is being recorded and that all participants are on a listen-only mode.

At the request of the Company, we will open up the conference for questions and answers following the presentation.

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

Please go ahead.

Good afternoon.

And thanks for joining us for our third quarter conference call.

As you probably saw already, we posted earnings per share of 6 cents for the quarter.

Revenues increased 10% sequentially to 45.3 million.

We are very pleased with these results.

Before we get into details of how we achieved this, I would like to 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 TTM’s most recent registration statement on form S-3.

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.

Thank you.

As Stacey said, we are pleased with our performance in the third quarter, with good news both externally and internally.

Externally we experienced a broad-based improvement in the market demand in the third quarter.

To date, that trend has continued.

Internally, we have done what we said we would do.

On a top-line basis, we are making the most of TTM's strong market position to capture market share and capitalize on cross-selling opportunities created by the ACI acquisition and our three specialized and integrated manufacturing facilities, and with better top-line performance, you can see the significant operating leverage inherent in our business.

Gross margins are up significantly due to enhanced operating efficiency, better fixed cost absorption, and lower raw materials costs.

And we continue to do an excellent job of controlling expenses and becoming more efficient.

The sequential improvement in margins demonstrated our operating leverage from the second quarter of 2003 to the third, gross margins improved from 15.7% to 20.9%, and operating margins improved from 1.8% to 8.2%.

One more highlight of the quarter, before I move on, was our successful secondary offering.

Of the 12.65 million shares offered, 12.45 million shares were from selling shareholders.

As such, our stock's public float increased by approximately 60%.

Now, as for the revenue, success on our revenue line, during the third quarter, we added 45 new accounts and as we discussed last quarter, we have been and will continue to be the beneficiary of client shutdowns in the industry.

We still believe the majority of these new business gains lie ahead of us during the fourth quarter and beyond.

We are gaining market share by capturing new programs and a bigger share from existing customers, including many of the names on our top 10 customer list, and we continue to win new customers.

We also realized business from cross-selling opportunities created by the combination -- or our combination with ACI, which includes qualify new as well as existing customers across our three manufacturing facilities.

And there is a lot of upside potential as we continue to qualify more customers and generate orders from them.

In the third quarter, our production continued to reflect a high value-added mix.

Our average layer count was essentially flat at 14.5 compared to 14.6 in the second quarter of 2003.

Products with 12 layers or more accounted for 63% of revenues this quarter, down slightly from 65% in the second quarter.

Products with 20 layers or more accounted for 31% of revenues this quarter, up from 28% in the second quarter.

Quick Turn represented 25% of revenues, down from 29% in the second quarter.

This reduction in Quick Turn mix was primarily driven by increased standard volume demand during the third quarter.

As for customer concentration, sales to our five largest OEMs constituted 50% of revenues in the third quarter, down from 55% in the second quarter of this year.

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

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

Thanks, Kent.

Since Kent has already told of our strong and bottom line performance, let me tell you about some particulars in between.

On the gross profit line, we continue to capture greater operating efficiency, better labor and fixed cost absorption and lower raw material cost.

On the last point, raw material cost, we said last quarter that we were able to negotiate significantly better prices for key raw materials and services following the merger with ACI.

In the second quarter, we only enjoyed part of this benefit.

We had a complete flow through of these lower costs in the third.

We were also able to leverage our expenses across a larger sales base on the sales and marketing line.

As a result, sales and marketing expense as a percent of revenues declined to 6% from 6.4% in the second quarter of 2003, and 7.5% in the year-ago period.

General and administrative expense declined to 6% of revenues, from 6.7% in the second quarter of 2003, and 8.3% in the year-ago period.

And on an absolute basis, G&A declined slightly sequentially from the second quarter to the third.

That decline was the result of a number of factors, including greater efficiencies following the integration of ACI and the fact that we were able to negotiate lower DNO insurance rates.

Only part of the benefit of lower DNO rates flowed through in the third quarter.

We expect the entire 150,000 of quarterly savings to flow through in the fourth quarter.

As we've said before and you can see from our third quarter performance, we have excellent operating leverage.

We estimate that each incremental of revenues generates gross margins in the high 40s to low 50s range.

And that assumes no mixed shift.

In a recovery, we would probably include a positive mix shift as well as price increases that boost margin.

Our leverage is probably even greater.

Switching to the balance sheet, it keeps getting stronger.

We ended the third quarter with cash of 31.3 million and debt of 10 million, translating to a net cash position of 21.3 million.

That compares with net cash of 8.9 million at year-end 2002.

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

On a sequential basis, volume, as we measure by average panels per day, was up 13%.

The average price was approximately flat with a less than 1% decline.

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

Appreciation was 1.9 million.

Cash flow from operations was 90,000, which was down substantially from prior periods due to a significant expansion in receivables.

That increase was primarily driven by higher sales.

For the quarter, the cash cycle stayed the same.

Net capital expenditures were 3 million, including 900,000 of construction in progress.

That keeps us on track to spend about 7 million for the full year.

As a result, free cash flow, which we define as cash flow from operations net capital expenditures was a negative $3 million.

Looking ahead to the fourth quarter of 2003, based on the improvement we have already seen in the market, additional opportunities to capture market share and our excellent operating leverage, we are forecasting further strengthening in the fourth quarter.

We did begin to see some ramp business in October, which means our customers are starting to bring new products to market.

We think it's too soon to assume a trend, but it's encouraging nonetheless.

Our guidance for revenue is 50 to 52 million, and we are estimating GAAP earnings per share of 8 to 10 cents.

Implicit in our guidance for the fourth quarter of 2003, we anticipate further gross margin improvement to 22 to 24%.

Sales and marketing should remain at 6% of sales and we expect G&A of expense of about $2.9 million including a higher bonus accrual in the fourth quarter.

With that let me open the call to your questions.

Thank you.

The question-and-answer session will begin at this time. [Operator instructions].

Please stand by for your first question.

Our first question comes from Michael Walker with First Boston.

Please state your question.

Thanks.

Good morning, guys -- sorry, good afternoon.

Two questions.

The first is, I'm wondering, you said you could do gross margins or at least the incremental gross margin -- contribution of gross margin as much as 40 to 50%.

Where do you see potentially kind of a couple years out margins getting to?

Do you have a target margin that you're trying to reach, let's say the EBIT line?

Yes, we do.

We said the gross margins are very close to 50%.

It's high 40s to low 50s with our current mix, or the mix we expect in the fourth quarter.

And kind of at a target level of about -- about, you know a couple of -- I'd say a couple million dollars higher, around 55 million.

I think those margins should be in the 25 to 30% range.

We probably could have achieved those in the fourth quarter except we had a change in our mix.

And that's without any price improvement and any kind of, you know Quick Turn kind of mixed shift in that regard.

And you see that falling out around the 15 or 20 margin EBIT or so?

The EBIT margins would probably be in the high teens, as high as, depending on the mix again, as high as the mid 20s.

And the second question is, on the cash flow, obviously it came down quite a bit because of a higher receivables which are due to higher sales.

The question is, you know, if sales are going to continue to increase and receivables and potentially inventories increase and we are -- are we going into a period of negative free cash flows here, or is there a point where your net income can overcome the higher working capital?

I think there is a point of where the net income can offset the negative working capital but I would expect us to be slightly negative again in the next quarter.

A couple of reasons, we're going to have some debt payments in that quarter of about $2 million.

That's not on the free cash flow line but that's a net cash flow item.

In addition I expect receivables to grow substantially as sales are going up 10 to 15% in the quarter.

Okay, great.

Thanks a lot.

Thank you.

Our next question comes from Matt Sharon (ph) with Thomas Weisel Partners.

Please state your question.

I hope you can review for us your capacity utilization in each of our facilities and also talk about lead times and the pricing environment?

Sure, Matt.

Our capacity utilization increased throughout the quarter and it varies by facility, and we have different types of challenges or bottlenecks, if you will, in each of the facilities.

But in our Chippewa Falls facility we ran fairly close to 90% as we exited the quarter -- in Redmond, 75%, Santa Ana, we always have available capacities for the Quick Turn, we're at about 50%.

As a company overall, that's 75 to 80% capacity run-rate with different challenges in each of the different facilities.

Our lead times again extended but we're able to keep them in a range where we can meet our customers' demands, keep our customers happy at the longer lead-time product work we're at about 8 to 10 weeks, mainly out of Chippeawa False, Redmond was 4 to 5 weeks, and in Santa Ana we also have available capacity for Quick Turn, we're running at about three weeks out of our Santa Ana facility.

Our pricing environment, what we're seeing now, last quarter we saw prizes prices stabilize, now I think our pricing for the quarter was flat.

If you look at it on a panel basis so far through October we're able to start to inch those prices up a little bit.

So I think as we move into the fourth quarter, we're able to move pricing up due to the supply end in the industry and so forth.

Actually on a price per layer basis which is just for technology, we were actually up 1%.

Why it looks like there was a slight decline in the price was a shift in mix towards some of the [Inaudible] mix.

Overall there was underlying strength in the pricing; however, the mixed shift kind of offset that.

What's the customer reaction to some of those price hikes so far?

Well, I think the price hike so far happen on the inside of the Quick Turn world and so forth where we have the opportunity to raise prices on a more real-time basis.

If you go to our longer lead time, we're honoring any commitments that we have in place, but our customers understand the industry.

They know that the supply-demand equation is becoming more balanced.

So I don't think that's a surprise to any of our customers, and if you look at what's happening throughout our industry, backlogs are up and lead-times are up, and so this is a natural phenomenon of where the industry is growing.

It's a pretty healthy industry right now.

And concerning the Quick Turn business down as a percentage, you talked about customers ramping new products and prototypes.

Are you modeling the same 25% percentage as overall sales, or do you think that's going up?

And what is your sort of comfort level in terms of a percentage of sales would you like it to be, 25%, 35%?

Oh, gosh, I'd love it to be 35%.

We've modeled it around the high 20s, 27 to 29% kind of thing.

Yeah, Matt, it was interesting that kind of the recovery came on the production side of our business, and I believe our customers are watching their budgets fairly closely, and as they watch their top lines and their profits improve and become a little more confident, what we're seeing actually through the first part of October is an increase in demand in the Quick Turn.

I think that's a result of customers becoming more confident in their ability to generate profits and willingness to spend some R&D money.

Okay.

Just one quick question, if I may, just concerning capacity going forward?

Is there sort of a plan in place to add capacity?

I know there's room in Chippewa Falls?

In Redmond, do you have any plan in place and when do you implement that?

We're looking at capacity availability on an ongoing basis.

We still have some capacity with some employee ads that we can get more output in certain areas.

Our remodel or our expansion in Santa Ana is pretty much complete, so that's a matter of just staffing up and getting more product out the door.

We have our empty facility in Redmond that we have plans put together.

It's a matter of just us deciding on when the best timing is to execute that.

And then in Chippewa Falls, we have empty floor space there.

We're looking at the best alternatives to expand capacity to both short-term and long-term.

But we can grow right now with some additional hires as we move forward, but we're getting very close to looking at some significant expansion.

Part of the capex that you see us increase in with this quarter with some opportunistic exercise with some options that we're able to pick up some equipment for a reasonable price, which we did, and have installed that.

So we're looking at long-term as well as short-term.

And also I think one good thing about having the floor space is we can kind of build into that space incrementally.

It's a lot harder to have to break ground or have a new footprint than it is like the inner layer facility, for example, additional floor space with additional buildings that is located on your same campus.

It's a lot easier to do that than have to bringing up the bricks and mortar yourself.

I think we're lucky right now that we have that additional capacity we can expand into relatively quickly, and we have the ability to choose which facility would be the best for expansion.

Up in Redmond, for example, we moved some drills over to the building that we purchased just west of our property there, and that allowed us to expand our plating capacity and bring a plating line down from Burlington and increase our plating capacity by 50%.

So we continued to expand our capacity on an ongoing basis.

Great.

Thank you.

Our next question comes from Jim Savage with Wells Fargo Securities.

You've answered a lot of questions.

Where do you think the EMS inventories are now in printed circuit board?

You think they are going to need to increase inventory levels to feel more secure about their ability to meet their customer demand?

Jim, I think when we start to do our channel checks with our EMS customers, they are currently not building inventory, so some of the demand we're seeing is throwing right through on to the products.

Some of the inventory that we've had in the hubs has been drawn down.

But as you know, these contract manufacturers have been through a lot over the last couple of years, so watching their inventories and keeping track of those very closely; it's a totally different scenario than we had in 2000 where we had some double ordering and some people getting carried away.

We don't see that at all today.

We see the contract manufacturers working very closely with the OEMs to make sure that demand is real, and we see that coming down into our business such that we're pretty confident that there's no buildup of inventories.

Now, in the future, if we can keep going like we're going and keep our lead times at a reasonable level, not only TTM but as an industry, I think you won't have the tendency to build up inventories like we've had in the past.

Great.

Are you getting any sense that there are customers asking for reduced lead times so out of Chippewa Falls, we need something faster than 8 to 10 weeks then your standard late time at this point?

We have worked closely with all of our customers out of Chippewa Falls to let them know where we're at to and what type of lead times they can expect now and in future and how we're expanding.

We're very upfront with them as far as getting orders on the books so that the capacity can be allocated wisely, if you will.

So we're working pretty closely with our customers to make certain that there's no panic in the street.

I guess that requires there not to be significant upside in their end-market demand too.

Oh, they're doing their best to forecast their end-market down and filtering that down through their supply chain, and we're participating in that with as best a forecast as we can get from all of our customers.

And are you getting any sense as to whether your competitors are will also seeing the same levels of high utilization that you're seeing in Chippewa Falls?

Yea we are.

I think our competitors are seeing higher utilization reates, longer lead times, and higher backlogs.

We talk with our competitors informally across the board, our sales people talk to their sales people, so there's a lot of informal feedback that comes back and that happens with our supplier base.

Yeah, the industry is very healthy right now, and we're seeing just a general pickup that looks like it's more sustained than it ever has been.

Great.

And one other thing, just if you were to look at the -- your ability to add capacity over the next 12 to 18 months by filling the sites that you have relatively empty at this point with new people and new equipment, what do you think the incremental capacity that you have available or will have available will be?

When we utilize all three facilities to 100% --

Well, I can't imagine you're going to do that with Santa Ana, right?

Pardon me?

You're not going to do that to Santa Ana, though --

No.

What I'm saying is running at full capacity, and you can say full capacity is 95% in production facilities and probably 75 to 80% in our Quick Turn facility, and at those levels, we would probably be close to $300 million in total sales.

Okay, great.

And just for clarity on that, that's a current mix and pricing.

There would be some pretty good upside in that if, obviously, you know, environment that robust, you probably expect more Quick Turn mix with higher margin and in addition you would expect maybe some price improvement.

So that constant mix.

So that's a conservative estimate.

Thank you.

Thank you.

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

Good afternoon, guys.

How you doing?

Hi, Keith.

A couple of follow-up questions, please.

One, can you talk a little bit -- it sounds like you kind of addressed it a little bit but the order trend in the quarter.

It sounds like it continued to progress in September and October being better than September; is that reasonable?

I think going back, July was a pretty flat month, if you will.

August-September picked up and increased sequentially through the quarter and the order pattern has continued to hold strong with fairly significant improvement in Quick Turn through October.

Can you give a little more color, when I dove tail that with what I saw on the end-market mix, it looked like high-end computing was off a little bit but you had really strong increases in the industrial and medical area.

Do you expect those kind of trends to continue, or was there some aberrations in the quarter that changed that mix between the industrial, medical, and the high-end computing?

We had strength kind of across the board in all of the segments except for the high-end computing.

I think that was off a little bit due to maybe -- it seems like a lot of the high-end computing product comes with capex kind of purchases rather than ongoing purchases, and so I think we're waiting for capex budgets to come a little bit more back in line with the high-end computing.

Certainly the networking and communication led the way on the recovery, but I would think that through all of our segments, we will continue to have strength in all of those segments and would fully anticipate and expect the high-end computing to come back.

Can you tell me how much Chippewa Falls actually shipped this quarter?

Is it in the low 22 area, or can you give some idea of what kind of sales came out of that operation?

We typically don't break out the facilities individually in disclosure.

Can we ask it this way.

Is it fair to say there's been a fair amount of growth since you acquired it in that location?

Yes.

We were up across the board at all our facilities but, yes, there has been a fair amount of growth since we acquired it.

If we look at it, your customers over 10%, is it fair there were three or only two customers over 10%?

There were only two this quarter, Keith, it was Cisco and IBM and Sun which was over 10 last year and just fell under the 10% threshold this quarter.

And is it fair to say that Cisco and IBM are both under 20%, or would that be stretching it?

Cisco's above 20.

Okay.

And we look at sales expanse we used to, on the old model, think of that as 6.5% of sales, obviously came down given, I assume, the ACI sales incentive structure is different given a few big accounts represent the majority of the business there.

Can we look at 6.0 being a sustainable, achievable selling expense rate going forward?

Yeah, there are two dynamics to it, Keith.

There is the ACI piece of it, but there's a fixed cost component to our sales force.

We also have our customer service that resides within that line, and I would say 6% would be a good modeling assumption for now.

But in the future, as we grow, it could go as low as 5.5%.

If you look back at the year 2000, we actually had 5.5% with a percentage of sales.

If we get up 60 or 70 a quarter, is that the level, or do we need to be north of the 70 million a quarter?

No, I don't think so.

I think in the range you said there's a good potential for it to be at 5.5%.

Okay, great.

Lastly, you alluded to you were looking at some capital expansion plans.

You know, can you give us a range of what the '04 cap ex plan might look at under a couple of scenarios you're evaluating?

The '04 cap x?

As you potentially look at expanding your footprints, as you mentioned earlier?

Of course it depends on when we pull the trigger on some of these capex expansions.

Keep in mind we have a pretty long way to go with the facilities as they are.

But I would think we'll be close to about the 9 million to $10 million range capex in 2004.

Using that kind of a cap ex measure, as we exit '04 in the current mix and the current pricing structure, would that get you well beyond the $300 million capacity, sore is that what it would take you to bring you to the $300 million?

No, Keith, I think to get to the 300, we would have to go another 15 to 18 millon on top of that to get to the 300 million.

Great.

Thanks very much.

Good job.

Thank you.

Our next question comes from David McGregor (ph) with Longbow Research.

Please state your question.

Yes, good afternoon.

You mentioned that the combination with ACI has given you a little more raw material purchasing power.

Can you just talk beyond that of what you're seeing in the market for raw materials right now?

Are you hearing about increasing laminate prices or etching chemical prices or just give us a feel for what might be unfolding?

Yeah, when we got together with ACI, purchased ACI, we used the purchasing power to renegotiate materials across the board with all of our suppliers.

We're pretty much complete with that now, and that's starting to flow through on to the income statement.

We have not had any of our suppliers come and talk to us about price increases, and we have some protections with some agreements relative to the amount of price increase that can be instigated in a year, depending on their raw material costs.

But as far as anticipate and expecting any raw material cost, there has been no conversation with any of our suppliers at this point.

Okay.

You're not hearing of any rumblings in the market?

We're hearing about laminate price increases in Asia and we're wondering how long it will take to spill into the North American market.

Yeah, we heard the Asia price increases on laminate -- I think that was almost two quarters ago that that was taking place and that was more a situation that was isolated to the Asian market, and we talked with our suppliers and I talked with several of our competitors, and we didn't feel like that would spill over, and as yet it hasn't spilled over.

But, you know, I think the industry is becoming more healthy.

We're able to raise our prices to our competitors and hopefully we can keep our costs low going forward.

Just a second question.

As we're doing our monthly surveys on printed circuit board fab shops, we're hearing Quick Turn multiples around moving at all.

I guess that was little bit of a surprise we thought there might be a little bit of movement there.

Could you comment on what you seeing and what your expectations might be for the next quarter or so?

I think that's correct.

If you go up to the end of the quarter, and I think that's represented by our lower percentage of Quick Turn going from 29 to 25, if you step forward and move into October now, we're seeing a tremendous demand now on our Quick Turn, and so that's -- what? -- a three to four-week demand that we've had and there's no reason why that trend won't continue, but right now the trend is solid with Quick Turn and we're able to get some better pricing to what we can deliver on a time basis.

Great.

Thanks a lot and good luck.

Thank you.

Our next question comes from Thomas Dinges (ph) with JP Morgan.

Please proceed with your question.

Good afternoon.

A couple of quick ones because you have answered a lot so far.

I was curious as to your assumptions are as going into a next quarter in terms of ASPs.

You mentioned prices are going up a little bit, but I wanted to get a little more qualitative comment around that.

Should we think of the increase in revenue being driven by, say, a 3, maybe 5% ASP increase and the rest of it coming from very strong volume, or how should we think about that?

Actually we've modeled in very little price increase, definitely less than 3%.

And the reason being is we're seeing some mix shift at a couple of our plants.

Not that it's less expensive to make but I think the ASP will dampen that slightly.

With that said, the underlying market is strong but sometimes mixed shifts can offset that.

Just as a follow-up.

It appeared just from my calculation here and please correct me if I'm wrong, but the top 5 seem to be -- it was slightly up in the quarter just in terms of absolute dollars on a quarter-on-quarter basis?

I'm just curious, most of the upside that you saw in the quarter is likely coming -- you know, where is this primarily coming from?

Is it a lot of the smaller newer accounts that you guys are taking share away from other folks, or is it sort of in that customer list that might be that six through 20 of your top 20 that's maybe growing a little faster than the top 5, and is that situation similar to this next quarter as you guys see it right now, or is it reversing itself and you're seeing any acceleration amongst your top 5?

I'll try to break that question down a little bit.

I think with our top 5, we saw somewhat of a mixed bag but some strength within some of the customers there, and it again goes back to the communication, the Internet-related customers that are driving a lot of the growth.

Now, having said that a lot of our growth's being driven in the top 10, say, and mainly coming from communication and the Internet segment, that doesn't rule out the growth we're experiencing across the board because -- you know, the industrial and the medical segments and the other segment is continuing to show strength.

So we're seeing growth basically across the board, but being led by the communications and Internet segments.

I think why it's tough to answer that question because there's a lot in the question is, those top 5 represent a larger base.

So when they grow, even if they grow at a lower percentage, dollar-wise they grow quickly.

What we saw at all facilities, and we have a customer base of approximately 600 customers, they were up pretty strong in all facilities.

So it is -- like Kent said, that's the proof that it's really broad-based.

And another kind of measurement, if you look at our top 5 on a percentage of sales, we were 50% in the third quarter for the top 5 and 55% in the second quarter.

So the top 5 actually diluted as a percentage.

And if you go to the top 25, that was 73% in the third quarter of '03 and 73% in the second quarter.

So not any dilution in the top 5 on a percentage basis, but certainly we become less concentrated in the top 5.

Okay.

Thank you.

Thank you.

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

Please state your question.

Yes.

Could you talk a little about the cross-selling effort?

How many customers have you qualified and how much customers are you actually shipping to now?

Yeah, John.

We have -- if you take the customers that we've cross-qualified that are significant customers, it's probably 10 to 12 different customers that we've qualified and some are still in the process of being qualified.

That's why, when we talk about the cross-selling and not seeing the benefit in the third quarter but it's coming mainly in the fourth quarter and beyond, those are relatively long processes.

So with 10 to 15 sizeable customers and then other new customers, as they come on board, we're able to cross-sell, it seems like a little bit easier.

As new customers come on board, we're able to cross-sell with all of our facilities, and then about 10 to 12 again with the major customers cross-selling, and we're starting to see that work flow through and capture some additional market share with those customers.

And that's continuing in October?

Yeah, that's continuing.

Actually, a lot of that is just kind of starting in late September and October, and we'll accelerate through fourth quarter and then beyond throughout the year in 2004.

There is a ramping process to it because you don't instantaneously become qualified and the order spigot turned on.

It takes a while for those orders to build after you're qualified.

If your Quick Turn percentage was about 25%, if you lumped in the customers there who are willing to pay a premium for shorter lead times, how large would that combined total be?

John, we've not measured that.

You know, we always measure our Quick Turn in ten days or less.

And our objective, when trying to say it's ten days or less, we're trying to measure what people are doing with the research and development, what new products are coming to market, what are they willing to pay time for.

And now certainly we've been able to get some higher prices beyond ten days and say up to 15 days on a premium basis, but I think, when we get premium on that basis, it's mainly because of the industry conditions and lead times, and it's not a measurement of true Quick Turn work.

And so we haven't actually got a pencil out and measured our premium work that is in addition to the ten-day Quick Turn work.

Yeah, we just typically disclose the ten days or less, because like Kent said, we're trying to capture that dynamic of bringing new product to market, not I didn't order enough and therefore I need to accelerate it.

We need to capture new business development, R&D, and bringing product to market.

With our Quick Turn, that's why it's ten days or less.

Exactly.

We want to capture what people are willing to pay time for, and we design our business built around that Quick Turn model.

We have a whole facility dedicated to the Quick Turn, so it's really important we monitor the work that people are willing to pay an extra premium for for time and not simply because the marketplace is full and I have to get it in three and a half weeks rather than four, so you can get a little premium for that.

That's not our objective at all.

You mention that you're continuing to benefit there from some of the plant closures.

Could you go on a little more detail and how long do you think that that tale will last?

When we say plant closures, there's two ways we benefit, and certainly in the third quarter we benefited fairly directly because of, say, the multex closing, the Toppan closing happened a little bit sooner than that [Inaudible].

We had some direct part number wins, direct customer win -- that we added to our customer base.

Now that we have those customers on board, as they grow and as we add part numbers to that, we continue to benefit throughout the fourth and, say, into the fourth quarter.

We benefit obviously indirectly as everybody else in our industry benefits with fewer competitors out there.

And so when we talk about benefiting from plant closures, it's directly, and then to some degree somewhat indirectly.

But you may still see some of that there in '04.

Oh, yeah.

I think it will move out into '04.

I mean, I can -- several of our customers have looked at us for, like, 30 part numbers.

We're tooled up on, say, five to ten, and we have the balance ready to go, and it depends on the customer and their particular needs and what products accelerate faster than the others and so forth.

You mention from an expansion standpoint that there seemed to be two major expansions.

The one has been moving into an additional 60,000 square feet there in Wisconsin, and the other is moving into a new building there, you know, adjacent to or near Redmond.

Could you talk -- is there more expansion that you can do on the kind of current footprint?

Yeah.

Well, it's a 40,000-foot building in Wisconsin, John, that is vacant, and then we have about a 40,000-foot facility that we purchased in Redmond when we closed our Burlington facility that's basically right across a little driveway there, and we've started to move some of the drills and other supply and storage into that facility and expand in Redmond.

We can expand in Chippewa Falls, there's empty space in one side of our facility there, as well as that building I described earlier a little bit earlier away -- it's not on the campus there.

So we can expand into idle capacity in Chippewa Falls in one of the facilities as well as that extra building and then we have the 40,000 square foot facility in Redmond.

And if you add all that together, there's about 100,000 square feet of expansion square feet that is not being used right now.

And, again, that would cost you this additional 15 to 18 million?

That would cost about -- yeah, to move into that, about the 15 to 18 million, in addition to the 10 to -- 9 to 10 million we would anticipate spending next year.

Thank you very much.

Thank you.

Our next question comes from Mark Hassenberg (ph) with Nottingham Capital.

Please state your question.

Good afternoon.

A couple of weeks ago, you announced that you had mill spec approval and that the size of the market was in excess of $600 million annually.

What part of that market would be available to you?

Yeah, Mark, it wouldn't be a sizable amount right now.

With our military approval of our Redmond facility, we think there's some low-hanging fruit out there that we have opportunities that we can capture fairly quickly here over the next three to four months.

Again, there is that approval process that we have to go through.

And then actually beyond that, after we get that low-hanging fruit under our belt, we look at the opportunities that we currently have now that the market's picked up, and we'll go after kind of the most efficient opportunities that we can.

But out of 600 million, you know, if we captured another 10 to 15, maybe 20 million of that, we'd be pretty happy.

And getting back to the Quick Turn business, on the last cycle, the Quick Turn business was a very profitable piece of business, and I think for most of the people in the industry, had margins significantly higher than their regular business.

And in your case, where you define Quick Turn as just ten days instead of three weeks, I would suspect that was even greater.

You were talking about a significant change in demand in Quick Turn.

When you talk about your guidance for the fourth quarter, number one, do you expect Quick Turn to have a significantly higher margin this cycle as well; and number two, when you talk about your fourth quarter and the 8 to 10 cents guidance that I think you gave, have you factored in, admittedly, a very short period of time where Quick Turn business has improved?

We have, Mark, filtered in some improvement, but what we haven't done because, you know, we are kind of conservative and we've seen some really good results in October, but we're hesitant to call it a trend.

But it still looks good, still looks strong.

So, no, we haven't filtered in a dramatic price increase for Quick Turn, and we are seeing some good Quick Turn pricing, but I wouldn't say that I'm comfortable raising that significantly in the fourth quarter.

But as the trends continue, I could see price improvement on the horizon.

Good.

Thank you very much.

Nice quarter.

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

Please state your question.

Just a few follow-up questions.

I notice the tax rate going higher.

Which would you use going forward?

Good question, Keith.

We would expect our tax rate to be increasing.

I asked you to model it at 36%.

Going forward, I would model it at 39.

And that's through next year?

Next year, yes.

Also you did a good job of holding inventories flat versus last quarter.

Can you continue to do that or should we start looking at it as turns that you can hold the 17 kind of turns.

Before we were obviously above the 20 but you had a mix with ACI.

How should we view that inventory going forward?

I think by the nature of the business, yes, we would expect the absolute dollar amount of inventory to go up but the terms to stay about constant.

Okay.

And as far as -- you gave top 25.

You have given top 10 in the past customer concentration.

Can you give me that again, please?

It's 60% for the third quarter --

63 last quarter, yeah.

Thanks a lot, Kent.

Good job, guys.

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

Thank you for your attendance.

We appreciate your interest in TTM technology.

We're working hard to create value, keep our customers happy, and we'll continue to do that.

Thanks for your interest.

Talk to you next quarter.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.