TTM Technologies Inc (TTMI) 2004 Q4 法說會逐字稿

Good day and welcome to this TTM Technologies fourth-quarter earnings release conference call.

Today's call is being recorded.

And now for opening remarks and introductions I would like to turn today's call over to the Chief Financial Officer, Stacey Peterson.

Ms. Peterson, please go ahead.

Good afternoon and thanks for joining us this afternoon for our fourth-quarter 2004 conference call.

Before we get into any detail, 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 Forms S-3 and 10-K.

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.

As you read in the release, 2004 was an excellent year for TTM.

Net sales expanded 33 percent to 240.6 million.

We reported earnings of 68 cents per diluted share in 2004, including a 1.2 million reversal of the tax valuation allowance.

Excluding the reversal, earnings were 65 cents per diluted share.

This compared to 18 cents per diluted share in 2003, which included an extraordinary gain of 3 cents per share.

For 2004, we generated cash flow from operations of 48.8 million, and ended the year with no debt and cash and short-term investments of 58.5 million.

Given the specific issues we faced in the fourth quarter, which I will elaborate on in a moment, we performed well in the period.

Fourth-quarter net sales were 59.2 million.

While sales decreased 5 percent sequentially from the third quarter of 2004, they increased 9 percent year-over-year.

Net income for the fourth quarter of 2004 was 16 cents per diluted share, including the 1.2 reversal of a tax valuation allowance.

Excluding the reversal, net income was 14 cents per diluted share.

This compared with 19 cents per diluted share for the third quarter of 2004 and 11 cents per diluted share for the fourth quarter of 2003.

Overall market conditions were relatively stable, but pricing pressure was slightly greater than expected, especially in quick-turn.

And as you recall, capacity constraints at our Chippewa Falls facility in the third quarter when leadtimes should stretched out to 13 weeks resulted in a slowdown in bookings.

With the expansion at Chippewa Falls, we have resolved the capacity constraints there, but customer orders came back later in the quarter than we expected.

But the orders did come back, and for the first quarter of 2005, we have recaptured the allocations we lost when we were capacity constrained.

And we continue to add new customers.

We added 33 in the fourth quarter.

In the fourth quarter of 2004, our technological and operational capabilities remained strong, although layer counts statistics were affected by the mix shift.

Problems with 12 layers or more accounted for 69 percent of revenues, down from 73 percent in the third quarter of 2004.

Products with 20 layers or more accounted for 37 percent of revenues, down from 40 percent in the third quarter of 2004.

The average layer count decreased to 15.6 compared with 16.3 in the third quarter of 2004.

Quick-turn represented 26 percent of revenues, down from 27 percent a year ago, but up sequentially from 22 percent in the third quarter.

On a sequential basis, quick-turn expanded as a percent of revenue, resulting from higher quick-turn volumes, as well as the slowdown in our standard leadtime business, mainly due to the previously mentioned capacity constraints at Chippewa Falls.

As expected, fourth quarter leadtime were down from the third-quarter levels to six weeks in Chippewa Falls, four weeks in Redmond, and three weeks in Santa Ana.

Overall capacity utilization for the Company dropped 4 to 5 percent to the low-70s for the fourth quarter.

With the increased capacity at Chippewa Falls, utilization at that facility declined to 85 percent in the fourth quarter from about 95 percent in the third quarter.

Utilization at Redmond was up slightly to 65 percent, and Santa Ana was slightly up to a firm 60 percent from the 55 to 60 percent range in the third quarter.

The Phase I expansion of Chippewa Falls is essentially complete.

We've expanded the footprint and installed all but a few pieces of equipment.

The physical expansion under Phase I gives us the ability to increase production by about 30 percent compared with third quarter 2004 levels.

We will (technical difficulty) capacity by adding labor as necessary based on demand.

As for customer concentration, sales to our 5 largest OEMs constituted 56 percent of revenues in the fourth quarter of 2004 compared with 55 percent in the third quarter.

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

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

Thanks a lot.

As Kent said at the beginning of the call, fourth-quarter net sales decreased 5 percent sequentially to 59.2 million.

Total volume declined 1 percent and we experienced some softness on the pricing front.

The average price per layer was flat, but the more important measure, average panel price, was down 4 percent from last quarter due to pricing pressure and a mix shift.

Gross margin was 24.6 percent in the fourth quarter of 2004, down from 26.1 percent in the year-ago period and 28.4 percent in the third quarter of 2004.

The decline in gross margins was primarily due to the raw materials price increase which took effect on October 1, pricing softness, lower operating efficiency, the product mix shift, which was partially offset by adjustments to sales returns and inventory reserves based on historical experience.

I also want to point out that the gross margin for the fourth quarter of 2004 was slightly less than what we would expect based on revenue levels alone.

But as orders at Chippewa Falls built over the course of the fourth quarter, the work was very back-end loaded, which reduced our operating efficiency during the first part of the quarter.

Our SG&A expenses came in about as expected.

For the fourth quarter 2004, sales and marketing expense increased to 3.1 million, virtually unchanged from the year-ago period, but up from 2.8 million in the third quarter of 2004.

As a percentage of revenues, sales and marketing expense was 5.2 percent in the fourth quarter of 2004.

This is down from 5.5 percent in the year-ago period, but up from 4.5 percent in the third quarter of 2004.

As we have mentioned before, this expense as a percentage of revenue can change with mix as commission structure varies by product category.

Sequentially sales and marketing expense was up primarily due to a higher mix of quick-turn.

General and administration expenses were 3 million in the fourth quarter of 2004, down from 3.4 million in the year-ago period and up slightly from 2.9 million in the third quarter of 2004.

As a percentage of revenues, general and administrative expense was 5.1 percent of revenues in the fourth quarter of 2004 compared to 4.7 percent in the third quarter and 6.2 percent in the year-ago period.

Our balance sheet strengthened even further during the fourth quarter.

We generated strong cash flow from operations of 9.4 million.

As a result we were able to fund net capital expenditures of 3.9 million and expand our cash and short-term investment position by 6 million to a total of 58.5 million.

Depreciation was 2.1 million for the quarter.

As for our first-quarter 2005 guidance, as stated in the earnings release, we expect revenues in the 59 to $62 million range and GAAP diluted earnings per share of 12 to 15 cents.

We expect the added capacity to Chippewa Falls and redemption of our previous customer allocation to offset the seasonal slowdown in quick-turn typically experienced in the first quarter of the year.

In terms of gross margins, we expect gross margins for the first quarter of 2005 in the range of 23 to 25 percent, which includes approximately 200,000 of additional depreciation associated with the expansion at Chippewa Falls.

As for operating expenses, we expect sales and marketing expenses to be approximately 5 percent of revenues or 3 to 3.1 million for the first quarter.

And we expect G&A expenses to be about 3.3 million, including amortization of intangibles.

That's 5.3 to 5.6 percent of sales.

Finally, in terms of items affecting our income forecast, let me mention the tax rate.

For 2005, we're using an estimated tax rate of 38 percent.

That compared with approximately 35 percent in 2004 before the partial reversal of the tax valuation allowance.

From a cash flow standpoint there is no impact.

Overall, as Kent said, we were very pleased with our financial performance for 2004, highlighted as it was by strong revenue growth and increased profitability.

For 2005 we anticipate a relatively stable market.

We are optimistic about TTM's prospects as we continue to add new customers, cross-sell products from our three integrated facilities, upgrade our technical capabilities, expand capacity and increase our market share.

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

(OPERATOR INSTRUCTIONS) Shawn Severson, Raymond James.

Just a couple of quick questions on kind of how we started out the year here.

One, just kind of the competitive environment and rebound in the quick-turn and prototype businesses, and do you expect more price erosion to take place in that particular segment of the business through March?

And then I just had a quick follow.

I think the business environment for us is, like I said, relatively healthy; a little bit choppy in the quick-turn environment.

Quick-turn is normally seasonal at this time of year, so we're seeing that take effect.

Pricing is relatively stable, except in quick-turn.

I think there's a little price pressure in the quick-turn environment.

Looking at inventories in the channel and customer level, do you feel that we came out very clean out of December, and that January, February, March is in relatively good condition for kind of on your enterprise side and on your volume side of the business?

As far as we can tell, and we judge by the amount of work we've put in hubs and so forth, that the inventory levels are in a reasonable position, and that they won't have a negative impact on the performance of the Company.

Thank you.

Tom Dinges, J.P. Morgan.

A couple of quick ones for you.

One, can you talk in a little bit more detail about the capacity constraints and how you went about resolving those so that as you guys continue to add some additional capacity here we don't run into the same issues there?

And then just a follow-up on the last comments about the quick-turn.

Maybe just go through a little bit of what are the dynamics you're seeing out there?

Is it just a couple of different competitors that are trying to salvage some business, do you think?

Or are you seeing it in kind of price quotes across the board?

Or is there some mix issue that's going on there in quick-turn; less real short leadtime orders, more of the slightly longer leadtime orders that's affecting the mix or a couple of --?

A little bit of color there would be great.

If I go back and look at the capacity constraints we had in kind of the end of the third quarter, beginning of the fourth quarter mainly, it had to do with Chippewa Falls.

And our expansion was not complete yet and we received more orders than we had capacity for.

Leadtimes went out to like 13 weeks.

We recognized that that was going to cause customers an issue if it persisted.

So we worked with our customers to slow down the intake or slowdown bookings.

So we worked closely with our customers to make sure that they were taken care of; working with which part numbers we could do, which ones could find a home for a temporary period of time.

Once we got in a position where our leadtimes were reasonable, back to the five, six-week level, then we went back to our customers and said we are now returned with the right leadtimes, and by then we started to get orders back.

So the spout came back on.

It didn't come on as fast, nor as quick, as we had hoped.

But it did come on.

So here we sit at the beginning of the first quarter, and all the business that we had to shut off in the fourth quarter is now back, and we're running in pretty good shape again with the customers.

That's kind of the series of events that took place.

So I think we recovered quite nicely and took care of the customers in the proper fashion.

Secondly, with regards to pricing on quick-turn, it doesn't appear to me that there's any one given segment.

I just think there's maybe a little too much capacity in the marketplace that is causing some price pressure, particularly in the quick-turn environment.

I don't think it's coming from any particular time element or any technology.

It's basically across the board, if you will.

But also remember, this is the seasonal time of year.

So it's just falling in line with historical trends for the January time frame.

Thank you.

Sean Harrison (ph), Longbow Research.

First off, I was hoping maybe you could address what you're seeing in the raw material environment.

I know a lot of the resin manufacturers out there recently raised their prices to the laminate producers, and I was wondering if you had received any notice of further price increases coming down the line.

No we haven't.

In fact, our material pricing has stabilized.

And the only pricing that was of a major impact was on the raw materials with the laminate, the resins that you're talking about.

We have reallocated between our two suppliers such that our pricing probably peaked in the fourth quarter.

Now it's coming back down.

So we think it had -- Stacey, I believe it was a 1 percent (multiple speakers) impact during the quarter and we will probably will cut that in half this quarter and again to another half of that half in the next quarter, in the second quarter.

Second, I was just hoping you could elaborate on the negative mix effect you cited as negatively impacting margins in the fourth quarter.

Sure.

The big mix impact was remember we were capacity constrained at Chippewa Falls, so we weren't as able to take as many of those orders.

So as of a percentage of our sales, Chippewa Falls was less.

And that's very lucrative work.

That also sort of accounts for part of the pricing going down was due to the market environment, but it was also due to the mix.

Because what happens is you'll notice our average layer count came down and our average price per panel came down.

So in kind of summary, when you can really benefit even in just a completely stable price environment is when your mix is rich with more technology.

What happens is you get your average panel prices going up, and we can produce that work more efficiently.

Thank you.

Thomas Hopkins, Bear Stearns.

I am just wondering how you characterize the inventory increase.

I got on the call late; maybe you covered it.

But it looks like you're up a little bit here; if it had anything to do with raw materials pricing or how would you characterize it?

Raw materials is actually a really small percentage of our inventory.

What I think you're really seeing is we had an artificially low level of inventory in Q3, and it's very consistent once again.

I hate to beat the drum over and over, but it's very consistent with that capacity increase at Chippewa Falls, the capacity constraint.

Because what happened is people drew down inventories more because they had more orders for us than we could actually handle.

Remember that our leadtimes stretched out?

So they really had to pull from their inventory hubs.

That's primarily at Chippewa Falls.

So that inventory level was artificially low.

We replenished some this quarter, and that's why it's up.

I think that's more of a more normal level, because if you look, it's still lower than our second-quarter level, but it's higher than third quarter.

Hopefully that is helpful for you to think about.

But I think it is a more normalized level of inventories that we should be maintaining.

I think, just add to that, there's not a buildup of inventory in the supply chain with our customers, and nor do we anticipate that buildup taking place.

Right.

It was just a dynamic in the third quarter where they had to pull it all the way through because we didn't have any more capacity.

So you don't feel at this point like your customers have too much inventory.

Would you characterize it as just maybe their demand isn't particularly strong right now?

I think the inventory that we see is like, I think as Stacey mentioned, the normal course of doing business.

I don't think there will be an inventory buildup.

I don't think there is.

Just once again, as we talked about, when people are pulling all the way through and keeping a short hub dwell time that means there's end-market demand.

It's going straight out to product.

So no, I don't sense there's any buildup in inventory in our particular products.

Right.

But I guess what I'm getting at is that there's no particular pickup in demand either.

I think the issue that we had was particular to TTM in the fourth quarter with the capacity constraints at Chippewa Falls.

And now that we've removed those, our order pattern is back to normal.

So that overall for the general marketplace, it's not as healthy as we would like to see.

I don't think it's on the negative side of things, and probably slightly positive.

But we could use a little more, that's for sure.

I think if you just kind of normalize out those TTM-specific issues in the fourth quarter like Kent is talking about, and you say gosh what does it is just look like right now, I think it's flat to slightly up.

Because we're seeing in increasing in our booking trends, right?

Well, part of that is due to -- or the biggest part of that is due to the fact that we now have more capacity.

But there is part of it that is demand, but it's a smaller portion.

So I think flat to slightly up if you just look at it apples and apples what does the environment look like for us.

I might add that probably the most healthy part of our segment of our business is a higher layer count work, say 20 layers and above. (multiple speakers) that seems to continue to be healthy and then have some good demand attached to it.

Great.

Thanks guys.

Dave Miller, Tradition.

Good afternoon.

Could you give how many 10 percent customers did you have during the quarter?

Just two;

Cisco and IBM.

And then if the 33 wins that you got in the quarter, is it skewed towards any particular end market, or are you bringing in more people on the volume side or on the quick-turn side?

They were mainly Santa Ana and Redmond customers, so you're down to the quick-turn and probably the smaller customers.

I think an interesting thing that we had this quarter was we had 33 percent of the new customers were in industrial and medical segments of the business.

Normally it falls right in line with the networking and high-end computing.

We had a nice skew to the industrial and medical.

Is that a factor of your sales force going after different segments or just luck?

Was it planned or luck?

I think we have been working hard to diversify our customer base, say, in Redmond, and Redmond matches up more closely with industrial and medical-type customers.

So I think it was by design that we were successful in bringing some of those customers into Redmond.

What was the book-to-bill for Q4 and book-to-bill in the month of January?

As you might expect, our book-to-bill in the fourth quarter was down, because that was again by design when we slowed the bookings down.

But we ended the quarter on a 90-day basis at 0.88 for the Company.

The industry was 0.93 so we were actually below that.

The good news is in January our 90-day book-to-bill is above 1, at about 1.2.

And we had a very strong January at about 1.3.

So that was again a factor of some healthy wins with customers, as well as opening up the spigot again in Chippewa Falls.

Thanks a lot.

Michael Ellis, Thomas Weisel.

I'm calling in for Matt Sheerin.

I was just wondering if you could characterize for us what you saw in some of your major end markets in Q4.

I think not too much changed within networking and high-end computing.

Our industrial and medical, we had a relatively strong new customer base that contributed there.

But our networking and high-end computing, we are still 44 percent for networking and 31 percent for high-end computing.

So there really wasn't a lot of change in our end-market segments other than the new customers that we brought on.

As you recall, in the fourth quarter our semiconductor test equipment segment, kind of the bottom fell out, and that has not returned.

So we're hoping that over time that returns, which will beef up our industrial and medical segment again.

But as a general rule we had -- well, we had a little seasonality with the computer peripherals, so that bumped up a skosh.

But overall the same patterns continued in the fourth quarter as we have had in the third and the second quarter.

Okay.

And then just secondly, I was hoping you could just talk a little bit more about the Redmond facility.

It looked like capacity utilization there was flat quarter on quarter kind of.

Just how are you feeling about how the operation is running right now and just your overall level of satisfaction with it?

Redmond is doing better, and we're encouraged about some of the changes that are taking place there.

Now, we have had a little bit of a rocky road up there with the loss of the Semi Cap equipment makers, and so that's had the topline a little bit choppy.

But as we worked hard to replace some of that work now, we are beginning to get a steady flow of work into Redmond.

And you can see that by the slight increase in the capacity utilization.

So we're quite optimistic about Redmond as it contributes to the overall Company and the path that they're on.

So it's a good story there so far.

Thank you very much.

Jim Savage, Wells Fargo Securities.

Tough environment.

So your bookings trends are very positive right now.

I guess the question is with the book-to-bill as positive as it is, there doesn't appear to be any overhang in inventory, is that correct?

That's the way we see it.

And do you think that -- and clearly there's going to be some positive sequential movement with this.

Has that been continuing to improve as the months progressed and into February, the book-to-bill?

I think what you're asking is do the booking trends seem to be getting even maybe a little bit stronger than when we started out January.

Yes.

Stacey Peter Yes, they do.

And part of it is there's some -- as we're bringing the capacity on we can handle more and more.

Remember, we started really when those orders it was very back-end loaded coming back to us in kind of the end of November, beginning of December.

So it continued to ramp.

That's great.

In your cash flow from operations, I assume that you're pretty much -- since you're pretty much finished with your CapEx right now there will be more free cash flow -- well, there's less CapEx.

Can you give us an idea of what the CapEx will be over the next -- both this quarter and for the year, what your expectations are now?

Let's just differentiate from a cash flow and balance sheet perspective.

From a cash flow perspective, we've actually spent -- on the Chippewa Falls expansion, we've already spent the majority of that.

There's probably about 1.5 to $2 million we want to place (ph) in service.

So what we have spent in terms of we thought we would be at 19 to 20 in a CapEx budget for 2004.

We have spent roughly 17.5 million of that.

We still have a little bit left to spend as we pay for the rest of the equipment and deposits.

And then kind of new CapEx for next year is going to be about 9 to maybe 10 million max.

Okay, that's helpful.

And was there any impact to Sarbanes-Oxley to your G&A expense?

Not really.

Nothing that we hadn't planned for.

Is there anything that you would anticipate in '05 that would be an increase?

At this point no.

But the one thing is G&A may be up just a touch in Q1 because we are wrapping up Sarbanes and some of our auditing fees get wrapped up then.

But it's nothing that's going to swing it a lot that I can see right now.

You had talked previously about being able to reallocate.

And Kent was just talking about reallocation of some of the laminate production to your other laminate supplier.

How is that going?

And do you really anticipate that this -- will that offset some of the price increases if you're able to take those laminate prices back down (multiple speakers) decreases in terms of your own pricing?

We went up about a penny a share in the fourth quarter.

Kind of a 1 percent of (multiple speakers)

Excuse me.

Yes, 1 percent of gross margin.

And now we're able to cut that in half for the first quarter.

We take that half and cut in half again for the second quarter.

That's probably where we will level out.

I think that's about 2.5, 3 cents.

The way to kind of look at it, just so we're being clear -- let's say we were at Q3 2004, the impact on my gross margin at October 1, materials price increase, it decreased gross margin by about 1 percent for this quarter.

Now when we look the first quarter we say versus Q3, because we've got to start from the same benchmark.

It's only going to be about 0.5 .

So it's down -- instead of being the gross margin down a whole percent, it will only be down 0.5 percent.

And when we go to the next quarter we think we are going to be able to halve that again and make it 2/10 to 3/10 of a percentage point.

So in terms of your gross margin, that has a positive impact following the December quarter and it offsets some of the price decline?

That's exactly right.

Great.

Thank you.

Chris Lippincott (ph), KeyBank.

A couple of quick questions.

Just going back to pricing, have you been receiving any specific requests or discussions from customers just on the pricing itself?

Just as far as the domestic perspective, anybody saying that there should be more of a thought to move any perhaps of the standard of production over to Asia or other geographies?

For the most part that is behind TTM.

And we look at the quick-turn work we're getting in Santa Ana, the high mix work in Redmond, the high-technology work in Chippewa Falls, and we don't feel a lot of pressure from Asian competitors at this point.

We don't really quote against them very often, if at all.

So still there's really nothing there to speak of.

Okay.

I think more the pricing declines we've seen are more from domestic competitors.

As far as you look out into the first quarter, would you expect that the pricing trends would perhaps begin to alleviate as we kind of go back in and perhaps see better utilization both with yourself and perhaps with the industry?

Where would you think the pricing trends might take us?

You know what?

I think they would probably be down in the quarter low-single-digits, maybe 1, 2 percent in terms of pricing.

Part of that is going to be blended because quick-turn is seasonally down.

But I think you will probably see it slightly down, because I still think there is some capacity out there, but I do think it will level off and then people will start to fill capacity more.

So it sounds sort of like a midyear phenomenon leveling off.

Maybe in first quarter.

Hard to say.

There's still -- we're going through the seasonality in quick-turn, so that impacts pricing.

And then there's still some capacity in the industry that doesn't help us as far as firming in of our (ph) pricing.

Just turning to the inventory, the inventory turns had extremely sharp, good turns for the quarter.

I am just thinking they seem to be near all-time highs.

I am just trying to think where would you think that as we go out the next few quarters would we see sort of a normalized inventory turn level as we go forward?

I think probably around the high-teens, the low-20s.

I'd say high teens.

So sort of maintaining where they were back in Q2; sort of the 18 or 19 level?

That's right.

That's more normalized.

They really kind of got a very positive impact as that inventory started to be drawn down in the third quarter.

And we're still, I think, maybe even a little bit low in terms of the inventory levels in our hubs.

Okay.

Just the last question.

I think you mentioned that you had sort of the networking computing primarily I think 44 and 31 percent, which essentially sounds the same quarter to quarter.

Can you round out the other markets?

Industrial and medical was 12 percent, computer peripheral 6 percent, handheld was 3 percent, other was 5 percent.

Thanks.

Amit Daryanani, RBC Capital Markets.

You guys have done a pretty good job in terms of generating cash flow from operations and also free cash flow.

You have about 58.5 million in cash right now with no net debt.

Could you maybe talk about what you perceive to be the most likely use of this cash?

I think as we look at our cash position, and we've worked hard to manage the balance sheet, as well as the income statement with the market, the industry where it currently stands, we would not be buying our shares back, and would look to use that money to be consolidating the industry.

We also think with the market environment where it is, sort of flattish, given that we're a little bit more better capitalized than some of our competitors and some of the smaller companies, I think it gives us more of an opportunity to get a good valuation on potential acquisitions and strategic moves we might make.

(indiscernible) in terms of acquisition, if that ends up being the use, is there a priority of doing it more in North America, Europe versus Asia, or --?

No.

Our acquisition strategy has been consistent and very clear; well thought out throughout the history of TTM.

We're looking at industries or market segments that we're not currently in, and we are currently not -- don't have a military aerospace type facility that would be a nice addition and complement our existing facilities.

We certainly have the quick-turn, a nice environment there.

That could be enhanced slightly.

With regards to Asia, our strategy there, we have visited Asia twice and went through nine, maybe ten facilities over there.

That's enabled us to develop kind of a working model for what type of facility when the time comes for us to move into Asia.

We're certainly not going to be a me-too high-volume cell phone, computer peripheral, notebook-type company.

We would look to have a higher level of technology with the capabilities to do a higher level of volume than we're doing out of Chippewa Falls.

So it would be a high-tech facility with a little bit of a volume bent, enabling us to leverage off our existing service and customer contacts and capabilities from our facilities that would enhance our current position.

So we are not in a position where we feel like we will be losing a significant amount of work to Asia.

So as we look going forward, we think there could be some opportunity there more as an offensive type situation as opposed to protecting what we have.

Did that answer your question?

Michael Walker, Credit Suisse First Boston.

Wondering if I could just walk through the capacity addition, just so -- I want to make sure I'm completely up-to-date.

It was my understanding that the capacity in Chippewa Falls would -- you would expand Chippewa Falls itself by about 55 percent, which I think worked out to 40 to 50 million or so of revenues annually, which in turn works out to, let's say, 10 to 12 million quarterly.

I guess my question is am I on or off base with that?

And then given that, how much of the revenues from December were accounted for by the new capacity in Chippewa Falls, if any?

And if not, are we looking at several more quarters worth of new revenue generating capacity coming online in Chippewa Falls?

While Stacey runs her calculator there, let me tell you we used -- we looked at a baseline of the fourth quarter of 2003.

So that was the baseline.

As we went into our expansion -- $10 million, 44,000 square feet -- the first phase would increase us by 55 percent of that level.

And we are probably 25 to 30 percent there with some equipment additions, as well as headcount adds.

Now to get to the completion of the first phase, we have another 25 percent, 30 percent upwards to go to complete the first phase.

The second phase then takes us up another 30 percent on top of the 55 percent.

That can all be incremental, and we can add headcounts and equipment as the marketplace dictates to us.

I think what you want is just a pretty quick and dirty number.

Really, if you think about capacity, it's probably up about 9 to $10 million versus our Q3 level.

And the reason being, we don't want to start from the Q4 number because we are under-utilized because of constraints.

So I want to take it back to where we were running at all max.

They were up roughly 30 percent at that facility, and that gives you roughly 9, $10 million.

So the Q1 sales guidance includes the first 25 to 30 percent or so of additional capacity.

Right.

Right.

And then presumably June will include the second 25 to 30 percent to fill out the 55 percent, and then the September/December timeframe would include the phase two 30 percent addition on top of that.

I like your demand profile (multiple speakers)

You ran that on a timeframe.

We look at it as what the marketplace dictates, so our timeframe might be different.

But basically you have the right concept.

Yes, you got it right.

Timeframe a little bit on phase two, would that be in '05 or is that more of an '06 occurrence?

That basically is dependent on the market conditions, our ability to capture market share and drive the top line.

What we're saying now that we couldn't say in the past is we have capacity.

In the past we kept bumping up capacity, which didn't enable us to cross-sell our facilities as effectively as we could.

So now we have available capacity, and we will drive the top line as hard and fast and rapidly as we can.

That takes care of the top line.

Now to move to the gross margin line.

Do you expect that to increase sequentially throughout the year if current trends stay where they are?

And if so, do you think you could get back to 30 percent by some point during the year?

The thing that's tough, it is tough to predict the timeline.

But I do expect them to go up.

Because when you look today, I mean one way to look at it -- let's talk about the midpoint of our range now.

Going from the midpoint to the high point of the range, which is 1.5 million move, you see over 1 percent move in our gross margin, which means our incremental gross margins are 50 to 60 percent.

Because remember now we have got a higher cost structure as we fill that up.

We've got a really good, strong incremental gross margin.

To say pricing stays flat and we go up there, I don't know if we could get to 30 percent, but I think we could have a few points move in the gross margin positively.

I think we would have to have some positive mix, meaning filling up by shop so that we don't have one shop that is kind of lower utilization and one higher.

And then if we got some more quick-turn mix, that would help too.

But it's kind of hard to call because it takes a lot of variables to go in place.

But if you just say exactly the same mix, I think a few percentage points is very possible.

My third and last question is more of an industry-level question.

You talked about there being a little too much capacity still out there in quick-turn.

Hopefully there's business to fill it up.

What I didn't hear you saying was if there was still capacity shutting down domestically.

And I don't just mean quick-turn, but also in the production business.

Are you seeing any capacity being taken off line, or is everybody out there pretty much either flat or adding capacity?

I don't think there's anybody in the rigid businesses adding capacity.

We have heard that there have been layoffs at other facilities.

So I think there are people still contracting out there.

As far as closures go, I haven't heard of anybody major.

There have been some smaller companies that have gone out of business, but nothing amongst the better, well-known companies.

We've seen one or so facilities that were bigger facilities, that were bigger announce 2 to 300 people layoffs.

We've seen something like that recently.

But Kent's right; no complete closures, except for smaller players.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Michael Ellis, Thomas Weisel.

Just one more question on the excess North American capacity.

Sanmina has talked about another big restructuring in their components business, and some of that will obviously fall in the PCB arena.

Not speaking to them specifically, but if we start to see some large-scale capacity come out here in North America over the next 6 to 12 months, what type of -- it might be hard to gauge, but directionally what sort of impact should that have on your business and your market?

It's hard to tell exactly -- or it's hard to quantify that, but it's very certain that that would have a very positive impact on TTM.

Thanks.

Scott Robertson, Stanford.

A quick question on the tax rate.

Wondering what's getting you all the way back up to the 38 percent tax rate.

I did expect it to go up in '05, but I was thinking more along the lines of 37, 37.5.

Can you just give a little color on what's taking it all the way to 38?

It's very complicated, so I won't drag you guys all way through the muck unless you really want to go there.

But happy to take that question.

What it basically is is we are reversing a valuation allowance against our deferred tax asset.

As most you know, we have a pretty big deferred tax asset and we had a valuation allowance against it.

And we've seen, since we have generated so much income in this year, and looking forward it looks like we're going to be pretty good income position, we decided to go ahead and reverse that.

The test for that is is it more likely than not for us to realize that asset, and we think answer is yes.

When you do that, how it actually manifests itself is you take it to income now, because you guys might have seen the $1.2 million bump up -- I mean reduction in taxes actually or the bump up in income.

So basically what happens is next year what we won't be able to do is what happens before you reverse that as you are taking that valuation allowance against your current tax rate.

So it will go up to 38 percent, which includes the full federal amount, plus state amounts.

Hopefully that's clear, but just think of it as right now we're bringing it into income.

Therefore, we can't use it going forward.

That's just the way deferred tax assets work.

It's a pretty complicated procedure.

But I'm happy to take you through any of the detail you want if you guys really want to go there.

Is that kind of clear?

Sort of?

That's great.

(OPERATOR INSTRUCTIONS) Mr. Alder, there appear to be no further questions at this time.

I will turn the conference back over to you, Sir.

I would just like to thank everybody for your interest in TTM and your participation today.

We look forward to a nice quarter, and we will see you in three months.

Thank you very much.

That does conclude today's teleconference.

We would like to thank you for your participation and wish everyone a good day.

And now at this time, you may disconnect.