TTM Technologies Inc (TTMI) 2005 Q3 法說會逐字稿

Good day, and welcome to this TTM Technologies third quarter earnings release conference call. Today’s call is being recorded. For your opening remarks and introduction, I would like to turn the call over to the Chief Executive Officer, Mr. Kent Alder. Please go ahead, sir.

Good afternoon, and thanks for joining us for our third quarter 2005 conference call. With me today in Santa Ana is Steve Richards, TTM’s treasurer, who has been handling investor relations as we finalize our search for a Chief Financial Officer.

Before we get started, 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 Form 10Q. The Company assumes no obligation to update the information provided in this conference call.

Now, as you read in our release, we reported third quarter net sales of $61 million and earnings per diluted share of $0.10. We were pleased on a number of levels with our performance for the period. Net sales increased 7% sequentially from the second quarter of 2005, although they were down 2% year over year. As I mentioned, net income for the third quarter of 2005 was $0.10 per diluted share. This compared with $0.08 per diluted share for the second quarter 2005 and $0.19 in the year-ago period. One important factor to keep in mind as you look at our bottom line performance is that it includes a $2 pretax accrual related to an agreement in principle reached to resolve a customer dispute concerning products shipped in 2002 and 2003. Excluding this amount, which I will discuss later, earnings per diluted share would have been $0.13 for the current period.

While Steve will get into the details behind the numbers, let me broadly outline the market environment we’ve been experiencing and explain the reason for the strong 7% sequential expansion in revenues. Volume was in line with the second quarter, but demand remained fairly steady throughout the quarter, which is the more typical pattern. As you may remember, that contrasts with the second quarter of 2005, which was significantly back-end loaded. The result of this steady demand was much improved operating efficiency in the third quarter.

Pricing proved stronger than expected, up 6% on a per-panel basis from the second quarter. There were several reasons for this pricing trend. First, and most significantly, our product mix reflected a higher technological component beyond what is apparent from the average layer count statistics, including increases in our sequentially laminated blind and buried via and HDI products. The second factor contributing to the pricing strength was an overall improvement across all segments of the industry. We also achieved some market share gains, specifically in the military and aerospace market and the communications segment. The seasonal increase in demand in the handheld segment, which we typically see in the third quarter, was also a factor. We continue to add new customers, a total of 31 in the third quarter. And, our technological and operational capabilities remain strong. For the third quarter of 2005, products with 12 layers or more accounted for 69% of revenues, down slightly from the 70% in the second quarter. But, products with 20 layers or more accounted for 39% of revenues, up from 36% in the second quarter. Overall, the average layer count rose to 15.8 compared with 15.7 in the second quarter of 2005.

Quick turn remained fairly stable and represented 21% of net sales for the third quarter of 2005, up from 19% in the year ago and down slightly from 22% in the second quarter of 2005. Third quarter lead times increased moderately from the second quarter. Lead times are now at 6 to 8 weeks in Chippewa Falls, 4 to 6 weeks in Redmond, and 3 weeks in Santa Ana. Overall capacity utilization for the Company was up slightly but remained in the mid to upper 70s for the quarter.

As for customer concentration, sales to our five largest OEMs constituted 53% of revenues in the third quarter of 2005, down from 57% in the second quarter. Our top five customers, in alphabetical order, were Cisco, HP, IBM, ITT and Juniper.

Now, before I turn the call over to Steve, let me comment on the accrual we made to resolve a customer dispute. As you probably remember, in April of this year, we addressed the reliability issue related to printed circuit boards supplied between April of 2002 and July of 2003 to one of our valued customers. These boards had passed rigorous testing and inspection conducted by TTM prior to shipment. However, these products, while functional, did not comply with one particular specification. Now, except for a few remaining details, we have resolved the financial impact of the issue with the customer, and with the $2 million accrual that we took in the third quarter, we have put this issue behind us and do not expect this issue to impact results on future periods.

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

Thanks. As Kent said, market demand remains stable, and over the course of the third quarter, TTM experienced a more typical, steady work flow. That enabled us to operate more efficiently. Combined with improved pricing, we achieved a significant improvement in profitability over the second quarter. While the gross margin of 23.2% in the third quarter of 2005 declined from 28.4% in the year-ago period, it improved from 19.3% in the prior period. Sales and marketing expense was in line with expectations at $3 million, or 5% of net sales, for the third quarter of 2005. As a percent of net sales, this compares with 5% in the second quarter and 4.5% in the year-ago period. General and administrative expense, including amortization of intangibles, was $5.2 million, or 8.5% of net sales, in the third quarter of 2005. That was up from $3.2 million, or 5.2% of net sales, in the year-ago period and $3.3 million, or 5.8% of net sales, in the second quarter of 2005. As Kent mentioned, the difference was accounted for by the $2 million accrual for the resolution of a customer dispute. Without that accrual, G&A expense would have been $3.2 million, or 5.2% of net sales, down from the second quarter.

Our balance sheet continued to strengthen even further during the third quarter. We generated strong cash flow from operations of $9.1 million. As a result, we were able to fund net capital expenditures of $1.4 million while expanding our cash and short-term investment position by $7.5 million to a total of $71.1 million. Depreciation for the quarter was $2.3 million.

As for our fourth quarter 2005 guidance, as stated in the earnings release, we expect revenues in the $60 to $63 million range and GAAP earnings per diluted share of $0.11 to $0.14. We enter the fourth quarter with a solid backlog, and so far, demand has remained steady. In terms of gross margins, we expect them to be in the range of 21% to 24%. As for operating expenses, we expect sales and marketing to be approximately 5% of revenues, or $3 to $3.2 million. And, we expect G&A expense to be about $3.2 million, including amortization of intangibles. That’s 5.1% to 5.3% of net sales.

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

[OPERATOR INSTRUCTIONS] We’ll take our first question from Matt Sherron with Thomas Weisel.

Yes. Thank you. Kent, I’d like to ask a couple of questions. First, on pricing, it looks actually a little surprising that you’re seeing favorable pricing because utilization rates really are not that high. So, I’m trying to figure out is it more the mix in the technology that you’re talking about? What about the more commodity areas? What are you seeing there?

Matt, our pricing-- We kind of listed four reasons in the call there. Certainly, the mix between technology levels was improved this quarter - not necessarily in the layer count, but more in the sequential lamination HDI segment. Because we are pretty much specialized in that area, that enabled us to achieve some higher pricing. Then, there was an overall general improvement in the market conditions. We had some market share gains in the military aerospace segment and some market gains in communication. But, it’s a lot of factors combined there. Our capacity utilization is up slightly, but I think we have some more runway to go with our capacity utilization. But, we’re pretty pleased with the way that our customers reacted this quarter and the pricing we were able to achieve.

Okay. And, what’s your outlook for pricing next quarter, then - sort of flattish?

Yes. We’re holding it about flat for the next quarter, Matt. We have a couple of longer term agreements in place that will dampen that a little bit. We’re also seeing a quite active quick turn segment of the marketplace that is helping drive prices up a little bit for us. So, we’re pleased with the direction we’re headed in the fourth quarter.

Okay. And, those market share gains that you spoke about - is some of that related to competitors moving out of North America? Are you starting to see that?

There might be some of that, Matt, but I think most of our market share gains, again, come back to some of the military aerospace, some of the computer peripheral segments, which is reflected in the handheld segment also. I think it’s more of our ability to, again, focus on the strengths in the North American marketplace and move that direction.

Okay. And, just two quick number questions. Could you tell me what the book to bill was at the end of the quarter and maybe what it is now, and then, also, if you had any top-ten or 10% customers?

Yes. Our book to bill-- We finished the quarter at 1.15. I might soften that a little bit. There seems to be a little more longer lead time work in that number. But, it’s still very healthy at 1.15 at the end of the quarter. So far, through October, we’re still above 1 but not running at that level.

Top ten customers. We had two above 10%.

And, who were they?

Cisco and IBM.

Okay. All right. Thanks a lot.

We’ll take our next question from Kevin [Kessel] with Bear Stearns.

Good afternoon. My question is also on the market share gains. Is it possible, Kent, to quantify what those were in terms of revenues in the quarter?

We haven’t gone back and put numbers behind that. But, it’s just challenging to do that. But, it was significant enough in the quarter that we felt like it was important to mention it here. It’s also associated with the shift that we had in our technology components. So, as far as-- I guess I will tell you, though, that it was in networking, computer peripherals, handheld segments of the market place.

Okay. Would you also say that--? You singled out HDI and sequential lamination. Were those also market share gains, or was that just further penetration of customers?

They were market share gains.

So, that as well.

When I say market share gains, that’s not only new customers, but it’s also new programs, new allocations within existing customers.

Okay, but taking away some of that business from competitors who might have done it in the past.

I think that’s correct.

Okay. In terms of acquisition activity-- You guys have a very strong balance sheet and it continues to get stronger-- how would you rank your priorities in terms of what you’re looking at, whether it be something over in Asia or maybe something more focused on aerospace defense? How do you think about it?

We looked at acquisitions kind of three different areas that we believe we are active in. The military aerospace, as we’ve mentioned before, is a very nice addition to our quick turn and high tech component that pretty much focuses on North America. Another area that we are certainly exploring and very active in is the quick turn market in North America and consolidating the quick turn segment. And, in Asia, also. That provides us an opportunity to capture some more market share. We look at that strategy as more of an offensive strategy. So, we’re very active in evaluating alternatives, particularly in Asia. We’re searching for the right, ideal, strategic fit that provides us with opportunities to enhance our core strategies. We made two trips to Asia. We’re formulating another trip here. We’re pretty active on all those fronts. I wouldn’t say one overweighs the other. I think it’s as opportunities become available, we’ll certainly assess those and make the right strategic, long-term moves for the Company.

Okay. In terms of size, do you have a size in mind of a company, or is there a size that you would consider too large to look at relative to you guys?

On the large end, I don’t think there’s any limits on the upper end.

Okay. That’s great. I’ll come back later, if there’s more. Thank you.

Thanks. From JP Morgan, we’ll hear from Jason [Gursky].

Hi there, guys. A couple of quick questions; first, on materials pricing. I was wondering if you could just kind of give us an update on what you saw during the quarter and what the outlook is there for the next couple or three quarters.

Yes. Sure. We had some prices in copper and a few other small prices. But, for the most part, there was nothing significant in the third quarter; nor do we believe going forward there will be any significant increases in our material pricing.

Okay. Of the 31 new customers that you mentioned in your prepared remarks, how many of those actually ramped to some material level of production during this quarter? And, of those that did not, when would you expect to see revenues from those customers?

There’s quite a mix in the new customers. As far as a dollar range, they totaled just under $700,000 of total sales in this quarter. The largest customer was about $142,000. Then, there’s a significant amount in the $10,000 to $30,000 range. It’s quite broad. Some customers, if they’re in the quick turn segment, which a lot of them are, we can ramp pretty quickly. If they’re in the longer lead time, the tier 1 type accounts, sometimes that can be a year long or a year and a half long ramp program.

Okay. So, of the 31 that came on board this quarter, all of them saw some level of revenue, I’m guessing, from what you just said. Do you expect that level of revenue to ramp further from that $700,000 that you talked about?

Yes. I mean, some of these customers we expect that to continue to ramp. I think some of them are small enough in nature that we entered their space, and we’ll probably run at a consistent low level.

Okay. Great. And, then, just a bookkeeping question. Outlook for CapEx for the full year at this point?

I can cover that one. Basically, we had about $1.4 million in capital spending - cash flow from investing in the third quarter. We expect about another $1 to $1.5 next quarter, for a total for the year of about $7.5 to $8 million for CapEx for 2005.

Okay. Great. Thank you very much.

We’ll take our next question from Shawn Harrison with Longbow.

Good evening. I just wanted to get back to the pricing. In general, is-- The new programs that you won the market share - those type of end markets - is the pricing on those programs typically higher than, I guess, the typical business you have right now?

Yes. Shawn, it is a little higher, but keep in mind a lot of it is in the blind and buried vias and the HDI category. When you’re into those type of technologies, there’s additional processes. Sometimes you go through processes more than once. It’s a little more costly. But, certainly, the spread between the cost and the selling price is very beneficial to the Company.

Okay. Just secondarily, you mentioned that-- At least this is the way I took it. You took prices up everywhere. Was that meaning that you actually went to specific customers and said, “We’re raising the price of the product to you,” or is it just kind of more related to the fact of the improved mix in these market share gains?

Yes. It’s more of an improved mix. Very rarely do we go back to customers and kind of across the board raise prices. I think, as I mentioned, going forward we’re still going to have some price pressure in our tier 1 level customers. We still have some price pressure there. But, with regards to the quicker response on the quick turns and the technology segments, that’s where we have opportunities to provide our customers value and still achieve a higher price.

Do you believe the market has become less price competitive because your competitors are a little bit more healthy or that demand has improved a little bit, or if there’s another factor? Maybe I’m not hitting on it.

I certainly-- Within our industry, demand has improved. I think if you look across the board with our competitors, you’ll find lead times are extending. Now, part of that is related to seasonality that we experience in the third quarter, and part of that is a nice uptick within the industry. So, it’s hard to tell how much is seasonality and how much is a general improvement in the industry. But, certainly, this quarter, almost across the board, we had an increase in demand for our products.

Okay. Lastly, on raw materials; I know you mentioned you don’t expect anything during the fourth quarter. But, recently, Isola announced they were looking to raise laminate prices 8% to 10%. I find that may be difficult that that wouldn’t affect you maybe in some way during the first quarter of calendar year ’06.

I think-- As a customer to Isola, we’re fairly sizeable, and we appreciate Isola and all of our laminate suppliers for that matter. We’re able to work with them on both sides of the coin, so we’ve got a winning combination for our laminate suppliers. As we mentioned earlier, going forward we don’t expect any material increases in our cost of goods in the material segment of the cost of goods sold.

If you were to receive a material increase, do you think you would be able to pass it through to the customer base immediately during that quarter?

Immediately is a little bit variable, depending on our longer term pricing agreements that we have. So, some of that is yes, and some of that is no.

Okay. Thanks a lot.

Our next question will come from Rich [Trujillo] with Needham & Company.

Hi. This is actually Rebecca [Eapenean] for Rich. I’m just wondering if you can maybe discuss any turns that you’re seeing in end markets going forward into the next quarter.

Sure. I’ll comment. Our comments are related to specifically PTM and what we see in the marketplace. As we look at networking going forward, we think we’ll see an increase in our percentage of work coming from the network segment. I think handheld for the first quarter will be up slightly. There’s some price pressure in the high-end computing segment, and if there was one segment that we see slower demand, it would be in the high-end computing segment. I would anticipate that to be down. The computer peripheral segment-- Because of some seasonality there in the third and in the beginning of the fourth quarter, that will probably be down for us also in the fourth quarter. Industrial and medical will be stable.

Thank you. That’s very helpful. Then, I guess, if you could just comment on utilization rates at the individual facilities and then percent of top-ten customers.

Sure. Our capacity utilization rates in the third quarter at Chip Falls ran about 85%. Santa Ana was up to around 64% and Redmond at 73%. If you average all that, you get to the mid 70s. The second question was the top-ten customers. Our top five are 53% of sales. The top ten was [inaudible] 25-- 75%. The nice thing about that percentage is it’s down from a customer concentration of 57 in the prior quarter. So, we did expand our customer base beneath the top five and, certainly, beneath the top two. I think that’s probably a longer term trend that we’ll continue to experience. It might not happen in the next quarter, but certainly over time I think the trend to have more customers and less of a concentration in the top five will continue.

We’ll take our next question from Ahmed [Prayanani] with RBC.

Thanks a lot. Kent, just to talk about prices a little more. It sounds like you’re seeing a lot better pricing right now. I’m trying to understand. Is it really driven by a more rational pricing environment out there, or is it seasonality that’s starting to provide some tailwind in terms of strength across your competitors? And, then, once we get into Q1 and Q2, are you going to resume back to the irrational pricing behavior we had earlier this year?

A good question. We look at pricing, and there’s not one specific silver bullet that we can identify that says here’s exactly what happened. But, certainly the increase in demand across the industry was very helpful for us with regards to pricing. We know that in the handheld segment in the third quarter there’s some seasonality that’s involved. Certainly, our improved mix with the technological components that we’ve talked about, not necessarily layer count, had a fairly significant increase in our pricing. So, I think that was the major factor was more of our mix shift to these higher technology products that we produced in the third quarter.

All right. And, then, [Phototronics] recently filed for bankruptcy. Really, you don’t compete with them a lot, but have you picked up some customers from there? And, just a byproduct of that is also are you seeing your suppliers kind of spooked by what happened to Phototronics and trying to reduce the credit facility they might have with you?

No. As far as on the financing side of our business, our relationships with our banks and financial institutions is very strong. I think that’s a long-term history that goes back to the founding of TTM six or seven years ago. We’ve been able to do what we said we were going to do and maintain strong relations on our financing side.

With regards to the bankruptcy, there’s not a lot of gains available for us, since we didn’t compete much with that particular company.

All right. Finally, could you give us an update on the CFO search and if you have any timeline that you could share with us regarding that?

Yes. We’re coming down the home stretch on the CFO search. We have several excellent options that are developing here. Hopefully, some time in the November period, we will bring that search to a conclusion.

Thanks a lot.

[OPERATOR INSTRUCTIONS] We’ll take a follow-up question from Kevin Kessel with Bear Stearns.

Hi, Kent. What would you attribute to why many of your competitors are actually still seeing price declines? If you think about it, would you say it’s more related to their mix? Why would you think that they’re still seeing price declines?

Yes. I don’t know of the specific ongoings of our competitors. But, certainly, for TTM, the mix was a positive factor in our pricing. We are now reporting here in the October time frame-- I think other companies who reported earlier hadn’t reported for this quarter. Maybe there’s some more good news coming there. For us, certainly the reasons we’ve talked about helped us with the positive impact in pricing. We’re projecting not a lot of price increase going forward but certainly maintaining at a pretty high level.

Okay. How broad would you say your market share gains were in terms of where you took them from? Would you say that a lot of them are coming from one competitor, or was it relatively broadly distributed?

It was not one competitor. It was pretty broad.

Just a housekeeping question. Would you have the accounts payable balance for the quarter?

Yes. I’ll provide that to you momentarily. Yes. A/P balance was $9.7 million for the end of the third quarter. That’s a large increase from second quarter. The second quarter was kind of seasonally down. We had some large check runs at the end of the second quarter. It kind of dropped our A/P balance down to $8.2 million. We’re up now more at our historical norm. We were at like $10.3 at the end of the first quarter. So, we’re kind of back to a more normal level. We saw some dipping in A/P in the end of the second quarter.

Okay. You guys don’t have to expend stock options until next year, but do you have any preliminary estimates in terms of what that impact will be?

We made a lot of progress on FAS123R implementation and preparation with the auditors, but we haven’t nailed down a number to give to you yet. You’re right. We don’t have to begin expensing until the end of the first quarter, and we are moving along quite a bit on that process but not far enough along to give everybody a good feel for what’s going to be in the first quarter. You probably did see that we expensed-- accelerated vesting on some underwater stock options earlier in the year. That will drop our projected expense going forward, which is good news.

Okay. Thank you very much.

And, we’ll take a question from Michael Walker with First Boston.

Thanks. Just a question on the guidance for December. You talked about pricing and mix helping out in September. It looks like you’re looking for a very slight, flat to up revenues, for December and margins to be flat or maybe slightly down a little bit. I was just wondering if you could kind of go into why you think there might be a little downward pressure on margins.

I think, Michael-- Again, I mentioned earlier there’s still some price pressure in the tier 1 type customers going forward with these longer term agreements that we have, although we anticipate our quick turn activity to maybe offset some of that pricing pressure. But, we are forecasting up. I think that’s the good news. One of the things we are challenged with at the end of every year is the holiday season. It really clouds our visibility. So, we’re not quite sure what happens with regards to the end of the year or last two to three weeks of the quarter. We’ve calculated our best estimate into those forecasts.

My second question is on the market share gains. Is it possible for you to split out gains from closed competitor plants versus gains from operating plants?

I guess if I-- I don’t think that’s possible for me to quantify that. But, in general, our market share gains came in the military segment that I mentioned and some in the handheld with the technology. We move up the technology curve. Some of the market gains were customers consolidating because of nervousness about financial conditions of our competitors. Some of the market share gains came just because they wanted to move more product into TTM because of the broad base of service and the total solution that we provide to our customers. So, I think market share gains came from across all of those segments. Some of the closures that we’ve had in the past-- We did benefit there also in this quarter. I can’t quantify that, but we’ve been benefiting from some of those closures in the second quarter also, and that continued somewhat into the third quarter.

All right. Thanks.

[OPERATOR INSTRUCTIONS] We’ll take a question from Matt Sherron with Thomas Weisel.

Thanks. Just a quick follow up. You talked, Kent, about seeing a little softness in the high-end computing market. I’m just trying to figure out-- Do you think that’s any sign of end demand, or are some of your customers just building inventory earlier in the quarter?

If there’s any market segment, Matt, that we have more price pressure in, it seems to be that segment. We had some price pressure there. Maybe-- I hate to say we might have lost a little bit of market share there. If we did, that’s a possible segment. So, we weren’t, I guess, focused on that segment because there’s a little more volume type work with a little more price pressure in that segment. I wouldn’t be able to comment, I guess, whether that’s inventory build up or not at the customers. I just am not in a position right now to make an evaluation there.

So, your visibility into end demand might be a little cloudy because of some market share issues, then?

Yes, with that particular segment.

Okay. Very good. Thanks a lot.

Matt, I will add that as we move here into the third quarter, some of the inventory levels have been seen drawn down by some of our OEMs and contract manufacturers. There’s another positive sign with regards to the state of the industry.

And, at this time, it appears we have no further question. I’d like to hand the conference back over to Mr. Alder for closing comments. Please go ahead, sir.

Okay. We certainly appreciate everybody’s attendance today. We value your interest in TTM and appreciate the questions. If you have follow-up questions beyond what we discussed here, feel free to give myself or Steve a call. Thank you very much, and we’ll see you next quarter.

That does conclude our conference. Again, thank you all for your participation. We hope you enjoy the rest of your day.