TTM Technologies Inc (TTMI) 2005 Q2 法說會逐字稿

Good day and welcome to this TTM Technologies Second 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 this afternoon for our second quarter 2005 conference call. Before we get into any detail, let me mention that during the course of this call, we'll make forward-looking statements subject to known and unknown risk 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 Form 10-Q. The Company assumes no obligation to update the information provided in this conference call. Now, let me turn the call over to our CEO, Kent Alder.

Thanks, Stacey. Second quarter net sales were 57.2 million, sales were down 3% sequentially from the first quarter of 2005 and down 7% year-over-year. Net income for the second quarter of 2005 was $0.08 per diluted share. This compared with a $0.11 per diluted share for the first quarter of 2005 and $0.17 in the year-ago period. While Stacey will get into the details behind the numbers, let me broadly explain what we experienced in the quarter.

First, volume strengthened up 2% from the first quarter. But pricing was softer than expected, down 3% on a per panel basis from the first quarter. Orders and shipments were back-end loaded which hurt our operating efficiency. And as we mentioned last quarter, second quarter results reflected the annual pay increase, which went into effect in April for a full quarter of higher benefit cost. We continue to add new customers during the quarter, 32 in the second period. And our technological and operational capabilities remain strong. Although the mix represents some softness in the high-tech segment this quarter, products with 12 layers or more accounted for 70% of revenues, up slightly from 68% in the first quarter. The products with 20 layers or more accounted for 36% of revenues, down from 41% in the first quarter. Overall, the average layer count decreased to 15.7, compared with 16.1 in the first quarter of 2005.

For the second quarter of 2005, quick turn remained fairly stable and represented 22% of sales, up slightly from 21% in both the year-ago period and the first quarter of 2005. Second quarter lead times were fairly consistent with the first quarter levels at 5 to 7 weeks in Chippewa Falls, 3 to 4 weeks in Redmond and 3 weeks in Santa Ana. And overall capacity utilization for the Company was up slightly in the mid-70s for the second quarter. As for customer concentration, sales to our 5 largest OEMs constituted 57% of revenues in the second quarter of 2005, compared with 58% in the first quarter. Our top 5 customers in Alphabetic order were Cisco, Hewlett-Packard, IBM, ITT and Juniper. Now, Stacey will provide some additional details of the quarter and discuss the near term outlook.

Thanks a lot. As Kent said at the beginning of the call, second quarter net sales were down slightly to 52.7 million, compared to 58.9 million in the first quarter. Total volume increased 2% from the first quarter of 2005. And as Kent mentioned, there was some softness on the pricing front, a little more than anticipated with the average panel price down 3% sequentially. Gross margin was 19.3% in the second quarter of 2005, down from 31% in the year-ago period and 23% in the first quarter of 2005. As Kent discussed upfront, there were a number of factors that affected gross margins most significantly pricing pressure, the back-end loaded nature of shipments, and higher wage and benefit costs. Operating expenses were in line with expectation. Sales and marketing expense was 2.9 million or 5% of sales for the second quarter of 2005. As a percent of sales, this was down just slightly from 5.1% in the first quarter in year-ago period.

General and administration expenses, including amortization of intangibles were 3.3 million or 5.8% of sales in the second quarter of 2005. That was down from 4.1 million in the year ago period, and 3.7 million in the first quarter of 2005. Sequentially lower Sarbanes-Oxley compliance costs and incentive compensation were partially offset by higher legal expenses. Our balance sheet continued to strengthen even further during the second quarter. We generated strong cash flow from operations of 3.7 million. As a result, we were able to fund net capital expenditures of 2.2 million, while expanding our cash and short-term investment position by 1.7 million to a total of 63.6 million. Depreciation for the quarter was 2.3 million. As for our third quarter 2005 guidance, as stated in the earnings release, we expect revenues in the $57 to 60 million range, and GAAP diluted earnings per share of $0.07 to $0.10. While orders so far in the third quarter are at higher levels than we experienced at the beginning of the second quarter, we continue to see pricing pressure. In terms of gross margins, we expect them to be in the range of 18 to 20%, and as for expenses we expect sales and marketing expenses to be approximately 5% of revenue or 3.0 to 3.1 million, and we expect G&A expenses to be about 3.5 million, including amortization of intangibles. That's 5.8 to 6.0% of sales.

With that let me turn the call back to Kent.

Thanks, Stacey. I'd like to make one final comment before we open the call up to questions and answers, and that is about the announcement that Stacey will be leaving TTM to take a position as CFO of a Los Angeles based company. First I'd like to thank her for her tremendous contribution to the Company, and I must say on a personal and professional level, she has been a delight to work with. As we stated in the release, under Stacey's direction, we have established effective financial controls and a top-rate financial team to take us forward. The Company has retained an executive search firm to fill this position, and in the mean time, Stacey will help manage the transition.

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

Thank you. The question and answer session will be conducted electronically today. [OPERATOR INSTRUCTIONS]. Matt Sheerin, Thomas Weisel Partners.

Just a question on the pricing, if I could drill down a little bit, if you could talk about pricing in quick-turn versus the volume business?

Yes, Matt. Our pricing in the quick-turn was pretty firm this past quarter. Most of the price pressure that we experienced was in kind of our mid-level technology type work that we build out of Redmond, and a little price pressure on the high-end, but basically in the mid-level and pretty firm in the quick-turn segment.

Matt, to add a little color to that, a lot of our pricing decline was actually much more customer mix related as opposed to market pressures during the quarter. Going forward, we are seeing a combination of both pricing in the market, and in addition some mix changes.

What do you think it's going to take whether it would be demand, capacity utilization, capacity coming offline, what is it going to take for us to see a more stable pricing environment because this has been going on probably for three quarters now?

I think, Matt, we still have the laws of supply and demand affecting us and there is still more capacity than we need particularly here in North America, but I think the price decline as we look forward, it's not as great as we have experienced in the past couple of quarters. So, I think an increase in demand would help that as well as some capacity coming offline.

And are you looking internally at any kind of cost cutting or anything to improve gross margin to offset that pricing pressure?

Yes. Matt, that's an ongoing effort within TTM, and we come up with new ideas every day to get more productive and more efficient. We have specifically signed individuals to move between the three locations and implement best practices, and just make sure that we continually go back to the basics and drive costs out of our business. So, we are always moving forward with efforts to reduce our cost and become more efficient, and I think you can see that because our volume this quarter was up, topline down however because of the price pressure.

And just lastly, with Stacey's departure and congratulations Stacey. Does that change at all your strategy? I know you have been looking at some acquisition opportunities, talked about some things in the military area, I know you are looking at Asia, is that put down on hold while you are looking to replace Stacey in the CFO role?

Yes, it does not. Stacey has done a great job in her tenure here as CFO, and one of the things that we've done that Stacey has been directly responsible for is building a real solid financial team. So, we will work very diligently to find the replacement, the Company is in a very strong position. And so, it won't slow us down but the workload will kind of be distributed and be increased a little bit, but we will still move forward.

Shawn Harrison, Longbow Research.

I was hoping maybe you could breakdown, I guess, the effects of each -- the pricing, the back-end loading and the higher wages and the gross margin this quarter. What percentage each accounted for in the decline?

Sure, we can do that at kind of a high level. I think basically what you want is a reconciliation of our gross margin period over period, is that helpful?

Yes, that would be helpful.

Yes, I mean, the biggest factor by far was the price, which was offset a little bit by the volume, still price was the biggest driver. But when you get down into the COGS section, I would say probably 1.5% maybe a little bit higher was due to, you know, we just had higher costs. And those higher costs were associated with a few things in general, if you want to look at labor, we had higher benefit and wage costs associated with increases we discussed on the last conference call, we had a little bit higher over time, associated with the back-end loaded nature we weren't quite as efficient and also similar other costs in COGS were higher because volume was up. In addition, a little bit less efficient because of the back-end loaded nature. So, if you just break it down and you say, gosh there was a 3.7 point decline in gross margin, just take about 1.5% of that as the cost component, and inefficiency, higher volume, and take the rest of it as to be price.

Okay. With the back-end loading, does that appear to be that is going to be an ongoing phenomenon or was that just a second quarter issue?

I think it was more dramatic in the second quarter than we've experienced in the past. It's hard to say how this next quarter will develop, the visibility is quite challenging. One of the things that has happened so far in this quarter though is, we are starting out in July, stronger than we started out in April. So, that's a positive sign when you look at the booking rate. So, I don't believe it's a general trend but historically it is a little bit back-end loaded. But this is lot more dramatic in this quarter than past quarters.

You comment there kind of just segues into a follow up question, which would be -- could you just discuss what you see in terms of seasonality both on the quick turn and the standard lead time side in the third quarter?

The seasonality in the summer is basically there because of vacations and holidays and so forth. I don't believe with most of our customer base there is a specific summer seasonality that is related to their sales and so forth. There are some customers that are stronger in the fourth quarter and some seasonality but, well there is some seasonality in the customer-end products, most of the seasonality in the summer is due to vacations, and holidays and so forth.

Amit Daryanani, RBC Capital Markets.

Just on your inventory levels, it looks like that jumped up about 12%, 1.2 million, I don't know, revenues (indiscernible) essentially down 3% and you are guiding flat relatively. Could you talk about that a little?

Sure. Amit, the big thing in that is we -- it is the back-end loaded nature of the quarter. We have seen an increased use in our hubs on the finished goods. But what we saw is a big jump in whip towards the end of the quarter and that's because we got all of those orders more towards that period until all that work was in process.

And then, just looking the networking communications segment, that seems to be trended down against a few percent sequentially, is that just weakness in the end market, are you seeing some product shifts?

I think that was mainly mix related. I know we were 49% last quarter, 44% this quarter, couple of things. I think the 49% was a little bit higher than normal because we were catching up in the fourth quarter and the first quarter in that segment of the marketplace, and so 44% is really not out of line; it mainly has to do with some mix and maybe timing of the orders as they come into us.

And then just finally, could you talk about how the book-to-bill was for the quarter that just ended?

We ended the quarter at a book-to-bill of 1.04.

Kevin Kessel, Bear Stearns.

In terms of pricing, you said that it was down I think 3% sequentially on a pre-panel basis, which was greater than your expectation. What is the expectation for next quarter in terms of pricing?

I'll address that. Our expectation for this coming quarter is down slightly but not a lot. So, as we look at pricing, there's still some price pressure out there, but it is not quite as great as we experienced in the past quarter. So, we are looking at just down slightly.

And Kevin, we are expecting a little bit of the pricing pressure in the market to be offset by mix.

So a better richer mix for you?

We would think that there will be slightly richer mix.

And when you say that, are you talking about mix in terms of more quick turn work or mix in terms of end market product?

We should see a little bit more quick-turn working out, so I think in the end market it should be slightly different. It is hard to really predict that with a high level of confidence because of the visibility but just looking at past trends in terms of seasonality in certain end markets and then quick turn, that's what we would expect.

When we talk about mix, it is kind of – there's like the mix between quick turn and production, there is a mix between high tech, there is a mix between the end-market segments, there is a mix between our three facilities. So, and we look at all of those aspects as we develop a forecast and take all of those into consideration.

And why do you think you would be seeing less pricing pressure at least in terms of cost pricing pressure than some of your other North American competitors who were forecasting 3 to 5% pricing pressure sequentially?

I think if you look at our competitors, we don't compete directly head-to-head with across our full customer base. I'm sure there's some customer specific programs that maybe differentiate us with our particular quick turn segment. We have seen that firm up and would anticipate that to be pretty firm throughout the quarter. So, as to why we are not projecting as low or as great a price increase, I would again summarize between the customer base and maybe the market segments that we serve.

And when you say that the quarter was back-end loaded, what exactly does that mean in terms of shipments in the last month, was it half of the shipments in the last month or -- what is defined as the back-end loaded or the more back-end loaded than expected?

It was significant. In this particular quarter, when we talk about back-end loaded, we are also talking about the first month that was not loaded to the capacity levels that we would like to have. So, when you look at the first month, we were under utilized with our facilities and then the orders and shipments accelerated through the quarter. So, it was fairly significant in that third month.

And then in terms again going back to the question I asked early about your cash, clearly you guys have spoken about the desire to do acquisitions. Is there any sort of a timeline or a timeframe and any thought given at all to doing a stock buyback at all at these levels?

No, I don't think so. Right now, we have the cash and we think the best use of our cash would be to consolidate the industry and expand through acquisitions.

Kevin, at this point when you see sort of a flattish market with pricing pressure that's actually when we think you can do – pursue more strategic opportunity. The reason being the valuations are much more in line and you know that we are very value sensitive.

Sure, definitely. And then one last housekeeping question, do you have what the accounts payable balance was in the quarter?

The actual accounts payable by itself, yes I do -- it was 8.2 million. Again, a lot of people add in the other accruals. So, if you want to talk about that, we can too, maybe offline.

Okay, great. Congratulations, Stacey.

Thomas Dinges, JP Morgan.

Just a follow up a bit on that last question, but just move it forward a quarter. You talked about the visibility being a bit poor and it sounded like it was maybe a bit worse than you thought than maybe you started last quarter, but based – as you can see towards the end of the quarter. How much in a normal seasonal September quarter would you have to ship, once you get past the seasonal slow period here in the month of September. Is it even more back-end loaded quarter than normal given all the vacations and those kinds of things and how is that shaping up and then I have a real quick follow up?

I mean when you hit into September you are out of some of the summer slowdown due to vacations and so forth, so there is a little tendency to have that month be very strong, but again relative to whether that's going to be more back end-loaded in the second quarter that we just completed. I would be surprised if it was as back end-loaded as this quarter was.

Now a part of that is the fact that we are starting at a higher level than we did in April.

Okay, and then just to understand a bit more of from the look-back when you said you had seen a bit more pricing pressure at the mid level and Stacey, I believe you mentioned it was a little bit more customer specific, is this just sort of some legacy product that has been there for a while, and you had cost commitments and that kind of stuff coming in there or was there actually something new in that mix that brought you that pressure there and kind of a part B to that question would be when you said you are seeing a little bit more market pressure specifically where is this is coming from? Is the OEM base, kind of, taking an opportunity here to try and reset pricing a little bit or is it more or so just the stuff that we have been hearing for a long time which is there is just too much capacity in the US and here and there you are seeing a little bit more pricing pressure?

Yes, I mean the pricing pressure again comes because of the amount of capacity we have and then the supply and demand equation is out a balance, and so it's kind of a flattish market right now, which allows the pricing opportunity to be in the hands of our customers. I guess the second part to that question, I will go back and try to answer that, with regards to some of the shift in mix that we had in that mid technology level and a lot of that came from the industrial controls with some of the semi (indiscernible) type business that we had that phased out and then we replaced that with a little more competitive type work from different customers.

Adrien Bell (ph), Heartwell Investment Management.

I wonder if you could, sort of, flush out for us a little beyond the third quarter, and how you want to see the rest of the year unfolding? Do you think we have seen the worst of conditions for the industry and with less pricing pressure you are alluding to for Q3 and the better start for the volumes of the Q3 that Q2 will represent pretty much the bottom of the cycle?

Well, Adrien it's hard for us to predict the bottom but and the signs that we allude to with a little less price pressure and a better start to the third quarter are very short term. It's a very short term to make any kind of judgments on with regards to the rest of the year, and we talked about the visibility being very, very difficult, but the fact that we are starting this quarter better and the fact that our pricing pressure is not as great in this quarter are two pretty positive signs. But I would be very hesitant to draw some longer-term conclusions based on short-term data.

That being the case for the start for Q3 the range of guidance seems somewhat wide? Can you sort of maybe, Stacey talk a little bit about the range and why you felt it needed to be as wide as it is?

Yes, it is still even though we see things starting out out little bit better, we could come down into a situation where mix, and/or the visibility out there could dampen our ability to see what the results would be. Because what we built in is a little bit of room for pricing. You guess well, it looks pretty stable right now. Either the mix or in quick turn if that turned the other way on us, could pressure our margins quite a bit. So that's why we have widened that range just to put that in there.

Adrien, let me add a lit bit to that. Our lead times in Chippewa Falls are five to seven weeks, three to four weeks in Redmond and three weeks or less in Santa Ana, and those are lower lead times than what we had throughout most of last year. They would have been more closer to 8 to 12 weeks in Chippewa Falls and so forth. So just from a backlog standpoint and our lead time the visibility just is not there to have a good projecting model.

And then also one other factor that you guys have probably seen as inventory days come up and part of it was with this quarter but just in general, when you have kind of that stable end-market demand what we see is our customer is using our inventory hubs more. So, while we have a kind of a take-on-order trend although they are limited, as Kent mentioned, people have started to use that inventory, the vendor-managed inventory more. So the actual period in which the revenue will fall and the costs associated with that isn't quite as clear as it used to be for us.

So that for the -- how should we interpret the build up in inventory then in the second quarter, is that a prelude to that revenue flying through in this quarter given the short lead times or is it a harbinger of higher levels of inventory generally for the business and more capital being tied up in the business?

I think it's a combination, I mean because of it was mostly WHIP, as suppose -- you can tell that they was loaded with the orders coming in towards the end of the quarter. So, what you will see is in general as we have seen, even last quarter you saw our inventory days creep back up. It is the fact that they simply can use that vendor managed inventory more because they have certainty of supply and they can see demand better on their side. So, in other words, I think you are going to see this trend continuing somewhat. Not a big increase but you are going to see and it's going to limit our visibility for a while.

With our contract-manufacturing customers they have expanded their Vendor Managed Inventory programs too, so a bigger percentage of our work is going through these programs, which again makes it more challenging to have the visibility.

[OPERATOR INSTRUCTIONS] Aaron Husock, Morgan Stanley.

I guess I am just a little confused about your pricing commentary about the second quarter. Because it looks like your average layer count was actually down about 3%, which is in line with the average channel price decline you are talking about. Was your average price per layer actually flat in the quarter?

Good analysis, it was pretty close to flat, that's correct. Because what you will typically see is, price per panel and price per layer are inversely related and the reason being is, as you get more and more of the inner layers, you've got the outer layer cost that "kind of get amortized" over that. You don't see a one-for-one linear relationship as you see price increase on the panel side and the layer side. Does that make sense? You don't get that complete offset in price or rise in price with increasing layer count.

And then in the next quarter are you generally looking for your slightly higher layer count?

I think we would see layer count up a little bit, I don't think it will go all the way back up to first quarter levels however.

I think it was just up slightly, but not a lot in our projections.

That's right.

Looking at your guidance next quarter, you're getting up about 2% sequentially on revenue. Can you just kind of talk – looking at your two main end markets, communications and computing, where are you seeing kind of relative strength or weakness in your outlook?

With our end-market segment, we are currently forecasting that the networking would be up slightly and relatively speaking, our high-end computing, we believe that segment won't be the 30% number that we had this quarter that would be down slightly.

And can you run through capacity utilization by facility?

Yes, sure. We are as a Company, we were in the mid-70s this quarter, we ran approximately 85% in Chippewa Falls. 60% in Santa Ana, and just about 70% in Redmond.

And just finally, when you are out talking to your customers or kind of I guess looking at your orders, do you have a sense for where – or if there been any change over the past month or so, and how they are thinking about their inventory that they are -- are they trying to work that down a little over, are they starting to accumulate any, how are they thinking about that?

I mean other than -- I mean from our perspective, the only indicator we have is the hub inventories and our customers have expanded those by putting more parts into Vendor Managed Inventory and so forth. But I don't think there has been a lot of change in how they are looking at the inventory at least from our perspective.

Mark Hassenberg (ph), Nottingham Capital.

I am sorry to go back to the back-end loaded question, but was quick-turn also back-end loaded or was it the longer-term result?

I am trying to run through those numbers just by memory here. It was on both, it was both, exactly.

But it was more so in the standard lead-time business on a percentage basis on a book term.

It was in both categories but certainly, yes. Good.

Because I am trying to figure out whether we are looking back or forward. In the back-end loaded, I mean there was -- was it an inventory situation early in the quarter, was your customer's business stronger later in the quarter or do you have any feel at all from the customers you talk to, whether it was back-end loaded because business improved for them or their inventories came down or some other factors that made them -- what made it so back-end loaded for the June quarter?

Yes, Mark it's probably all of those. I mean there is, every customer has a little different scenario and we are dealing with just under 600 customers and they all have just a little different position that they find their self in. So it varies across the board.

Was there any one factor, I think that stood out? So, we just saw the order, trends really change, kind of in the late May and June time frame.

As far as the pricing situation, is there anything you are doing or can do with the sales force to try to change the pricing situation. Are there one or two competitors that are just mucking up the waters here?

We talked about who we compete with in the past and so we won't comment on that, but there has not been a lot of change in who we compete with.

[OPERATOR INSTRUCTIONS]. JD Padgett, Founders Asset Management.

Quick question for you on gross margins, it looks like you guided revenues pretty much flat to slightly up, talked about hopefully mix getting somewhat richer in Q3 versus Q2. But it seems like the gross margin guidance kind of leaves more room for that to be down versus up sequentially in Q3, just trying to reconcile those things?

As we think, from our perspective, I see it more as flat or slightly up. But once again, we put in some room in the guidance for the fact of the visibility that we talked about before. While, we got the lead times that Kent described, our longest lead time only being five to seven weeks and the inventory, we just have to make sure that we wanted to put a range out there that we thought was reasonable.

So, the key factors that would take it down obviously would be if pricing worsen, what you're thinking or if the commentary on mix ends up to be just the opposite?

Right, or even if volumes mature because remember we have a lot of leverage in our model. Our incremental growth margins are still pretty high and then they are at the mid point of the range, I think they are around 50 a little higher than 50. So, what happens, I mean, you kind of get the double whammey, you get the price and the volume and just because of the (indiscernible) cost nature of the business, it can really impact gross margin.

From a mix standpoint what do we want to see for gross margins to be better quick turn up?

That always helps. Yes, absolutely. That can be a very high margin work and also with the utilization rate at the plant up which once again covers those fixed costs a lot faster but it has a higher pricing and higher margin even when you don't think about the fixed cost piece of it.

Are you going to another public company or you are going to disappear?

Disappear for a little while.

Well, it has been good working with you. Wish you the best.

Thank you. I've enjoyed working with you too.

Mark Hassenberg, Nottingham Capital.

We've been talking about the pricing pressure. What's happening on the material cost side? Are you seeing any relief there?

We are not seeing any increase in material costs, at the same time we are not seeing any decreases of a substantial nature.

At this time we have no further question now for closing remarks I would like to turn the call over to Mr. Kent Alder, please go ahead sir.

I would like to thank everyone for joining us today on this conference call and I give Stacey one final thanks for her years of service and successful tenure here at TTM. Thank you very much Stacey and with that we thank everybody and we look forward to the next quarter conference call, we will see you in three months; thank you.

And that does conclude today's conference; thank you for your participation.