TTM Technologies Inc (TTMI) 2005 Q4 法說會逐字稿

Good day and welcome to the TTM Technologies fourth quarter earnings release conference call. Today's call is being recorded. At this time I'd like to turn the conference over to the Chief Executive Officer, Mr. Kent Alder. Please go ahead, Sir.

Thank you. Good afternoon and thank you for joining us for our fourth quarter 2005 conference call. With me today in Santa Ana is Steve Richards, TTM's 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 cyclicalities of 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, as you read in our press release we reported fourth quarter net sales of 63.1 million and earnings per diluted share of $0.46, which include $0.31 due to a reduction of TTM's deferred income tax asset valuation. Overall, it was another solid performance at the high-end of our expectations and a reflection of favorable pricing and demand trends.

In addition, we did not experience our normal seasonal downturn at year end. Instead, demand remained healthy throughout the quarter. Net sales increased both sequentially and year-over-year. We increased 4% from the third quarter of 2005 and 7% year-over-year. In terms of earnings per diluted share the $0.15, excluding the $0.31 tax benefit reported in the fourth quarter of 2005, compared with $0.10 for the third quarter of 2005 at $0.14 excluding the $0.02 tax benefit in the year-ago period. I will let Steve elaborate on the factors that affected EPS in a few minutes.

As I mentioned, we enjoyed favorable market conditions in the fourth quarter. Volume as measured by panel shipped increased 2% sequentially from the third quarter of 2005. The average price per panel also increased 2% sequentially. And we continued to add new customers. We added 29 new customers in the fourth quarter.

For the full year, net sales were essentially flat at about 240 million. Earnings per diluted share were $0.43, excluding $0.31 of full year tax benefit, compared to $0.65 excluding a $0.03 full year tax benefit for 2004. Year-over-year comparisons were impacted by pricing pressure, startup costs of our Chippewa Falls expansion and higher Sarbanes-Oxley cost at the beginning of 2005.

But we ended the year on a strong note. And as Steve will tell you we expect continued strengthening in the first quarter of 2006.

For the fourth quarter of 2005, our technological and operational capabilities remained strong. Products with 12 layers or more accounted for 66% of revenues, down slightly from 69% in the third quarter. Products with 20 layers or more accounted for 37% of revenues, compared with 39% in the third quarter. And the average layer count was 15.5, compared with 15.8 in the third quarter of 2005.

Quick turn increased to 22% of net sales for the fourth quarter of 2005 compared to 21% in both the third quarter of 2005 and the year-ago period. Fourth quarter leadtimes increased to 7 to 9 weeks in Chippewa Falls, 5 to 7 weeks in Redmond and remained constant at 3 weeks in our Santa Ana facility. And overall capacity utilization for the Company rose to just over 80% for the fourth quarter.

Customer concentration decreased again this quarter. Sales to our 5 largest OEMs constituted 49% of revenues in the fourth quarter of 2005, down from 53% in the third quarter and 57% in the second quarter. Our top 5 customers remained the same this quarter. They were in alphabetical order Cisco, HP, IBM, ITT and Juniper.

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

Thanks. As Kent said there were some additional factors affecting the EPS in the fourth quarter and in prior period. In both the fourth quarters of 2004 and 2005, we recorded a reduction in income tax expense arising from reduction in the valuation allowance on our deferred income tax assets. Our strong consistent earnings performance which makes it more likely that we will utilize our deferred tax asset led us to reduce the valuation allowance.

This reduction added $0.02 to diluted earnings per share in the fourth quarter of 2004 and $0.31 in the fourth quarter of 2005. In addition, our effective tax rate for the year was approximately 36% which was lower than we had estimated, primarily due to the mix of sales among our various tax jurisdictions. As for our operating performance in the fourth quarter, as Kent mentioned, sales, gross margins and earnings per share were all at the high-end of our expectations.

The improvement in market demand was broad-based, rather than related to a particular customer or end market. Also, a firm backlog enabled us to operate more efficiently during the quarter.

Gross margin of 23.8% in the fourth quarter rose from 23.2% in the third quarter but declined from 24.6% in the year-ago period. Sales and marketing expense was down somewhat to 4.8% of net sales for the fourth quarter. This compares with 5% in the third quarter and 5.2% in the year-ago period.

G&A expense represented 4.5% of net sales in the fourth quarter, down from 5.1% in the fourth quarter of 2004 and down considerably from the third quarter when G&A expense represented 8% of net sales. As you recall our third quarter expense included a $2 million accrual, related to an agreement in principle to resolve a customer dispute concerning goods shipped in 2002 and 2003. We have since signed a definitive agreement.

Our solid financial performance enabled us to strengthen our balance sheet even further during the fourth quarter. We generated strong cash flow from operations of $12.6 million. As a result, we were able to fund net capital expenditures of $1.6 million while expanding our cash and short-term investment position by $11.2 million to a total of 82.4 million. Depreciation was $2.6 million in the fourth quarter.

As of the first quarter of 2006, we expect favorable market conditions to continue with increased volume and flat to slightly higher pricing. In terms of guidance, as stated in the earnings release we expect revenues in the $67 million to $71 million range. And GAAP earnings per diluted share of $0.16 to $0.20 since which includes the effect of stock-based compensation cost, which will begin in the first quarter of 2006.

In terms of gross margins we expect them to be in the range of 24 to 27% and as for operating expenses, we expect sales and marketing to the approximately 5% of revenues or $3.3 to $3.5 million and we expect G&A expense to be about #3.6 to $3.8 million, including amortization of intangibles. That is about 5.4% of net sales. We expect to record approximately $300,000 of stock-based compensation cost in the first quarter as we adopt FAS 123R.

About two-thirds of that amount will be included in G&A expense and the remainder will be in cost of goods sold. The Company is using the Black-Scholes option pricing model.

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

(OPERATOR INSTRUCTIONS) Matt Sheerin. Thomas Weisel.

Kent, a couple of questions. One, if you could just speak to the strength in demand you are seeing perhaps by product area and then quick turn versus volume?

Okay. Sure, Matt, thanks. Just as some general numbers our book to bill in the December quarter was 1.19, so we continue to see nice strength throughout the quarter in our booking rate. I don't have the number for January but it's definitely above 1. We are seeing strength across all market segments, if you will, and maybe I could just walk through some of these market segments and give you kind of our latest update on where we think they are going. With the networking market, that remained fairly constant. Quarter over quarter, we are seen some strength in the enterprise IT, mainly.

We are also seeing some strength with the service providers but it's not quite as strong as the enterprise IT. The high-end computing market segment, that decreased last quarter. What we're seeing in that segment is product seemed to be a little more mature and there's a little more standardization so there's more price competition in that quarter. So when we look out, I would think that that segment will probably level out in the second and third quarter. And then when we look out beyond that towards the end of the year there are some new platforms that are still in development for our customers. So we think there will be more opportunities that we will take advantage of later in the year.

Industrial and medical. That was up. Maybe it's up due to military aerospace that we don't break out as a market segment. But it's included in that industrial and medical and we've got some strength there. So I think that will be up the next quarter, too, and then probably level off. Computer peripherals is flat. No major change there. Handheld devices were down a little bit in that segment, mainly due to the kind of a strong design cycle we had in the third quarter. The fourth quarter then is down and it's probably the fourth quarter percent that will be more normal than the third quarter.

Quickturn percentage at 22%. We are seeing some nice demand on the quickturn segment. There's also some larger volume type demands that we are handling through our facilities also. So I think that is a reflection of the overall industry conditions being pretty strong. So we are pleased with the operation of all of our facilities. The demand and particularly the ratio of the quickturn and where we are headed with our end market segments.

And that quickturn. Are you expecting that to remain around 22% of revenue this quarter?

When we look forward I think it's pretty flat maybe up just as a [scosh] but no great strides in the quickturn percentage.

Lastly your commentary about the strong book to bill on 1.19. It's obviously very strong. And that could lead some people to be concerned about possible inventory builds. What do you think about that? Are you seeing that at all out there? And just on the pricing, I think you said your overall capacity utilization is at 80%. Is that enough to give you leverage to really get those price increases to stick?

The price increases are to some degree mainly a function of supply and demand. So we are pretty positive about where we are at and we're not in a position to I guess or we don't philosophically go in and take advantage of pricing opportunities when we could. We try to make sure we're the go-to guy and treat our customers fairly from that perspective.

I think our backlog does reflect the strong book to bill ratios we've got; but as we look at that backlog it has due dates that are spread out so that we can make sure that we service our customers efficiently and not run late on deliveries and so forth. As far as us maintaining a backlog and being able to service our customers, we are investing back into the Company in areas of technology that are also turning out to be a little bit of a bottleneck for us. By that, I mean a lot of the sequential lamination, the Blind and Buried Vias continues to put demands on our facilities and so that's where we are targeting our CapEx as we move forward into those areas that improve our capabilities with Blind and Buried Vias technology as well as eliminate the capacity constraints there.

So you don't think you're not seeing any signs of an inventory build by customers?

Our inventory flowed through very nicely and we have several hub or inventory hub agreements with our larger customers and I think we got six of them throughout the world now. And the inventory from our perspective is not building in any of the hubs. It's flowing right through and being utilized by our customers.

Kevin Kessel with Bear Stearns.

Kent, in terms of a follow up on the question that was just asked on the inventory, this is I think the fifth straight quarter in a row that you have actually seen your inventory increase on a sequential basis. It is now around 5% of sales. So when you say you still seek a good flow through it seems like the numbers are showing a little bit of either change here in the trend. Are you guys are being required to hub much more or potentially there is some sort of a build going on?

Actually don't get too caught up in that, Kevin, because we aren't seeing our inventory numbers, in the fact that we have raw materials with and finished goods amatory. You know because we design our products, we build our products based on the customers' demands and designs. We don't actually build a lot of finished goods and house a lot of that.

Most of our inventory build this quarter was raw materials and that is directly related to the increase in backlog we've seen. So I understand your concern and we do have ongoing requests from our customers to have finished goods inventory hubs at the customer location but this quarter's growth in inventory was largely due to raw material increases due to the increased backlog.

I understand (MULTIPLE SPEAKERS)

And also the whip increase.

And the whip increase to support higher sales levels next quarter?

I'll make a statement here. I think that when you just look at pure finished goods, we are actually probably down.

Meaning you [hubbed] less this quarter (MULTIPLE SPEAKERS)

Yes. I mean, I know that's not going up.

That's very helpful and I appreciate that. Then just on the back of that, last night your largest customer was talking about doing -- very specifically talking giving some detail around doing some more lean manufacturing initiatives. Essentially pushing more back on the supply chain in terms of their inventory. Is that something that you anticipate because they describe it as a timeline over the next 6 to 8 quarters. Do you anticipate that that will have an impact on your hubbing activities going forward? And you will be carrying more inventory on behalf of them?

It's early to say and I'm not in a position to comment on that; but we do have these hubbing agreements that we have I guess kind of [men max] that are in place and so there's no indication that they will change for us. I think the fact that they are looking at lean manufacturing pushing that back down, that is a positive sign for my perspective that business is good.

Right but would you be compensated do you think for the time you were tying your working capital up in that inventory?

No.

To the extent -- you don't think so?

It's difficult to say. It's hard to -- that all becomes -- it's kind of a negotiation that you do with customers and so forth.

Then the last question is, you guys are obviously guiding for sequentially increasing sales and margins. On a sales line do you -- is this just a better overall end market demand environment or do you actually believe that part of the sequential growth here going to March is on the back of market share gains? How would you break that up?

Well, certainly, the industry is very strong. We always believe that with our strategy and our business model that we have capabilities that competitors don't have. And given the fact that we are able to operate in a very challenging segment of the marketplace -- and by that I mean technology with a time element to it -- we believe that we continue to capture some market share. Now having said that, though, the industry as a whole is doing quite well. And we've had in our industry a fairly long down cycle.

And so it is possible that there is some pent-up demand within the [Prentiss] circuitboard industry. All the signals that we see out there from customers are positive and it's pretty much across the board that demand is strong.

I also believe that a lot of our competitors and our suppliers are seeing the same thing. So it's pretty strong across the board industry uptick.

Which likely led to your pricing being up, I think you said 2% per panel, you were looking for kind of a flat to down. And that was as a result of what you'd just described, I imagined?

Yes that's correct.

And then did you guys -- I didn't hear you mention what you expect for pricing going into March.

Yes. We said flat to merely slightly up to the first quarter but it's going to be the growth in our revenue is more than demand and production-driven than it is price-driven.

Sean Harrison with Longbow Research.

I guess my first question just has to do with the revenue guidance. Maybe how much of that is volume-related versus an improvement in mix that is also kind of helping the top line line growth?

It's really both. I mean a lot of it is just as Kent said before in the market demand, there is a little bit of the shift that is taking place kind of maybe towards more productivity in Quickturn activity. We will say how that panned out for the quarter. But this is a tricky thing in first quarter and normally for us is that typically there's a seasonality the first quarter. So Quickturn isn't normally as strong as it has been of late.

So we're not sure yet if the Quickturn demand is going to stay up the entire quarter. So I would say that, overall, there's more of our revenue growth is demand-driven than, say, mix shift. We are seeing strength in Quickturn too and that may persist the entire quarter.

Just to add to that, I think when you get to the end of the first quarter and compare our production throughput total numbers for the first quarter versus the last quarter, you'll find that a lot of our revenue uptick is based on throughput or increased production rather than increased pricing.

My second question has to do with utilization rates and maybe capital expenditures going forward. If you could maybe review capacity utilization by facility and then your thoughts on where you need to add capacity and I guess how quickly you are looking to do that?

Capacity utilization rates were up in all of our facilities. Up slightly in Chippewa Falls to 85%; Santa Ana is up to 66%; Redmond is at 77%. So that's some pretty nice increases in capacity utilization in our West Coast facilities. With regards to utilization, we are starting to feel the need to improve our capabilities based around the Blind and Buried Vias sequential lab technologies which is the front end of the printed circuit board manufacturing process, which is the nomination process up to plating and then up to the drill process.

So the front end of the process is where we're going to focus our CapEx as we move forward both from -- to improve our capabilities as well as capacity. We finished 2005 with $8 million in CapEx -- just under 8 million. We are forecasting about 12 million CapEx going forward in 2006.

And I am assuming that will probably be more back end weighted just due to timing and getting everything in place?

We have some equipment that is on quarter now in our Santa Ana facility that will come on board in the last part of the first quarter. So it depends on which facility we're looking at but it could be a little more weighted to the second quarter. Maybe the third quarter.

Amit Daryanani with RBC Capital Markets.

Congratulations on the quarter. Just in terms of your ASIC expectations in Q1 I know you said it was going to be flat to up. Is that true for both volume and the end side of the business or is that pricing better than one of those segments right now?

It's strong, kind of cross the board. We are seeing particular strength in some of the quicker turn and prototyping type of projects than the overall larger production work. But still it really is across the board in both the Quickturn and production run.

Then just the Quickturn business. It sounds like it is going to hold in pretty well in Q1 despite what (indiscernible) would indicate. Is the strength been driven more by some of the nontraditional tech segments for aerospace medical versus the Communication IT segment?

I don't think so. I think it's coming from the segments that we anticipate. The military aerospace that we are having a nice uptick in our business is not necessarily Quickturn. I think a lot of that is related to our ability with our Quickturn facility to service customers, penetrate accounts and get an opportunity to look at some of the production work that fits into our other facilities. So as we talk about gaining market share, I believe it's the utilization of our capabilities to penetrate accounts and be able to service accounts and that leads us to gain some market share.

On the cash flow side, one more quarter of positive cash generation. You (indiscernible) a liveweight model what you are thinking as regarding using the cash at this point? I mean, in the past you have talked about potentially doing an acquisition to enhance your presence in Quickturn or in the (indiscernible) aerospace?

Yes. I mean we're pleased with the cash generation that we generate as a company; and we've talked about it in the past that that cash is targeted for acquisitions. We've been asked if that would be used to pad a dividend. The answer is no. Also been asked if that would be used to buy back stock and the answer is no, there. We think the best utilization of that cash is to take advantage of the opportunities that will present themselves.

Finally, just going back to the inventory issue. When you start to look at PC productions over the last few quarters versus the electronic equipment production happening in North America there's a pretty big delta and the PC production is much higher than the electronic equipment production. Typically they do tend to correct after a few quarters of delta and they both move in sync. I'm wondering if the trends that you're seeing is -- and I realize it's going away from your hubs but is it something for the and market? Are you (indiscernible) stagnating at some point in the supply chain?

Yes. I think that's a good question and when you look to those two book to bill drafts for printed circuit boards and electronic equipment eventually they do come together; and they would indicate that printed circuit boards is higher than electronic equipment. That is a little bit counter to everything that we are seeing with strong demand, backlogs are up, pricing is firming. So we are not anticipating a major correction there to bring those two lines together.

I think another important point to consider when you evaluate that is those are pretty high-level global markers. And included in that electronic equipment order is the computer segment, communications, there's search and navigation, there's test and control. And the segments that we participate in could be performing well and doing quite nicely relative to the overall indicator.

Rich Kugele. Needham & Co.

Just to get a little bit deeper on the technology. How do see your own capabilities with Buried and Blind Vias relative to your competition? Are they also needing to invest to prevent this from being a bottleneck in the process?

We focus on our business not necessarily our competitors but if the industry is affecting other competitors like it is us, I am sure there's a demand for that Blind and Buried Vias at the other competitors. Now I think we have been quite proficient at producing Blind and Buried Vias for quite some time and we'll continue to improve our expertise in that area. So I'm sure that the demand is there but particularly for us it is and with the expertise that we have, we see that that part of our business will continue to increase. So that is where we are going to invest.

I might mention, too, that part of -- a lot of the decides that are coming to us have this newer technology. So as we look forward, some of the mature products are being redesigned with this new technology on board. We are preparing ourselves for that leading-edge technology to continue to grow as a percentage of our business.

And relative to pricing, does this does the implementation of these features help keep the layer count from necessarily being a great indicator of pricing trends and where you could see a stable layer count with the complexity increasing?

Yes you are exactly right. The layer count is simply one measurement but if you had to pick one, you would probably pick layer count. But this also is a significant indicator with regards to pricing on a per panel basis. Now it's more costly to build that product and you run risks of having higher rejects because you have to be more precise in your processes and quality controls. But when you look at the delta between the additional cost and the additional price, sales price, you find that it is more profitable.

Then in terms of taking a step back and looking at taking an early cut at the year. If these type of trends continue how do you see the industry growth rate for the year? And what would be a initial slag at the year topline type look at it?

Well that's a good question and it's one we all have and I wish I had a crystal ball. But just the same indicators that we look at and evaluate are some of the ones that you also evaluate. And we look at kind of the cycles, the length of the cycles that our industry has been through and we have some positive signs that this is a nice uptick cycle for us. The fact that we didn't go through the normal seasonality is a very positive factor.

I think you've combined that with some of the capacity consolidation that has taken place over the last 4 to 5 years and that's also a factor in what we are looking at for the balance of the year. Now we don't forecast out as you know beyond the next quarter because we don't have a crystal ball; but relative to what we are seeing at this point in time compared with other quarters, there are some very promising and positive signals.

(OPERATOR INSTRUCTIONS) Jason Gursky with J.P. Morgan.

Just a couple of bookkeeping questions and then maybe a little bit more of a qualitative one. Excuse me if you've answered this one. Can you just give me a sense of what your expectations are on the tax rate for the full year in '06?

Right Jason. That's right, we didn't discuss it yet. We expect the tax rate to be between 36 and 37%. As we said in this script our tax rate is actually a little lower for 2005 than we had been forecasting, mostly due to the geographical shift in our mix of work by various tax jurisdictions. So I think using guidance of 37.5 and it might have been 36. I think 36 to 37 for the year. I believe I'll give you better guidance on it by the end of the first quarter once we see how the mix of work is shaping up. But right now 36 to 37% per tax rate.

And then just dig into this tax rate thing here. Can you give us a dollar amount on the valuation allowance for -- ?

The total valuation allowance reversal was $12.7 million. Of that, $12.4 million was universal on our Federal deferred tax valuation allowance and just $300,000 in our state tax asset (indiscernible). But we still actually do have $2.5 million of valuation allowance against our state assets still because we are still adding credits to those. I don't want to go into a whole lot of detail about these tax assets because it's kind of an accounting nuance that you guys aren't going to be as interested in as I am.

But basically it's like the determination about whether you reverse your deferred tax asset by (indiscernible) is simply a test of is that more likely than not that you are going to benefit from the deferred tax asset that you'll be able to use it all up over the next several years and that determination is made at year-end. We normally assess it at year end which is why we had some reversal in the fourth quarter of '04 as well.

Right and that 12.7 million was split between the two fourth quarters or was that all for the fourth quarter?

That was all this quarter.

All this quarter. 34.7? (MULTIPLE SPEAKERS)

30%. And the lion's share of that was Federal, not state.

Then on the qualitative side just a little bit more detail, perhaps, on the increased sales in the military arrow. I guess you have it under industrial and medical but you had mentioned that the strength came from Mill Arrow. Is that a new customer for you or an existing one that is growing and (MULTIPLE SPEAKERS)

Jason, basically, as you mentioned earlier, as you alluded to, are kind of industrial medical encompasses 4 categories. It's a catch all and it's aerospace, industrial automation, medical devices and testing measurements. And as you saw from the earnings release our percent of sales in the fourth quarter of last year in that group of categories was 12%. This year, it's like 19.5% so big increase there year-over-year and the biggest piece of that was increases in aerospace.

That was basically steady growth in ITT. We do some military two-way radios for them and that has been growing kind of throughout the year. It's up again in Q4 over Q3 but Q3 was already pretty strong with them. So it's the most dramatic increase in the year versus year comparison that it's a steady increase in work for that customer and this had a military two-way radio project.

Right and as far issue can say it's sustainable for the next couple quarters?

Yes, Jason, let me just add to what Steve has said to that. In addition to ITT we have qualified Santa Ana and Redmond with military approval and we continue to, over time on a control basis, increase our percentage of military work at both those facilities. It's important that you do that on a control basis so you can still maintain and service the existing work that you have without interrupting customer deliveries and making sure customers are taken care of, as well as operating efficiently throughout your production operations. So we will continue, I believe, to see a nice increase in our military aerospace work.

At this time, there are no further questions. Now for closing remarks, I'll turn the conference over to Mr. Kent Alder.

I appreciate everybody's interest in TTM and we will see you next quarter and with that, we will go back to work.

Thank you. That does conclude today's conference call.