TTM Technologies Inc (TTMI) 2004 Q3 法說會逐字稿

Good day, and welcome to the TTM Technologies Third Quarter Earnings Release Conference Call.

Today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to Chief Financial Officer, Stacey Peterson.

Please go ahead ma'am.

Good afternoon and thanks for joining us for our Third Quarter Conference Call.

TTM posted another solid quarter.

Revenues were $62.2 million, an increase of 37 percent year-over-year, and 1 percent sequentially.

Earnings per share were 19 cents.

But before I get into any more details, let me mention that 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 most recent registration statement on Form F3 and 10K.

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 who will provide you with more detail.

Thank you.

As you heard from Stacey, we sustained revenues and profits at strong levels in the third quarter.

While overall business conditions remain relatively stable, we're not seeing the kind of across-the-board strength we enjoyed in the first half of the year.

Rather, we're seeing variability by individual customer and end-market.

Despite this choppiness, TTM continued to perform at high levels.

We continue to successfully execute our time and technology strategy by capitalizing on cross-selling opportunities among our 3 specialized and integrated manufacturing facilities.

And we continue to win new customers.

During the third quarter, we added 31 new accounts.

In the third quarter, we further improved our technological and operational capabilities and moved up the technology curve.

Products with 12 layers or more accounted for 73 percent of revenues, up from 69 percent in the second quarter of 2004.

Products with 20 layers or more remain strong at 40 percent of revenues, consistent with last quarter.

The average layer count increased to 16.3, compared to 15.7 in the second quarter of 2004, and 14.7 in the first quarter.

Quick turn represented 22 percent of revenues, down from 25 percent in the year-ago period and flat with the second quarter.

Our quick-turn business continued to expand year-over-year, with revenues up 17 percent.

With the standard lead time, high-technology business grew at an even faster pace.

And we did see a moderate but steady recovery in quick-turn demand over the course of the third quarter compared with the softness we experienced at the end of the second quarter, with September being the best month of the quarter.

But there has been no meaningful pickup in the ramp-to-volume portion.

And there was some price pressure in the quick-turn arena.

We ended the third quarter with lead times about the same as they were in the second quarter, 8 to 9 weeks in Chippewa Falls, 4 to 5 weeks in Redmond, and 3 weeks in Santa Ana.

But over the course of the third quarter, lead time stretched out further than we would have liked at Chippewa Falls.

Overall, capacity utilization for the Company remained at 75 percent, the same as the second quarter.

Chippewa Falls utilization increased from 90 percent in the second quarter to 95 percent in the third quarter.

Utilization at Redmond, which was approximately 70 percent in the second quarter declined to 60 percent.

Santa Ana remained at 55 to 60 percent.

As you can imagine, with capacity utilization of 95 percent and periodically extended lead times, the capacity expansion at Chippewa Falls is quite timely and will allow us to better serve our customers and continue to capture market share.

We remain on schedule and on budget with Phase I of the expansion, which should be completed in the late fourth quarter.

This expansion will increase Chippewa Falls' capacity by 55 percent from January 2004 levels.

As for customer concentration, sales to our 5 largest OEMs constituted 58 percent of revenues in the third quarter of 2004, compared with 53 percent in the second quarter.

Our top 5 customers in alphabetical order were Cisco, HP, IBM, ITT, and Juniper.

Now Stacey will provide some additional details of the quarter and discuss the near-term outlook.

Thanks Kent.

As I said at the beginning of the call, third quarter revenues increased 1 percent sequentially to $62.2 million.

Volume, as measured by average panels per day was up slightly, about 1 percent.

And we produced even more layers as indicated by the rising average layer count.

On the pricing front, the environment remained fairly stable.

The average price per layer fell 5 percent largely due to product mix changes and slight pressure on quick-turn pricing.

But the more important measure, average panel price, was flat with last quarter.

Gross margin was 28.4 percent for the third quarter of 2004, comparing favorably with 20.9 percent in the year-ago period, but down from 31 percent in the second quarter.

The sequential decline in gross margins was due primarily to product mix changes and lower capacity utilization at Redmond.

Offsetting the higher cost of goods sold were SG&A expenses, which came in a little bit lighter than planned.

Sales and marketing expense was 4.5 percent of revenues, down from 6 percent in the year-ago period and 5.1 percent in the second quarter of 2004.

This expense as a percentage of revenues can change with mix since the commission structure varies by product category.

General and Administrative Expense was 4.7 percent of revenues compared with 6.2 percent in the second quarter, and 6 percent in the year-ago period.

Sequentially, G&A declined by about $900,000 compared to the second quarter of 2004, which included stock-offering related costs of about $350,000.

Additionally, there were lower-incentive compensation expenses in the current quarter.

The bottom-line results was reported earnings per diluted share of 19 cents in the third quarter.

That compared favorably with earnings of 6 cents per share in the year-ago period and 17 cents a share in the second quarter of 2004.

As you may remember, the second quarter earnings per diluted share included a restructuring charge of $855,000, or about 1 cent per share.

And the current period benefited by about 1 cent per share from a lower tax rate.

While we accrued taxes at a 37 percent rate in the first half of the year, we now anticipate a rate of 35.5 percent for the full year based on the geographic mix of sales and some additional tax planning.

For the third quarter, the tax accrual was 31 percent bringing us in line with where we plan to be for the full year.

Our balance sheet strengthened even further during the third quarter.

As mentioned in our release, we generated strong cash flow from operations of $17.8 million.

As a result, we were able to fund net capital expenditures of $5.7 million while paying down the remaining $6.7 million of debt on our balance sheet and expanding our cash and short-term investment position by $5.5 million to $52.6 million at the end of the third quarter.

Depreciation was $2.1 million during the second quarter.

As for our fourth quarter guidance, as stated in our earnings release, we expect revenues in the $58 to $62 million range and GAAP diluted earnings per share of 14 to 18 cents.

We realize the guidance range is slightly broader than usual.

With more volatility in orders, softness in the semiconductor test equipment market and greater than unusual uncertainty with a few specific customers who can't be as precise.

And we wanted to give you a realistic estimate based on what we're seeing in a range of possible events for the fourth quarter.

While overall business remains relatively healthy, demand trends are mixed relative to specific customers in end-market.

As I just mentioned, we've seen a little softness in the medical and industrial market, specifically among the semiconductor test equipment customers, which comes as no real surprise.

In terms of gross margins, we are seeing a little pressure on pricing, particularly on the quick-turn side.

And a raw material price increase, which took effect on October 1 of this year is expected to trim our gross margins by 1 percentage point.

As for expenses, we expect sales and marketing expense to be roughly 5 percent of revenue, and we expect G&A expense to be about $3.5 million for the fourth quarter, and that includes amortization and tangibles.

Overall, we are pleased with our third quarter performance and our ability to sustain revenues and earnings at these strong levels.

More than ever, we have demonstrated that our strategy and our consistent execution of that strategy, even in a choppy market environment, set up apart in the printed board marketplace.

With that, let's open the call to your questions.

(OPERATOR INSTRUCTIONS).

David MacGregor, Longbow Research.

Good afternoon.

Just a couple of questions.

First of all on the raw materials, Stacey you mentioned that the raw material prices went up by 1 percent as of October 1, and I guess given the sort of the overall state of the industry right now, I find it surprising that raw material vendors can still push through a price increase.

Is that because you're in competition with market conditions elsewhere in the world?

I think it's, well let's clarify the number.

First of all, the price increases we saw in raw materials was predominantly in laminates.

And that affected gross margin by 1 percent in the fourth quarter, or were expected to.

That wasn't the increase in price.

That's the margin impact.

Got it now, thank you.

I'm just making sure I clarify that for everybody.

I think the answer to that is yes, part of it is demand elsewhere in the world.

But I think also laminate producers in the past had not been able to pass through some price increases, and they can actually do so right now.

And I think you're right, it seems like that's going to be limited going forward given the given the current state of the industry.

And David let me add to that we have 2 major laminate suppliers.

And so what we're doing to alleviate the impact of that price increase is change the allocation between those 2 suppliers so that over time, we can minimize the impact of that price increase.

Got it, and my second question had to do with Chippewa Falls and the ramping plans for up there.

Ninety-five percent cap utilization is awfully tight, obviously.

Do you have orders in-hand to get you through that ramp curve, and can you talk about how quickly that incremental capacity can become accretive?

Let me just address the capacity issue there.

During the quarter, our lead times at Chippewa Falls extended in the middle of the quarter out to 12 to 13 weeks, so we could have used that capacity this quarter to keep our lead times down.

That capacity will come online and have an impact in the first quarter.

And keep in mind, this capacity we are leveraging on our existing infrastructure, management teams, and other infrastructure there.

So it's not like we have to bring a new facility on board.

We're just going to expand what we're currently doing.

So that will have a very rapid implementation and impact on our operating profitability.

One number that we've used in the past just to give people a sense of it from a fixed-cost perspective, what we would expect beginning the first full quarter in operation, which would be the first quarter of '05 would be an incremental expense about $200,000 a quarter in depreciation.

As Kent mentioned, everything other than that is just incremental as we see the business come.

Okay, and that sounds like awfully strong performance for that plant versus what we're hearing from some of your competitors.

And I was just wondering if you could talk about the extent to which you believe you might be winning market share with those OEMs and on those programs.

I think it's real clear that we continue to capture market share.

And our performance in of course all of our facilities, but most of the demand is coming through Chippewa Falls has been fairly satisfying.

I think a lot of times in printed circuit boards, sometimes it does become more of an execution game, and I think we've got the team in place to execute, to satisfy customers.

We work very hard at keeping all of our customers happy and balancing all their needs.

And the fact that we continue to book and have our lead time go out when several of our other competitors have their lead times much shorter I think is demonstrative of the fact that we were capturing market share.

Now, because our lead times went out in the third quarter, we did have to slow our booking rate and get our lead times back in line.

Now our lead times are back to the 8 to 9 weeks so we can resume a normal booking rate, and I think that speaks very positively for us in the future.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Matt Sheerin, Thomas Weisel Partners has our next question.

Just on the capacity issue, what's happening at Redmond where capacity utilization was actually down?

Are there any efforts to -- and I know you've talked about this in the past, qualifying customers in that facility and moving some things around so you can kind of equalize the capacity utilization.

Good question Matt, and we have worked hard at cross-selling all of our facilities, and we continue to cross-sell up in Redmond.

But some of the customers have a longer ramp than we would like as far as trying to cross-sell the Redmond facility.

The Redmond utilization mainly dropped this quarter due to the softness in the semiconductor industry.

That's where we have serviced most of those customers in the test equipment area out of Redmond.

So that's why that came down.

We do have Redmond qualified to do up to 20 layers with Cisco and other qualifications have taken place.

But the ramp on that is taking, it takes a while to have customers move in that direction.

But we anticipate as we go forward that we'll continue to see more and more cross-selling move into Redmond, and hopefully alleviate some of the capacity constraint we've had in Chippewa Falls.

And in addition to that, we have the capacity coming online in the January timeframe.

So the future for all of our facilities and their ability to keep lead times down and service customers in the future, we're pretty well positioned to do that.

In the industrial, medical segment you talked about the semi test area.

Are there other parts of that business, has medical shown signs of softness or is it just primarily the semi test area?

It was like 100 percent in the semiconductor area.

Okay, and what's your customer percent in that area?

For the quarter?

Yes.

For the quarter it was at 14 percent.

It was down from 19 percent in the second quarter.

Okay, so it's down about 25 percent or so.

And like I said earlier, that's all the semiconductor.

Okay, and just a quick question on pricing.

First on quick turn, are you just seeing more competition out there?

Is that what drove prices down, number one?

And then second given your increased materials cost, is there any chance, particularly with your high utilization rates in Wisconsin that you can actually pass along costs, or is it just too tough an environment to do that in right now?

I think right now would be tough to pass them along.

I think the reason why you saw the drop in the quick-turn prices, particularly earlier in the quarter, as you recall in our last call, in the second quarter we started to see softness.

So while the capacity utilization came back up at the end of the quarter kind of mid, you know the first two-thirds of the quarter, it was kind of light.

And so when that happens, what you'll see is the competition intensifies.

Then as you start to fill up, obviously, then it starts to mitigate somewhat.

Yes, okay.

The number of jobs that we tooled up on this quarter is about the same as the second quarter.

So we're still seeing some good activity with quick turns.

We're just missing the ramp work, or the size of the orders that isn't coming back.

That's right.

Okay, thanks very much.

Tom Hopkins, Bear Stearns.

Good afternoon.

Just wanted to talk about what sort of cost measures, cost controls you can start to implement given some of the softness we've seen here for a quarter-and-a-half.

And what are kind of the signals and alarms that you're looking for to really get aggressive even with some of the CapEx spending?

I think Tom, like I mentioned earlier this business is an execution-type business, and we're not waiting for macro events to drive us to look at ways to save money.

And I mentioned earlier the fact that one of our laminate suppliers has raised his price, and so we're taking action by reallocating material orders to a lower-cost source.

So we're constantly doing that.

I think when you start to drop like we have in Redmond, you have to look at controlling your overtime, and other hourly issues that can help you there.

So we're constantly looking at ways to balance the work between all the facilities, all the majors at our hand to drive our cost structure lower.

And as I look at the situation that we're in, I don't think this is the beginning of a down cycle.

I still think there's just some sluggishness in there, maybe a little bit of inventory buildup in the first half of the year, not much because we don't see a lot of inventory in our supply chain, nor do we see it in the EMS supply chain.

There might be some in I guess the component industry or the distributors.

But for us and our supply chain, we don't see inventory.

So I guess we're looking at this as just a little bit of a sluggish type environment, not the beginning of a down cycle, which changes how you react and respond to controlling and looking at your cost structure.

Yes, I don't think our customers are telling us anything that makes us feel like demand is going to fall off significantly or anything like that.

Okay great, thanks.

Keith Dunne, RBC Capital has our next question.

Yes, a couple of questions please.

One, the SG&A selling kind of area was a little bit lighter than I thought.

Clearly you talked about the 2 things as bonus and the exemption from the prior quarter, but was there anything unusual besides those 2 items in either of the selling of the G&A area?

No, those are actually the items.

The selling was mostly more mix-related as it depends on what customers that drive the top line.

And then I think you know that there were about 350 in offering costs, and as our incentive-comp programs are very performance-based, based on the full-year numbers.

And you talked about some Redmond efficiencies it sounded like in the press release.

I heard there were some things like that that those were largely passed.

Did something else happen there where they fell back, or was it strictly efficiencies ready to lower test equipment demand?

Yes, I think you're on with your last statement there Keith.

I mean, the inefficiencies at Redmond were mainly caused because of the, we had a reduced top line due to the semiconductor customers that didn't place orders in the third quarter.

And did the tax rate go down towards 35.5 percent, is that what we should be using for next year in the go-forward, or can you give us any color?

Yes, I'll give you some.

We're still working on tax planning for next year because there were certain kinds of uses of some of our tax credits that we have to re-evaluate.

But I think it would be roughly 36 for next year.

I don't think it will be back up as high as 37.

Okay, thanks.

And there will be some more flavor for that for the end of the year.

And another question regarding, without asking for a forecast, but your new production comes on in late December, so it can help in the March quarter.

Would that potentially make it then a little stronger than normal seasonal quarter because the thought being you'd work down those lead times down to the 4 or 5 week level from the 8 to 9 week level because it probably serves your customers better, and it assures that they don't reach out and potentially to someone else just short term as you're gaining share long term.

How does that affect the lead times versus the availability of capacity in Wisconsin for the first quarter?

I think certainly if we can keep our lead times down at the 4 to 5, 6 week level that is another arrow in our quiver to capturing market share that we haven't had in the past.

So I think that frees up some opportunities that we haven't had in the past.

And when you look at it from that perspective, you would think that future quarters will open up more and we'll be able to capture even more market share that we currently do.

Kent so philosophically, you'd rather work those lead times, and that would be consistent with your customers to work down to 4 to 6 versus 8 to 9 currently, to summarize.

Is that what you are saying?

I think in a general tone, Keith, yes, that's correct.

Okay, and secondly if Phase I will finish, while you mentioned it picks up capacity at 55 percent from the January '04 levels, I imagine some of that capacity have already been realized so there isn't a 55 percent gain in capacity from the fourth quarter to the first quarter but maybe 20 percent or something.

Can you address that and address it in the context of maybe looking at what you might do with Phase II of an expansion?

Yes, sure.

First of all, you're right Keith.

Of the 55 from January '04 level, which we probably already realized about 25 percent of that.

So we've already realized that through labor, throughout the course of the year.

Then secondly, in terms of the Phase II expansion we had talked about that a long time ago.

We really break that down into segments to be able to talk to the marketplace about it in a really clear and concise way.

But the reality of it is it's really just adding equipment as we see the demand.

So the first phase of the expansion required a couple of long lead-time items, like a plating line.

Everything after that being in place really is just a normal CapEx program that we could probably go up to 30 percent higher at Chippewa Falls if we wanted to with Phase II.

But it's not something that we have to put down all the money of that CapEx program at the same time.

We can do it a piece of equipment at a time.

And one clarifying remark, I just want to make sure everybody on the call is clear of what we are talking about these capacity numbers.

They're not for TTM as a whole.

They're for Chippewa Falls.

Kent and lastly, and my last question, I'll let someone else take it.

You're doing an awesome job on cash flow, $18 million this quarter, and just look over the long term you've done a terrific job in this downturn to give you a cash flow positive every quarter but one quarter, and that's when you bought that facility up in the Pacific Northwest.

Any use for the cash?

What are your thoughts on how you prioritize how you might absorb that cash?

Or do you just see it continue to grow?

I guess Keith, I mean what we look at with our cash is how do we at some point in time get the best return on that cash.

And where there has been some talk about a stock buyback but I think when you look at our cash, I think we've got a nice opportunity when it comes to maybe expand not only organically but also through acquisitions.

Exactly, and you get more flexibility in terms of being opportunistic with acquisitions.

That's primarily what we see that for now.

I think there's a bigger opportunity here with cash for that purpose rather than any other use.

And that's going to obviously beg the question do you see more potential, without identifying targets obviously, but domestically or a to go to Asia?

Where would the acquisitions, how would you prioritize acquisition candidates geographically?

I think Keith you know we've talked a lot about our strategy, our time and technology strategy.

And we're solidly behind that strategy.

It's been consistent since day one.

So if you look to acquisitions, we're not going to stray from our stated strategy.

We think that's the sweet spot that isolates us from the low-cost competitors and so forth.

So we will look into that space.

Now we did make a trip to Asia this last quarter, Stacey, myself, and our Technology Vice President, Mark Kinning.

We toured I think 6 different companies over there through their facilities.

It was pretty clear to us that that was pretty much confirming our thoughts with regards to our strategy, and our strategy being sustainable throughout the next 4 to 5 years.

The Asian low-cost suppliers again are focused on volume and cost and commodity-type products.

And the higher in technology you go, the lower the volume.

So there's a lot of good reasons why our strategy is solid.

And we'll continue to explore opportunities I guess both in Asia and locally, and continue to execute our strategy and look to opportunities.

I wouldn't want to limit it to one or the other.

But it sounds like there is more general in North America than Asia given what your comments about the Asian focus at this point.

I think it fits our niche at this time.

Okay, that's great.

Thanks very much.

John McManus, Needham & Company has our next question.

Yes, could you tell us what the percent of revenues were out of, with the Wisconsin plant this quarter.

We typically don't disclose that, but it's probably around 54 or 55 percent, just rough.

So it didn't move up, even with the change at Redmond.

Yes it did move up.

It moved up a little bit this quarter.

I'm giving you a rough number.

And yes, it did go up.

It probably went up a couple of percentage points.

And is your largest customer now more than 25 percent of revenue?

No.

Could you tell us what role the high-end computing, which customers grow the high-end computing sector this quarter?

Well, we typically don't like to get into a customer-by-customer analysis.

But I think if you look at our top 5, top 10 customers that we talk about, I think you can figure it out.

Can we assume that there was some ramp in Sun which might have driven that, or would that be a bad assumption?

That's a bad assumption.

Do you think that with the capacity in Wisconsin coming on in the first quarter that revenue could be higher in the first quarter than the fourth?

I think yes John, we do.

One clarifying comment I want to make about the customers.

When we refer to the customers on this call, those customers are OEM customers.

We look through our contract manufacturers through our OEMs, just to make sure there's clarity on what we mean when we talk about customers and percentages.

Obviously in the second quarter, Credence was one of your top 5.

Was the shortfall in the semiconductor cap area all Credence or were there other customers involved?

There were other customers in the same sector.

And just one last question from me on the quick-turn pricing.

Can we assume that the less than 10-day and less than 5-day pricing was stable, but the ramp-to-volume quick-turn piece had lower pricing?

Or, and maybe you can give us some idea of how much pricing went down in the quick-turn side.

You know what?

It was down across the board in the quick-turn environment because when the utilization rate like we talked about earlier in the quarter was down, it pressured all of the categories within quick turn.

But when you have ramp, ramp can fall in 1 to 5 or 6 to 10 days, and it'll help fill up the capacity, and then the prices will improve.

What would you think would happen here in the fourth quarter?

I think we still would experience price declines in general of roughly 2 maybe 3 percent.

And 2 to 3 percent was a good figure for the third quarter?

No, we typically don't describe exactly what our pricing differences are by product category for competitive reasons, but it was down more than that for this quarter.

Okay, thank you very much.

Dave Miller, Tradition Asiel.

Good afternoon, guys.

On the lead-time front at Chippewa Falls, do you think that cost you any business during the quarter, or were you able to build a little bit of a backlog?

Well, we did build a backlog.

Our backlog was stronger at the end of the quarter than it was the first.

But when our lead times got up to 12 to 13 weeks, we had no choice but to slow bookings.

So we did slow bookings during the extended lead time period.

Okay.

And just back to the pricing situation.

Have you guys seen any new competitors on the quick-turn side of things, not maybe the really, really short lead times, but in the 5-to-day area.

I talked to some guys in Asia who are trying to dabble in that, and obviously, they can't compete with somebody like you or DDI on a 24-hour turnaround time, but in the 5 or 7 day time frame they think that they can start to be competitive.

It's basically the same customers, the same type competitors that we've had.

You're still seeing the same types of guys?

Yes.

I mean, with regards to Asia and our trip over there, I think in my opinion from our experience is it will be challenging for that quick-turn model to be effective over there.

I think the companies that are going to be effective in Asia are the ones that have a strategy that fits Asia, which is low-cost volume.

And that's the advantage they have.

The innovation technology is still here in the United States, and I think our strategy fits the times and the place.

And we're in the right place with the right strategy.

Then on the new wins, can you give a rough breakout of how those fall by your end market sectors?

Yes, they were, about 70 percent of those were in the network in the communications sector, and then 17 percent were in industrial controls.

So that was the 2 major sectors of our new customers, and they accounted for $650,000 of top line sales in the third quarter.

Okay, and then last for me, what was book-to-bill for the quarter. and then maybe how does that track through the months for the quarter?

We ended the quarter with a book-to-bill of 1.04, and August was the biggest month.

And we were at 1.15 in August, and sort of continued a pretty nice ramp, but the capacity limitations caused that number to decline.

So we were at 1.04 90-day at the end of September on a book-to-bill.

Okay, thanks a lot.

Michael Walker, First Boston.

Thanks, just a follow up on that last question.

Does that mean that September was well below one on a book-to-bill basis?

September was, I don't have the exact number for September, but it was, it would be pretty close to flat, maybe slightly below.

But we had to slow the bookings too in the August time frame.

It was through the August/September time frame, early September.

Okay, and then there's been a lot of conversation out there about inventory builds and weakness in the telecom area, particularly wireless, which you feed into.

But you guys are apparently really not seeing a lot of deterioration in that area?

Most of the weakness is in semi cap?

We don't have a lot of exposure to wireless, actually.

I'd say that was networking, actually.

Okay.

And we don't see a lot of inventory in our supply chain.

I think OEMs EMS providers have been very cautious about inventory buildup having had some issues with that several years ago.

So they're watching their inventory levels.

We're working extremely closely with our top customers on inventories.

And I don't think there's an inventory build going on.

I think when you see an order, it's a real order and not to build up inventory.

As you'll see consistent was that our inventory actually declined a couple million dollars during the quarter, and our turnover improved from 21 days in the second quarter to 17 days in the third.

Okay, a capacity question of sort, but not specific to TTM, just at the industry level, what's your sense of how industry capacity is faring right now?

You've got Merix which is still in the process of adding some, and then you've got Samina closing things down.

So do you feel that the overall high-end board capacity situation is fairly healthy at the moment?

Well, I think that the capacity kind of ties into your lead times, and since there's some shorter lead times now, there is some additional capacity available for the higher-layer count.

I believe that, I mean we to some extent have had our hands tied because of our capacity limitations.

And once we have that capacity available for us, then we will have another very effective tool to compete in that arena.

Okay, and my final question is do you know, I mean are you seeing any kind of large OEMs out there, and I'm not just saying necessarilly for your customers, but just large manufacturing OEMs that are shifting some business over to Asia because of a developing capability over there, or is it really what's domestic is staying domestic?

I think it's the latter.

I mean, we don't see anything above 16 layers that is moving over to Asia very rapidly.

And again, I think the thing that you've got to keep in mind with Asia it's not necessarily totally technology.

The mix plays a very vital role in Asia versus the United States.

I mean, we have extremely low run size with the panels.

We have flexibility.

We have the ability to discard and stop jobs and tool jobs up.

We're a very experienced work force.

And the strategy and what you have to have to be successful in a high-mix, high-technology environment where you're selling time is totally different from Asia.

So I think if you were, our strategy is solid, and our business model is sustainable.

If for some reason you were in the commodity marketplace with volume circuit boards 16 layers and below, then that's going to be built in Asia.

And I think it really, like Kent said has to do with volume.

If there is a particular board that's 16 layers and not overwhelmingly high in complexity with blinded id's and different kinds of things on that board with the layer count, there's enough volume in Asia.

But remember our Redmond facility has a lot of work just because of the mix.

It's not about necessarily the technology.

It's being able to do multiple orders at small run sizes.

And even when we talked about volume at Chippewa Falls, it's still a relatively small order size, or run size.

All of our entries in our layer count this quarter, what was it, from 15.7 to 16.3, that came out of our Redmond and Santa Ana facilities this past quarter.

We continue to migrate up the technology curve as we service the higher-ended customers where the mix is.

Okay, the average layer count you gave was 16.3.

That was across the entire business, correct?

That's correct.

At Chippewa Falls, it's above 20.

Right, okay so that was going to be my next question.

And then my final question is do you have the top 10 percent customers?

Yes, the top 10 were 66 percent of sales.

Okay thanks.

George Burman, Gunn Allen Financial.

Good afternoon, ladies & gentlemen.

I wanted to congratulate you first of all for another great quarter.

Thank you.

We've been following your Company ever since last year.

You bought the division out, I think it was from Honeywell, and I think that where you are now, completely debt-free with $50 million in the bank, I think there are lots of good things to come.

Well, we agree with that.

The integration process of this huge plant, I think you paid about $1 for it if I remember the press release correctly?

Yes, it was $1, and less than $1 million when you get the accounting.

Right, and it gave you access to a number of new large blue-chip customers, correct?

That is correct.

Your Company stock reached a high of I think about $21.

Obviously, you came a little bit off since then.

There was one of your large shareholders that filed for an offering I believe.

Has that taken place so far?

No.

And basically what we have right now is shelf registration, and there are 2 private equity holders that own about 10 percent of our shares, and they can sell when they need to.

So the market is open for them to sell when they feel they would like to.

The answer to that would be yes.

In the past, they've been very disciplined.

They understand the industry.

They still sit on our Board, so they're also subject to insider trading rules from our Company, and they have to disclose via Form 4.

Right, and these shares are in your fully-diluted 40 million shares, right?

Yes.

Yes.

So you are supporting right now a book value of close to $5 with over $1 in cash?

That is correct.

I'll be looking forward to your future endeavors, and wish you the best of luck.

I think the report, as the past ones, was very, very good.

Thank you.

Thanks.

Jim Savage, Wells Fargo Securities has our next question.

A few questions about ramping to volume.

I know that the ramp-to-volume was slow in the third quarter.

Are there any major programs that you anticipate could be ramping to volume before the end of the year, or based on your customer forecasts early in 2005?

Generally, Jim, in the fourth quarter we do see some ramp-to-volume.

So that's the quarter that it's most likely to occur.

Now specifically, do we have anything that is apparent that will have some ramp-to-volume attached to it?

I guess the answer is no.

Well, and typically though we don't see that because if the customers know they're going to ramp it, they're going to schedule it out so they don't have to pay quick-turn prices.

Okay, in terms of the capacity expansion, have you hired production people at this point?

Are you training people now, and is that already in your expenses?

Yes, we continue to expand our work force in Chippewa Falls.

We went up last quarter 29 employees.

They were in Chippewa Falls.

So as that expansion comes on line, I think we've hired people, but we'll still need to hire some additional people.

Have you hired more so far this quarter?

Yes, we were up 29 this quarter, and all of it was in Chippewa Falls.

The fourth quarter hasn't been material yet.

Not material yet this quarter, okay.

And as you are able to bring the new capacity up and reduce lead times, has there been, at this point you're obviously giving your guidance to your customers regarding that.

Is there a sense at this point that they will be shifting programs over to you?

Have you gotten any customer commitments that would have an impact in the first part of next year?

Well Jim, I believe that with our customer base, it's up to us to provide for them what they need to place orders with us, and we have been again somewhat constrained because of our capacity limitations in Chippewa Falls.

Once that capacity comes on line, we certainly believe that we'll continue to expand our business with all of our top customers.

If we look at the expenses in your guidance for the fourth quarter, the additional G&A expenses and the reduction in gross margin, how much of that is related to the capacity expansion?

Relatively none of it.

Relatively none of it.

What we don't have is the depreciation coming on.

Remember we said price would be down a little bit?

And then there is the potential for volumes to be down a little bit also.

Jim Savage, Okay, thank you.

That's the big drivers of it.

Jim we're running 95 percent capacity at Chippewa Falls.

It's almost impossible to get higher than 95 percent.

When you get 95 percent utilization, my question is on your volume high-technology business.

How does that end up having price pressure on it?

Well, most of the price pressure was not associated with our volume orders.

Most of it is associated with your quick turn.

Are there any particular quick-turn competitors who you think are being disruptive to the market at this point?

We probably aren't going to comment on our competitors.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

Mark Hassenberg, Nottingham Capital.

Good afternoon.

Given the lower incremental costs for bring down the capacity in Chippewa Falls, what kind of incremental profitability do you anticipate when volume starts to pick up?

You mean on just kind of like incremental gross margin, what I would expect from that?

Right.

You know what, at that plant remember it's going to depend on the rest of the whole Company.

I still think it would be in the 45 percent range.

And given the strength that you saw outside of the semiconductor capital goods area in the third quarter, doesn't that suggest that inventories weren't an issue with your customers?

Yes, that's exactly right Mark.

And we talk with our customers constantly and the EMS providers who are servicing the customers.

And we do not believe, and it's pretty solidly through the numbers that there are not inventory issues in our system.

And given your guidance now for the fourth quarter, which is a bit more conservative than you might have been a few months ago, is that almost entirely due to the semiconductor capital goods area, or are there other reasons to be concerned?

No, there are 2 major reasons, and the first one is the semiconductor marketplace and the fact that we had to slow our bookings down because we didn't have capacity in Chippewa Falls is causing us a little more uncertainty as to when the timing of those orders come back.

It's very clear that our booking rate is resuming to normal levels, and so it's just a matter of timing as to when those orders come back to us.

Thank you very much, great quarter.

Scot Robertson, Stanford.

Thank you.

Quickly Stacey, when you purchased ACI back in December 2002, it had about an $80 to $90 million run rate.

Did you ever break out what it ended up fiscal 2003?

That was the projection, but we know it came in well ahead of expectations from what you were modeling on the acquisition.

We never did break that out, but it's roughly for the past few quarters I think it's been about 53 or 54 percent of our total revenue.

If you look at that, you can just back into the rate.

Okay, but for 2003 was it roughly 50 percent?

It was about 50 percent.

Okay, thank you.

Jason Gursky, JP Morgan.

Just a couple of quick questions.

Do you guys have any estimates for CapEx next year?

You mean in 2005?

Right.

We think that will resume to normal levels, probably at the $8 to $10 million range.

Okay.

We had CapEx this quarter of $5.7 million, and of that $5.74 went into the expansion in Chippewa Falls.

Can we anticipate CapEx for 2004 to be $18.5 to $20 million.

And half of that is the expansion at Chippewa Falls.

The rest of that is normal CapEx.

Right, I know you mentioned a few things about SG&A this quarter and why it was down as a percent of revenue.

How should we think about that going forward?

Will there be any types of kind of quarter-over-quarter increases going into the first quarter related to salary increases, things of that nature?

Not in the first quarter, there wouldn't be.

Our annual process comes in the second quarter.

And we don't know that at this point.

Okay, and then absolute dollar terms kind of using this quarter as a base going forward, is the next couple or three quarters.

Let me make sure you and I are talking about the same this quarter.

For the fourth quarter, we said it was going to be about $3.5 million, and that includes amortization and tangibles.

And I would say that's a good number going into the first quarter also.

Okay, that does it for me.

Thank you.

And we have no further questions at this time.

I'll turn the call back over to you Mr. Alder and Ms. Peterson.

All right, I just thank everybody for joining us today.

Maybe just to summarize quickly, we don't believe that we're in the beginning of a negative cycle.

We think there is some sluggishness out in the industry, but we also believe with our 3 facilities, we are very well positioned for the future to continue to grow and capture market share.

So thank you very much for your participation.

And that concludes today's TTM Technologies Third Quarter Earnings Release Conference Call.

We thank you for your participation and wish you a great day.