TTM Technologies Inc (TTMI) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the TTM Technologies first quarter earnings release conference call.

As a reminder, today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to the Chief Executive Officer, Mr.

Kent Alder.

Please go ahead, sir.

Good morning, and thanks for joining us for our first quarter 2007 conference call.

I am here in Stafford, Connecticut with Steven Richards, our CFO.

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 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, the integration of the recently acquired Printed Circuit Group and other risks described in TTM's most recent 10-K.

The Company assumes no obligation to update the information provided in this conference call.

Also you will note in our press release issued today that we provide GAAP and non-GAAP financial information, specifically with reference to EBITDA.

A reconciliation between the GAAP and the non-GAAP information is provided in the press release.

With that, I'd like to turn to the results.

Our results for the first quarter of 2007 include a full quarter of operations of the Tyco Printed Circuit Group which we acquired from Tyco on October 27, 2006 compared with two months in the fourth quarter of 2006.

By all measures the Company had another solid quarter of financial results, and we largely completed the integration of the Printed Circuit Group.

For the first quarter we posted revenues of $176.9 million and earnings per diluted share of $0.20.

In fact, the PCG acquisition was accretive to earnings in the first quarter.

Revenues increased 143% year-over-year and 23% sequentially.

As we mentioned in our earnings release, the Aerospace defense sector contributed strong demand, which helped offset softness in high-end computing.

Clearly our results point to the success of our strategy behind the PCG acquisition and the customer and in market diversification it provides.

This differentiates us from our competitors.

With the exception of high-end computing and to a lesser extent networking, we saw continued strength in the Aerospace defense sector and relatively solid conditions in our other end markets.

As many of you are aware, we experienced a temporary slowdown in orders from a key networking customer as inventory levels are adjusted in the supply chain.

As part of their plan to operate with leaner inventory levels, they temporarily reduced orders in March which reduced our revenues by approximately $1.5 million in the first quarter.

As a result of this slowdown on March 5th we furloughed 250 employees at our Chippewa Falls facility.

We currently have 200 employees on furlough.

We expect to continue our furlough at that level through May and gradually reduce the number beginning in June until the furlough ends in July.

We will continue to rotate our workforce to alleviate any undue financial hardship to our valued employees.

Once this customer's inventories are adjusted we expect orders to resume at healthy levels.

As we discussed during our last quarter conference call we announced plans to close the Dallas, Oregon facility, which was part of the Tyco PCG business.

The facility ceased production as planned on April 6.

It should be noted that first quarter revenue included sales from the Dallas facility which totaled over $10 million.

The boards manufactured at our Dallas facility generally carried a lower margin.

With our production in the first quarter we ensured customers that they will have enough printed circuit boards to fulfill orders for their products as they qualify one of our other facilities.

We expect to recapture as much as one-half of this business.

Some demand will start in the second quarter but the more significant demand will commence in the third quarter.

Quickturn as a percentage of PCB sales increased sequentially from 13% in the fourth quarter of 2006 to 15% in the first quarter of 2007.

The percentage declined from approximately 21% in the year ago period due to the acquisition of the Printed Circuit Board group which limited Quickturn capacity.

In terms of our technological and operational capabilities products with 12 layers or more accounted for approximately 53% of revenues compared to 59% in the fourth quarter of 2006.

Products with 20 layers or more decreased to approximately 24% of revenues compared with 32% in the fourth quarter of 2006, and the average layer count decreased to approximately 13.1 in the first quarter of 2007 compared with 14.6 in the fourth quarter of 2006, and 15.4 in the year ago period.

Turning to leadtimes, first quarter leadtimes were largely stable with the fourth quarter and generally ranged from three to six weeks at our Printed Circuit Board facilities and four to eight weeks at our assembly facilities.

Capacity utilization in the quarter remained in the mid '50s for assembly plants and ranged from 60% to 85% in our Printed Circuit Board facilities with an overall utilization rate in the upper 70s for our Printed Circuit Board operations.

During the first quarter of 2007 TTM added 26 new customers.

In the first quarter of 2007 we continued to reduce customer concentration.

Sales to our five largest OEMs constituted approximately 24% of revenues in the first quarter of 2007, compared with 28% in the fourth quarter of 2006.

Concentration was about half what it was in the year ago period when the top five customers represented 45% of sales.

Our top five customers in alphabetical order are Cisco, Honeywell, IBM, Juniper and Raytheon.

Before I turn the call over to Steve, let me make a few comments regarding the progress we have made with the integration of PCG.

The integration is basically complete.

The integration went extremely well, and we completed most projects ahead of schedule.

In addition to the consolidation of our sales force and the transformation to a common human resources information system, we've implemented a tool to consolidate financial reporting, standardize benefits across all divisions and introduced a new, more efficient organization structure.

We are now at the point of refining all the systems we have put in place.

The acquisition was accretive to earnings in the first quarter of 2007, and we expect it to be accretive in the second quarter, as well.

And as Steve will discuss, we've paid down debt ahead of the required schedule.

Now I will hand the discussion over to Steve.

Thanks, Kent.

I will run through the highlights of our first quarter performance.

As a reminder as Kent noted, first quarter 2007 results include three months of the operations for the Printed Circuit Group compared to two months in the fourth quarter of 2006.

Net sales for the first quarter 2007 increased 23% sequentially and 143% year-over-year.

On an apples-to-apples basis, assuming a three-month contribution from the Printed Circuit Group in both periods, the average price per panel declined almost 5% compared to the fourth quarter of 2006, offsetting that was a 7% sequential increase in panel production.

Gross margin in the first quarter of 2007 was 19.6% compared to 19.1% in the fourth quarter 2006 and 27.8% in the first quarter of 2006.

Raw materials pricing was stable during the first quarter, and we expect that to remain the case in the second quarter.

Selling and marketing expense for the first quarter of 2007 was $7.6 million or 4.3% of sales which compares with $6.3 million or 4.4% of sales for the fourth quarter of 2006.

First quarter general and administrative expense including amortization of intangibles was $9.4 million or 5.3% of sales.

That compared with $9.5 million or 6.6% of sales in the fourth quarter of 2006.

During the first quarter of 2007 we reported stock-based compensation expense of $660,000.

64% of this expense was recorded in G&A, 28% in cost of goods sold and 8% in selling and marketing.

Interest expense for the first quarter was $5.1 million which included $1.5 million of debt amortization costs.

Net income for the first quarter was $8.5 million or $0.20 per diluted share.

As we noted in our release, financial results for the first quarter may be subject to change pending the resolution of certain accounting matters relating to the acquisition of PCG.

Changes are likely to affect the fair value of some of the net assets acquired.

We do not expect any material changes due to the income statement accounts.

As for our balance sheet, as you will recall the $226 million purchase price for the PCG acquisition was financed with a $200 million, six-year term loan, with the remaining $26 million coming from cash on our balance sheet.

Already ahead of the required schedule we've paid down $50 million or 25% of the debt in the first quarter of 2007.

Net capital expenditures were $3.6 million in the first quarter, and depreciation was $5.9 million.

Looking ahead to the second quarter of 2007 we project revenues in the range of $158 million to $167 million and earnings per diluted share of $0.13 to $0.19.

As Kent mentioned the closure of the Dallas operation will eliminate about $10 million from second quarter revenues.

However, because the Dallas worth carried a comparatively low margin we don't expect this loss of revenue to hurt our gross margins.

Gross margin percentage for the second quarter is expected to be in a range of 18% to 20%.

We expect the selling and marketing expense will be approximately 4.5% of revenue and that G&A expense, including amortization of intangibles, will be approximately 6% of revenue.

In April we paid down an additional $25 million in debt, which resulted in interest expense of about $2.7 million compared with $3.5 million in the first quarter.

As you can see, we got off to a strong start in 2007 and expect to continue to benefit from the greater size, expanded customer base, diversification and cross-selling opportunities that we gain with the integration of PCG.

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

(OPERATOR INSTRUCTIONS) Matt Sheerin, Thomas Weisel Partners.

Could you start off, Kent, and just tell us what the book-to-bill was during the quarter and what it is now?

Sure, Matt.

Thanks for the question.

Our book-to-bill (inaudible) for TTM was 1.09.

We had a nice jump in January, a nice jump in February.

March was also up at a slower pace because of the inventory adjustments (technical difficulty) strong bookings in the (technical difficulty) assembly business.

Our assembly breakdown was 1.1 million book-to-bill and the Printed Circuit Board group was 1.08.

And was it stronger on the mill aerospace side?

Yes, it was stronger in the military aerospace and in assembly portions.

Okay, and you talked about 19 to 20% gross margin.

When the Cisco business comes back and you get the furloughed workers back in the third quarter, are you sticking to your 20% to 25% gross margin target?

Yes, I think when that work comes back and returns to more normalized conditions the gross margin (technical difficulty) above 19% given the other conditions remain the same.

And Kent, what is your sense of the cycle here?

It looks like your book-to-bill is improving.

You still have some weakness on the computing and networking side but what is your general sense?

Are we at the bottom or coming off the bottom here?

Matt, I would be very reluctant to call a bottom, but certainly the market conditions we see are not horrible.

They are not that rambunctious by any means, we think they are probably a little soft, a little flat.

And the exciting part for TTM is we are growing through kind of this soft market.

I think that reflect on our strategy, our facilities are all running well.

The sales force is very active and energized with a lot of cross-selling that we can execute on.

So we are in an excellent position to capture market share regardless of what the marketplace gives us.

But I guess, Matt, back to the marketplace itself we've kind of been in a flattish, slightly down stage here for quite some period of time.

So if history repeats itself we are due to having some uptick.

Thanks a lot.

Brian White, Jeffreys.

Could you talk a little bit about the June quarter outlook and what are the drivers in sales coming below expectations for the June quarter?

Yes, let me just on the June quarter.

there is two major events that are in place in the June quarter on the top line.

That is with the closure of the Dallas facility we will be down about $10 million there for the June quarter.

Some of that will start to come back in the second quarter.

Mostly that will be a third quarter impact in the positive sense of the word.

We anticipate with the Dallas closure that we would maintain 15 to 20 million.

That was our original estimate.

Now that we've been to that we are closer to the $20 million range.

That is probably somewhere in the 18 to 20 million of retained business.

So a lot of that will be coming back (technical difficulty) third quarter.

The second event that impacts the June quarter is another temporary type of situation.

That is inventory adjustments with one of our major customers that will continue through this quarter on a decreasing basis or increasing sales basis, and that should be through that beginning in the third quarter somewhere.

Kent, just on the Dallas facility you announced in December that this is going to be closing, and you discussed on your last call this is going to be closing in early April.

So analysts put that in their numbers.

So what beyond that is it really just the Cisco business and soft end markets, because people knew about this on your last call?

I think probably the timing of the impact with the Dallas closure (technical difficulty) a lot of the circuit boards for our customers so that they would have time to qualify our other facilities.

And so probably the Dallas number that we realized in the first quarter was higher than it normally would have been, and it will be lower in the second quarter simply because of the timing of the issues.

And then the inventory adjustments didn't' (technical difficulty) I think at the time of our last call obviously did not know that was going to take place.

That is another big impact.

And how about on EPS, because Dallas as I remember was breakeven facility, and yet you are guiding to 13 to 19.

I think the Street is at 19.

So what drives the EPS there?

Is that all the networking?

It can't be Dallas.

You're right, Brian.

The Dallas plant, although top line will be impacted by the closure of that plant, the (technical difficulty) folks at that plant performed quite well in the first quarter that work is just, as we mentioned (technical difficulty) less of a contribution to gross margins.

That is not going to be really the driver.

The big driver in the (technical difficulty) margins quarter-over-quarter is going to be the softness with that key network customer because obviously we are at very large fixed costs (technical difficulty) business but a lot of (technical difficulty) that are deployed in this business.

But as shipments and units production fall they have hit the margin and that is what is happening in Q2.

That is a protracted impact from that (technical difficulty)

Okay.

Thank you.

Kevin Kessel, Bear Stearns.

For high-end computing can you kind of walk us through where that is today, the weakness?

In the high-end computing that continues to be soft, and we are anticipating not much change in that in the market.

We think the softness is going to continue into the third quarter.

So out of the market segments the network and communication is doing well.

The aero defense is doing very well with a lot of strength in that end market segment.

And then we are into the high-end computing storage, which is down and the medical and industrial [instrumentation] that just continues to grind along and we continue to capture market share (technical difficulty).

So we are pretty excited about where the Company is and our ability to capture market share and win business.

It's kind of an exciting time for us with the combination of the two companies really working well; with the plants operating in very nice fashion, providing our customers with more options, better options and so we are excited about the position of the Company.

If the marketplace would give us a little help I think you will see some nice results when that happens.

And even in the second quarter here some of the issues that we are dealing with are (technical difficulty) in nature when you look at the inventory adjustment that comes through as we predict.

And that will be behind us in the third quarter and will be much better.

Do you expect that inventory adjustment or realignment to continue at the same levels throughout the whole quarter?

You saw one month impact in Q1.

Are you going to expect to see a three-month impact then in --?

The answer is no, we expect, originally we were at 250 employees.

Now we are at 200, that is a reflection of some uptick in the business and we expect that business to gradually increase throughout the quarter.

So that when you get to the end of June into the July timeframe we should be completely through that inventory adjustment and have all our employees back and producing at normalized levels.

Okay, and the furlough you said would be scheduled to end in beginning of July or end of July?

In the July time.

Okay, great.

Thank you very much.

(OPERATOR INSTRUCTIONS) Shawn Harrison, Longbow Research.

First question just has to deal with seasonality kind of given the new revenues.

What is the typical seasonal patterns of demand for the military aerospace sector?

I think they are much -- good question, Shawn.

They are much different than the commercial side, and the seasonality doesn't seem to have a big impact there.

And we are seeing some nice strength in those sectors, as I mentioned.

As this industry matures we tend to see less and less seasonality particularly in the segments we serve, the high-technology segment, the Quickturn segment and now the military aerospace segment.

(technical difficulty) our customer base and market is having a nice reflection on any seasonality that maybe some of our competitors face.

Okay, second question just has to do with the potential for share gains in the market.

There was a large competitor out there that shuttered operations; just if you could comment on the potential there in terms of just to pick up share; and where else you are seeing share potential in the marketplace.

With that closure we did have some nice gains and picked up some market share where we competed with them inside of existing customers, picked up a couple new customers.

So we did benefit from that shutdown.

This quarter we (technical difficulty) 26 new customers, that is a little lighter than normal.

I think that is just a timing thing and so forth, but the market share gains that we are experiencing are mainly within existing customers.

And we are getting added to new programs, capturing new work, cross-selling the new capability within the facilities (inaudible) material offerings, Quickturn capabilities going throughout the Company.

So I think the market share gains we are experiencing are real, and they are coming through as you can see on our income statement.

You will also see a very active sales force that has a lot of activity taking place right now.

So the strategy of combining these two companies is working, and it is working very well.

So we are excited about where we are at given market conditions and produce these kind of numbers with market conditions as they are and some of the temporary challenges we had in the second quarter.

We are excited, optimistic about the longer range future.

My third question is just a clarification.

The interest expense number for the quarter, that was for Q2, 2.7 million?

Yes, that is the actual interest on the debt and we will also have because we are paying down the debt fairly aggressively, we will also have some about $900,000 to $1 million of amortization of debt issuance costs.

(technical difficulty) interest expense, about $1 million of amortization [inflation] costs.

What was the total amortization amount, if you could remind me?

It was 1.5 for the first quarter and I think overall it was about $9 million over the life of the loan.

Okay.

The follow-up I had to that is it looks like free cash flow this quarter was a little north of $30 million.

I guess maybe just given if you could provide kind of an outlook in terms of your free cash flow forecast for the full-year; and then just given that forecast how much additional debt do you think you could pay down?

Assuming we've paid down now through Monday of this week, $75 million of our debt, we only have 125 million left, which is in the space of six months where I thought I would be at the end of the year.

So we are pretty excited about our ability to both generate cash, and use it to service the debt.

So our cash flow numbers are still coming together but it looks to be about $28 million in cash from operations.

So about 24 and change in terms of net free cash flow when you net out the capital expenditure.

I think we had some great gains in (technical difficulty) capital this quarter.

That may not be as easy to replicate going forward but I still think that that 28 million-ish net free cash number is going to be a good number going forward on a quarterly basis.

And I think that will allow us to service the debt down to probably about [$25] million by year-end, maybe even lower.

Just one last question then, just on the pricing environment.

You mentioned it was down 5% sequentially in the quarter.

Was that mix or was that true price reductions out there in the marketplace?

Was it more Quickturn related or standard leadtime?

That's a good question.

It's actually the Quickturn environment has been really robust first quarter and seeing some improvement in Quickturn pricing over the softness we had in that sector in Q3 and Q4.

And the pricing difference we saw of almost 5% quarter to quarter, keep in mind that is an apples-to-apples comparison as if we had the PCB business in October in our fourth quarter results.

Most of that was really mix shift.

As we saw some of the softness in our higher layer count visibility in Chippewa Falls due to the high-end computing and the issue with that one networking customer that contributed a little bit less to our overall revenue, which kind of led to pricing being down just more as a basis of mix than anything else.

And the outlook for pricing looks sounds like it's pretty stable heading into the second quarter.

Yes, stable is the way to characterize it.

I think we aren't seeing a lot of change in price in Q2 versus Q1.

(inaudible) for the softness (technical difficulty) change in pricing really wasn't to market as much as a mix shift so I think the outlook is really stable for pricing.

Thanks a lot.

Tom Dinges, JPMorgan.

Kent and Steve, can you guys walk through where you stand in some of the cost savings initiatives with the merger in terms of materials purchasing and those kind of areas?

What kind of progress do you think you will make this quarter, and where would you kind of expect to be there by the end of the year?

And I have a quick follow-up for you.

That's a good question, Tom.

We have utilized a lot more synergies than we originally anticipated throughout our whole organization so our costs are down throughout.

The integration went quickly, smoothly and less costly than we anticipated.

Now with the size of the company that we have we are using our purchasing power to drive our costs down and come up with a win relationship with our suppliers.

So I am reluctant to quantify anything here, but it is clear that we are continuing to drive our costs down, particularly materials, whatever price increase would be out there.

We will more than offset those with our ability to provide volume to our suppliers and win with lower costs.

So we are pretty excited about the integration, how its (technical difficulty) and execution of this taking place and driving (technical difficulty) cost of our business.

Quickly back to the question about free cash flow and this quarter you guys said you had some improvements on the working capital side you might not get in 2Q.

But one of the areas obviously was inventory and you are expecting to see some work down on one of your large customers part in terms of their overall channel inventories.

But what are you guys expecting in this quarter in terms of just on that line item inventory that you guys can work down to hopefully offset maybe some other areas in the working capital lines that won't get as much torque this quarter?

I can talk about that.

As you'll see when you got to do your working capital day calculations our cash cycle did improve this quarter but mostly that was through better AR and AP management.

Inventory as you saw from our balance sheet, remained flat at about $67 million of overall combined inventory.

I will tell you that the finished goods inventory particularly with the key networking customer is up this quarter and so I think we will probably see some sales of that higher balance at the end of Q3 flowing out during Q4 kind of hand-in-hand with some of these (technical difficulty) quarter will probably (technical difficulty) with some more from the inventories.

(technical difficulty) the inventory will be dropping is my estimate by the end of June and that should help our working capital as well.

But I still think we have some room to do some further enhancement (technical difficulty) our side.

Thank you.

(OPERATOR INSTRUCTIONS) Brian White, Jefferies.

What was the book-to-bill for April?

We haven't computed that yet.

I just go by kind of the [gut feel].

I think the bookings continued on a fairly healthy pace.

I don't have a number for you on April.

Keep in mind Monday was the last day of our fiscal month of April, so it is --.

Okay.

Usually you guys have some type of number, though.

What were the incremental sales from Tyco in the March quarter or just total sales from Tyco?

Brian, we are not going to look at our company that way anymore.

Obviously we did in our (technical difficulty) contributions sales from the PCB plants but we are one company now with 11 facilities for the rest of the year.

So don't look at the contribution from Tyco or from our legacy plants.

Okay, how about customers over 10%?

Do we have names of customers over 10%?

We don't have any customer over 10%.

Just on your comments on pricing it sounds like pricing went down because of mix in the March quarter.

(inaudible) You expect stable type pricing in the June quarter.

There has been some price hikes in Asia in laminates, I am just again after the big hike last year, I am just wondering if you are getting any type of hint that more price hikes are on the rise just due to the rise in copper prices.

Certainly I know that the concern about commodities prices is obviously one of our concerns, it's a very big concern of you guys in the investment community.

I think the news there, as I said in the call and in our comments were that we don't expect to see any impact from raw material price increases during the second quarter.

It's hard to say yet how the last half how it is going to pan out but I will tell you that our larger position as the dominant PCB manufacturer in North America, with multiple vendors is giving us some ability to help offset any kind of price increases that come out of.

Okay, good.

Thank you.

Matt Sheerin, Thomas Weisel Partners.

Just a kind of a bigger picture question regarding the migration of PCB production from North America to Asia.

You have several large customers on a computing and communications area that obviously are looking for the higher layer accounts, sophisticated manufacturing alternatives in lower-cost areas.

As you see bookings over the next couple of months or so, do you see any signs that customers may be moving production away from you to some alternative sourcing in Asia?

And what is your sense of how that plays out?

You know, Matt, when we come to Asia it is almost like we don't even think of it as Asia low-cost anymore.

We've been competing with (technical difficulty) on a global basis now for a number of years.

So we don't -- we look at strengths and weaknesses of each of our competitors.

And obviously in Asia they have a lower cost structure for labor.

And so that means you have to look at kind of work they can service versus what kind of work we can serve.

So when we really execute our strategy of time and technology and the military aerospace we outperform our competitors.

So we do have some competition that we compete with on an ongoing basis.

(technical difficulty) marketplace is a little soft, then there is a general tendency to have competitors try to fill their shops with work that is not ideal for them.

And so you have this overlap.

And so we have some of that coming in right now.

But as far as losing more work to a low-cost facility, we will be subject to that competition all the time, but I think with the technologies that we have and the position of the company we can compete very nicely with Asian facilities.

So you don't see any sort of near-term risk to any significant share losses?

I woudn't, I mean there is always risk, but I don't believe we will have any significant losses, no.

Okay, great.

Thanks.

(OPERATOR INSTRUCTIONS) And it appears there are no further questions.

For closing remarks I would like to turn the call over to Mr.

Kent Alder.

Please go ahead, sir.

Thanks for joining us today on this conference call.

Just to the summary type remarks we are extremely pleased with the integration and the acquisition of the Printed Circuit Group.

We've got excellent capabilities now that are beginning to come forth as we cross-sell our capability and capture (technical difficulty) share in the business.

I think in the second quarter here there is a couple of short term issues, the inventory adjustment and so forth that we're dealing with that probably mask the true performance of the Company.

When we get through the second quarter we are pretty excited about the future.

We will continue to take advantage of the position being the largest in North America with very strategic ability, complimentary, very active sales force.

We are excited about the future winning business (technical difficulty) has.

So thank you very much everyone, and we will talk to you next quarter.

That does conclude today's conference call.

We thank you for your participation.

You may now disconnect.