TTM Technologies Inc (TTMI) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the TTM Technologies financial results conference call for the fourth quarter of fiscal 2007.

My name is Mike and I will be your operator for today.

At this time, all participants are in a listen-only mode, and following the presentation instructions will be given for the question-and-answer session.

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr.

Kent Alder, Chief Executive Officer.

Please go ahead, sir.

Good afternoon and thanks for joining us for our 2007 fourth-quarter and year-end conference call.

I'm here in Santa Ana with TTM's CFO, Steve Richards.

Before we get into any details, 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 in various industries that the Company serves, and other risks described in TTM's most recent SEC filing.

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

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

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

Now, before I turn to the quarter, let me briefly recap the major highlight of the year.

During 2007, we successfully integrated the Tyco Printed Circuit Group into TTM, forming the largest printed circuit board manufacturing company in North America.

With the integration successfully behind us, we are now able to focus our complete attention on further improving our business by capitalizing on the strength of our combined company.

Throughout the year, we made significant improvements by implementing best practices -- procedures between divisions, and we will continue to expand our technological leadership and industry-leading execution capabilities.

We are strategically positioned to fulfill the complex technical requirements of our broad customer base, and we look forward to the future with confidence.

Now let's focus on the results for the quarter.

We delivered a solid fourth-quarter performance fueled by continued strong demand for our high-tech manufacturing services as well as our aerospace/defense customers.

Fourth-quarter revenue, gross margins, operating margin and earnings per share all grew sequentially over the third quarter.

As a reminder, we have two operating segments, and we report separate financial results for each segment, as well as for the consolidated Company.

The Printed Circuit Board Manufacturing segment is comprised of nine operations in North America.

Our strategy has never changed since the inception of TTM and through three acquisitions.

With that consistent strategy, we have focused and will continue to focus on lines of business that are both profitable and sustainable in North America, namely, quick-turn manufacturing, high-technology, aerospace/defense, and high-mix/low-volume.

Our consistent strategy is key to our success.

The Backplane Assembly segment is comprised of two operations, one in Hayward, California, and the other in Shanghai, China.

Let's look first at the Printed Circuit Board Manufacturing segment, which continued its strong contribution to the Company.

Fourth-quarter net sales, excluding intercompany sales, of $147.5 million increased 5% compared with the $140.5 million sales in the third quarter.

Fourth-quarter operating income increased to $17.1 million compared with $13.9 million in the third quarter, an increase of almost 23%.

This growth was driven by continued strong demand for our high-tech and aerospace/defense customers and from improving operating performance.

Printed circuit board production increased 4% sequentially, and average panel price increased 1%, driven primarily by a shift in product mix.

Market pricing for printed circuit boards remained essentially stable quarter over quarter.

As always, we continue to adjust our technological and manufacturing capabilities to satisfy customer requirements and expectations.

For the Backplane Assembly segment, fourth-quarter net sales before intercompany sales were $27.9 million compared with $30.7 million in the third quarter.

Fourth-quarter operating income was $1.5 million compared with $2.3 million in the third quarter.

Net sales were down for the quarter, mainly due to a deferral of certain orders from the fourth quarter to the first quarter in our U.S.

facility.

We shipped some of the deferred orders in January, and we expect a stronger revenue contribution from Backplane Assembly in the first quarter of 2008.

Now let's look at end markets.

Sales increased from the third quarter to the fourth quarter in all end markets except medical/industrial/instrumentation, which comprised 14% of fourth-quarter sales.

Sales in that end market declined 1% from last quarter.

This slight decrease was due to the normal ebb and flow of business, with numerous customers that make up this end market.

However, we did see strength during the fourth quarter in the test and measurement portion of this broad end market.

Aerospace/defense increased 1% to 33% of sales in the fourth quarter.

This increase was driven by a variety of our major military customers.

As you will recall, our book-to-bill was 1.23 at the end of September, due largely to increased orders from this aerospace and defense customer base.

The computing/storage end market held steady at 13% of sales in both the third and fourth quarters.

Networking/communication also held steady at 40% of sales in the third and fourth quarters.

During 2007, we have increased market share with many of these customers and expect the trend to continue in 2008.

Now I'll talk about our top customers.

Almost all of our top customers are customers with whom we have long-standing relationships, some lasting more than 30 years.

They represent a strategic mix of commercial and aerospace/defense customers, roughly half from each part of the business.

No OEM customer represented more than 10% of sales in the fourth quarter.

In alphabetical order, our top five OEMs in the fourth quarter were Cisco, EDO, Juniper, Northrop Grumman and Raytheon.

Now let's discuss our technological and operational performance.

The average layer count of our printed circuit boards in the fourth quarter was 14.1, an increase from 13.9 in the third quarter.

Boards with 12 layers represented 60% of fourth-quarter sales, up from 58% in the third quarter.

Boards with more than 20 layers represented 28% of fourth-quarter sales, consistent with the third quarter.

In a broader sense, we have seen the high-tech nature of our products increase throughout 2007.

While we talk a lot about our technology in terms of layer count, we're constantly increasing technology in all areas to consistently improve customer offerings.

In fact, a significant portion of our 2008 CapEx budget of approximately $23 million is purely for technological improvements.

We're producing more printed circuit boards that utilize sequential lamination and HDI, as well as other technological advances.

We're also using more advanced and low-loss material in our manufacturing processes.

Expanding our technological capabilities has always been a vital part of our strategy and corporate culture.

Our industry-leading technology enables us to further strengthen our customer relationships and continue to diversify our customer base.

Quick-turn as a percentage of revenue essentially stayed level at 13.5% sales for the quarter, which is clearly a sign of stability in the market, given our increased sales in the fourth quarter.

Leadtimes in general have also remained steady.

Demand from high-tech and aerospace customers has enabled us to maintain our leadtime at eight to 10 weeks for those products, while leadtime for other products have remained at four to six weeks.

At the end of December, our Printed Circuit Board book-to-bill ratio was 1.11.

That compares with the IPC book-to-bill ratio of 1.01 as of December 2007.

Once again, we're above the industry average.

Now, before I turn the call over to Steve, I'd like to take a moment to comment on recent concerns we've heard expressed regarding the health of the North American printed circuit board market.

Others have indicated that the North American market is softening.

Our experience differs.

Our leadership position in the industry affords us a broader and more comprehensive vantage point.

Our competitive advantages have led to margin expansion, and we have seen our leadtimes at our highest-tech manufacturing facilities extend over the course of 2007.

While some are shutting down plants and laying off staff, we have added employees to our manufacturing workforce in the fourth quarter.

We continue to see ongoing strong demand from many of our end markets, and we expect that trend to continue in the first quarter.

In closing, we're well aware of the increased anxiety about the economy.

It is clear that our stock price reflects the overall uncertainty in the market and not our financial performance, which continues to be strong.

Our solid results for the fourth quarter were an improvement over the third quarter's results, and we expect the first quarter to be strong as well.

As always, we will continue to operate efficiently and effectively with a customer-focused strategy to grow our business and create value.

TTM is the largest North American printed circuit board manufacturer, with leadership positions in quick-turn, aerospace/defense, high-technology and high-mix.

Our footprint positions us to support our customers in all aspects of their product lifecycle.

We have a clear direction of where we need to go, what we need to do and how to execute.

And we face the future with confidence.

Now, for the balance of the presentation, I will let Steve review our financial performance and discuss our outlook for the first quarter.

As you saw in the press release, TTM reported solid results for the fourth quarter of 2007, with sequential improvement in every financial metric.

Increasing demand for our high-tech manufacturing services was the main driver of improved fourth-quarter net sales of $167.5 million, up 2.7% over last quarter.

Fourth-quarter gross margin of 20.7% increased from 19.2% in the third quarter, marking the first time since the PCG acquisition that gross margin has exceeded 20%.

The fourth-quarter gross profit benefited from approximately $1 million in nonrecurring accounting entries.

Our net income of $11.8 million or $0.28 per diluted share reflected an increase of approximately 44% over the third quarter.

Net income for the fourth quarter benefited from a reduction in income tax expense due to a decrease in the valuation allowance on our deferred tax assets.

Our strong, consistent earnings performance, which makes it more likely that we would utilize our deferred tax assets, led us to reduce the valuation allowance.

This reduction added $0.06 to the diluted earnings per share in the fourth quarter.

On a year-over-year basis, net sales increased 81% to $669.5 million, due to the PCG acquisition.

Results for 2006 included just two months of operations of the acquired plants.

Total operating expenses for the fourth quarter increased from $16.1 million or 9.9% of sales in the third quarter to $17.1 million or 10.2% of sales in the fourth quarter.

Selling and marketing expenses for the fourth quarter increased from $7.1 million or 4.4% of sales in the third quarter to $7.6 million or 4.5% of sales in the fourth quarter, primarily due to higher commission expense on increased sales.

G&A expense, including amortization of intangibles, for the fourth quarter was $9.5 million or 5.7% of sales.

This was an increase from $9 million or 5.5% of sales in the third quarter.

The increase is primarily due to higher compensation expense in the fourth quarter, including a larger bonus accrual due to better fourth-quarter performance.

In the fourth quarter of 2007, we incurred stock-based compensation expense of $894,000.

70% of this expense was recorded in G&A, 20% in cost of goods sold, and 2% in selling and marketing.

Operating income of $17.6 million for the fourth quarter represented a 15.7% increase over the third quarter of 2007.

As we expected, fourth-quarter interest expense, including debt amortization costs, increased to $2.7 million compared to $2.6 million in the third quarter as we continued to pay down debt.

This slight increase is solely due to increased debt amortization expense because we repaid more debt in the fourth quarter than we repaid in the third quarter.

During the fourth quarter, we paid down $24 million of debt.

Our debt level is now $85 million.

In 2007, we reduced the Company's debt by 58%, which is extraordinary, and a testament to our focus on reducing leverage in order to keep all of TTM's growth opportunities available.

We expect to continue to reduce our debt level in 2008.

Fourth-quarter net income of $11.8 million and earnings per diluted share of $0.28 both substantially increased over the third quarter, with net income increasing 44%.

Third-quarter net income was $8.2 million or $0.19 per diluted share.

TTM's EBITDA growth continues to be significant and speaks to the leverage in our financial model.

EBITDA for the fourth quarter was $24.4 million compared with third-quarter EBITDA of $22.2 million.

For your reference, there's a reconciliation of this non-GAAP measure in the press release.

Fiscal year 2007 net sales of $669.5 million increased 81% from fiscal year 2006 net sales of $369.3 million.

Fiscal 2006 included two months of operations from the PCG acquisition.

Net income decreased from $35 million or $0.83 per diluted share in 2006, to $34.7 million or $0.81 per diluted share in 2007, primarily due to significantly higher interest expense and intangible amortization expense in 2007 due to the PCG acquisition, as well as softer market conditions in 2007.

We continue to maintain a very strong balance sheet, excellent cash flow and a very manageable debt position.

As I mentioned, during the fourth quarter we reduced debt by $24 million, bringing the debt balance down to $85 million at the end of the quarter.

Cash and short-term investments at the end of the fourth quarter of 2007 totaled $18.7 million compared to $27.3 million at the end of the third quarter.

Cash flow from operations was $18.6 million for the fourth quarter.

Net capital expenditures were $4.2 million, and depreciation was $5.5 million.

Looking ahead to the first quarter of 2008, we project revenues in the range of $168 million to $176 million and earnings in a range of $0.20 to $0.25 per diluted share.

The gross margin percentage for the first quarter is expected to be in a range from 19% to 21%.

The relatively higher revenue contribution from the Backplane Assembly segment is likely to temper gross margin during the first quarter.

We expect that selling and marketing expense will be approximately 4.5% of revenue and that G&A expense, including amortization of intangibles, will range from approximately 5.1% to 5.3% of revenue.

The reduction of our debt balance, as I mentioned earlier, will result in interest expense, including debt amortization costs, of about $2 million as we continue to repay debt in the first quarter.

We expect our tax rate in the first quarter of 2008 to be approximately 37.8%.

As you may have noticed, on January 15 we filed a shelf registration statement to periodically sell up to $200 million in debt, common and preferred stock, and other securities.

The filing of the shelf registration at this time enables the Company to have flexibility in evaluating future growth opportunities.

We do not have a specific opportunity related to this filing, nor is it our intention to issue shares into the market at this point in time, nor in the near future.

Rather, we chose to file a shelf registration so that we're optimally positioned to respond and move quickly on any opportunity that presents itself.

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

(OPERATOR INSTRUCTIONS).

Matt Sheerin, Thomas Weisel Partners.

A question on the book to bill, which has been higher than the industry.

If you were to back out the military/aerospace business, which tends to have a higher book to bill, and you have more backlog there, could you tell us what it's been looking like?

Yes.

I don't have that number right at my fingertips here, but when we look at the nonmilitary/aerospace business, it's not growing as fast as the regular commercial business, but it is still growing.

So it's a more steady, more consistent growth and still positive.

So I'm just kind of interpreting between the fast-growing aerospace/defense and high-tech that our book to bill would be positive in that area also.

I'm very confident it would be positive.

But in the past, it has tended to be higher than the rest of your business.

It sounds like it's not anymore, so you feel like you are seeing positive booking trends across your businesses?

Yes.

There's definitely positive booking trends across our business.

We're seeing higher booking trends in our high-tech and aerospace and defense offerings.

And then you're talking about relatively stable pricing environment, but your competitor Merix has been talking about pricing pressure both in the volume business as well as quick-turn.

Why do you think you're not seeing that?

That's probably a good question.

I think when we look at the end markets and the customers that we serve, we probably are not crossing paths with competitors like we have in the past.

As you recall, I keep mentioning, the strength of TTM is our fundamental, consistent business strategy of high-tech, high-mix, quick-turn, and aerospace and defense.

We have had that strategy for a number of years, so we haven't been involved in volume throughout the history of TTM, and we've moved into these end markets and areas that we produce because they're higher profitability.

So in doing that over a lot of years, I think we've been able to excel and not cross paths with a lot of competitors.

So we have a different message than maybe some of our competitors that is more positive in nature.

And then a question on the backplane business.

You talked about a pushout there.

Is that normally a choppy type of business where you will see that, or was that a one-off?

No, we see a little more choppiness in that business, and it's different than Printed Circuit Boards because you're ordering a lot of materials, a lot of components.

And at times, maybe a component doesn't come in when you think, and that delays a fairly sizable order.

So you will see a little more choppiness in that segment of the business.

I mentioned that we had a pushout from the fourth quarter to the first quarter.

We have shipped most of those pushouts in January.

So we will probably see a bigger contribution from that segment of our business in the first quarter than we did in the fourth quarter.

And just my last question for you, Steve.

You talked about a one-time $1 million benefit, I think it was, to the gross profit or gross margin.

Could you explain what that was?

Yes.

It's a couple of different accounting entries, and I'll try to give you the high-level as opposed to all the detailed accounting nuance.

But the two biggest ones were we have been accruing for our medical reserve for the printed circuit group on a kind of nine-week expectation.

That means that we expect about nine weeks of claims to come in, in the near term.

And that's what you kind of reserve for.

But we have been probably a little bit conservative in that accrual because, with the PCG medical plan, they've only been with our plan since January 1, 2007.

So we moved that down to eight weeks in the current quarter.

That gave us a one-time not insignificant benefit to our income statement in gross profit.

The second thing is that at the end of the year, we did a thorough revisit of all the WIP, work in process, inventory percentage completion gates -- we're going to get into accounting here, sorry -- at all of our plants.

And it seems like, with the military work we're doing now versus what we were doing a year ago, we are fairly -- have more material content in the work that we're doing.

Therefore, when you start your work on the floor, when you release it the floor, you have actually more material already.

So in all the subsequent gates, the WIP is more completed, if you will, as you move through the process.

So it's led to some more capitalization of some costs at the end of the fourth quarter in inventory as opposed to in the P&L.

So it's got a one-time impact that we saw in the fourth quarter that gave us some benefit.

So, combined, that was about a 60 basis point improvement in gross margin, then?

Yes.

I've got the adjusted number, about 20.1% gross margin if you back out those two things.

Amit Daryanani, RBC Capital Markets.

Just had a quick question.

Looking at your press release, you guys talked about seeing sequential strength in Q1, I think, in the quick-turn business.

It seems a bit odd considering what you have seen historically, where the quick-turn business tends to slow down in the March quarter.

So why are we seeing strength, and what percent of sales will it be next quarter?

I think our quick-turn percentage is relatively flat first quarter over the fourth quarter, although our numbers are up, because you see our topline went up and the percentage of quick-turn stayed the same, so in raw dollars, we are up.

Quick-turn, around the end of the year, Christmas, first of the year, we kind of slow down the end of the year and pick up sometime later on in January.

We didn't see that as much as we have in the past, but the quick-turn, as we look at it, we are not having to become price competitive.

I think our pricing is holding in there.

When I look at our quick-turn, I'm seeing the same thing we see in the rest of our Company in that we are a high-tech quick-turn facility.

The technology we're producing for our customers is a technology for which there's not as many competitors.

It ties in with the rest of our facilities and so forth.

So I think we've been able to differentiate ourselves from our competitors and not follow in the same ebb and flows, if you will, because of our technological capabilities -- not only quick-turn, but in the Company overall.

And recall that with the Tyco acquisition, our aerospace and defense business is now 33%, a third of our business.

That's $220 million of aerospace and defense.

That's the more stabilizing influence, if you will.

The backlog seems to be bigger there, and we can better operate and run the business.

Now we are starting to cross-sell technology, so a lot of benefits that we're now experiencing as a company that we didn't have a year ago, and all of that is helping the quick-turn.

And then sorry, I probably missed this, but what were the leadtimes on the volume production side of things this quarter, and where do we expect them to be next quarter?

Our leadtimes are pretty consistent this quarter with last quarter.

We are eight to 10 weeks in our high-technology and aerospace and defense facilities and four to six weeks in our other facilities.

But along with that is we always operate our facilities so we have flexibility to service customers when needs arise.

I think part of the strength that we have culturally with our operations is the ability to be flexible.

That enables us to capture market share as we service customers better, and the strength that we have is to be flexible and still drive margins.

So we operate efficiently at the same time that we're flexible.

So leadtimes really haven't changed, and where we're at right now, I don't see them changing in the near future.

That's helpful.

And one of the other things, I guess, is when leadtimes do get this high up, do you get a sense of customers maybe double-ordering, which is why you're seeing some good strength in your booking right now?

No, I don't believe that's the case at all.

I think the professional way that our industry now manages the supply chain, we have been able to eliminate any bubbles of inventories.

Our leadtimes are not that high, and as I mentioned, we still have nice backlogs in all our divisions.

But we maintain flexibility, so we are able to give our customers what they need without having to build inventory or have double-ordering occur.

Just a final question, and I'll jump off the queue after that.

But if I look at the shelf registration you guys have done for $200 million, when you guys did the Tyco deal, I don't think you ever filed any equity shelf registrations, at least at that point.

So would we read into this as -- I realize you have some debt on your books, but you're potentially looking at some point down the road to do a Tyco-like deal again in terms of the magnitude of revenues?

I'll cover that from a couple points of view, Amit.

First, the reason we didn't do a shelf prior to the Tyco deal is due to the nature of the acquisition and the timing of it and so forth.

It was much better financed through debt, and we have certainly been able to manage that well.

We also, at that time, had $100 million in cash, more than $100 million in cash, on our balance sheet to finance that acquisition.

So kind of separate analysis there.

But I think, certainly, in terms of Asia, we evaluate and continue to evaluate a number of possibilities for acquisition of varying sizes, some large, some small.

So there's no -- as I say in the script, there's no idea we have on tap right now that's going to be used for that.

I think we're really just trying to keep all options open.

You know what I mean?

Possibly public debt offering, public equity financing.

The fact that we filed a shelf doesn't necessarily mean that we're predisposed to one instrument or another.

We certainly have done really well with debt, with the Tyco deal, and I think we obviously have shown to the lending community that we do intend to adhere to our paydown structure and timeframe and so forth.

So I think we're in good graces with the lenders and could easily take on debt to do another deal later on.

But I wouldn't read too much into the shelf registration as indicating that we want to do equity or debt or large or small acquisitions.

I think we will, once we identify a target at some point, we will choose the right method of financing that target at that time.

Brian White, Jefferies & Company.

I'm wondering if you could talk a little bit about some of the trends that you saw in January in your business.

Let me think back here.

We've got three months; I've got to separate out last month.

Historically, January, we usually get off to a little bit of a slow start coming out of the new year and so forth, and that was not unusual in January.

January was fairly active with the Backplane Assembly, that we anticipated would be, so we had some nice orders come in in Backplane Assembly.

After we got past the first of the year, the rest of the business came back with a fairly brisk activity level.

Our book to bill in January for Printed Circuit Boards is above 1, and we haven't gotten to the total numbers yet, but it's not close to 1, it's well above 1.

So I think that's indicative of the activity that we were able to experience in January, and so far through the first week in February, that activity continues to be fairly robust.

Isn't that a little concerning with some of the cautionary tone we got last night from one of your top five customers, Cisco?

Yes.

Cisco probably isn't the only one that has thrown out some cautionary tones there, and even though Cisco people, I guess, understood that they were trying to get to 15% growth and they only projected 10%, that's still not a bad number, 10% growth.

But when we look at our business compared to the cautionary comments and the macroenvironment, we're just not feeling the impact of that.

We still believe that we are in the right programs.

We have a broad base of customers, we're in the right end markets, we have the right product offerings for our customers, we've got the technology, we've got the quick-turn, we have the high-mix, aerospace and defense.

Everything we've done with our Company since the very beginning, I think, are paying dividends here, and benefits, because I think there's less competition in the spaces that we operate in.

And I believe that with the strength that we have been able to develop and the expertise and operational capabilities, the technology that we continue to invest in, I'm very confident that the future will be real positive for us.

So maybe the macroenvironment flings down upon us, but right now, we're not feeling it, and we're pretty optimistic about the future.

What is the visibility on the business right now?

Well, the visibility probably hasn't changed.

You heard what our leadtimes were, eight to 10 weeks in the high-tech, aerospace and defense, and four to six weeks in the rest of our business.

Beyond leadtimes, however, we listen to customers, we see what they are saying, what activity level they have.

They are talking about programs that they would like us to be involved in and ready for.

They are talking about technologies, and do we have the advanced technologies, which we always satisfy our customers on.

So other than the leadtimes, the activity levels, the quote levels and the experience that we have with 913 customers going forward, it's not anything different.

But it does give us a pretty firm, broad base to look at when we get a view of the industry.

We are looking at it through the eyes of 913 customers with four end markets that are the right space to be in.

So I think we get a pretty good feel for where we are headed and where a lot of our customers are going.

And just finally, Kent, when did you see slowing trends in 2001?

2001?

Back when I was in my mid-20s?

The 2001 -- that happened, like, immediately.

It was actually probably in the fourth quarter of 2000, and I think the industry was going through a total transformation.

We probably had what I would even call negative booking weeks, where cancellations were coming in faster than, say, orders.

So it was a pure transitional time back in 2001, 2002.

You recall that we lost half of the North American industry.

It went from a $9.6 billion industry down to the $4.5 billion industry it is today.

So 2001 was a totally different environment.

It wasn't one of the cycles that we talked about; it was a transition of our products.

I do want to highlight, though, that whether it was before 2001 or after 2001, TTM is consistent in our strategy.

And when I talk about consistent, I'm talking about just, say, volume work.

We didn't want volume work before 2001.

We don't want volume work now.

We've stayed away from volume because it's too price-competitive.

Whether we're competing against other North American suppliers or against Asia suppliers, it has always been price-competitive.

So we've avoided that.

We've invested in technology because there's fewer competitors in technology, so that we can earn higher profit margins.

We've invested in high-mix capabilities.

So we have consistently, with or without Asia competition, been in the sweet spot of the industry, and all of our facilities are designed to produce a high-mix, high-technology, high-quality board with the flexibility that our customers need.

Shawn Harrison, Longbow Research.

First, a quick question for Steve.

Do you have an estimated interest expense number for the full year, and then secondly, just how much debt you are looking to reduce maybe for 2008?

We don't have a full-year interest expense number for the year, because we don't really give guidance out for the full year.

But I will tell you that we are paying down debt aggressively, and we will continue to do that through the year, although our CapEx programs are going to be a little bit higher this year, probably $23 million to $25 million.

That will kind of offset some of the usage of cash that we had put towards debt normally.

So the interest expense will step down every quarter throughout the year.

Keep in mind, though, that 40% -- actually, more than that at this point -- of our debt is hedged.

And so we are not going to see, say, the benefit in interest expense throughout the year that you might expect, given the precipitous decline in interest rates from the Fed and so forth.

So I'll tell you that the interest expense guidance for the first quarter is, in terms of the actual cash interest piece, about $1.5 million, and about $350,000 of debt amortization costs, because as you know, every time you pay a chunk of debt down, you've got to take some more of that amortization of the deferred financing costs off the books.

So, all in, about $1.9 million this quarter, and I expect that to ramp down throughout the year each quarter.

Just a follow-up question on the high-technology business -- what are leadtimes right now in Chippewa Falls, and what were they last quarter?

In the last quarter, we were eight to 10 weeks, probably about nine, with some flexibility.

That was no different from the third quarter.

In the first half of the year, our leadtimes were lower than that, when we were going through the Cisco lean and so forth, so our leadtimes are longer now than they were at the beginning of the year, but stayed the same in the third quarter through the fourth quarter.

And then on prototyping activity, are you seeing stable trends in that market similar to what you're seeing in terms of quick-turn demand?

I think the trends in quick-turn are stable.

We are not feeling price pressure.

I think the technology that we produce in the quick-turn enables us to avoid some of the price pressures that others have talked about.

The quick-turn environment enables us to penetrate new customers, bring customers online, move those to our other facilities.

So I feel like quick-turn has been a big part of our business since the beginning, and that continues to march along as normal.

And then one final question on the Backplane Assembly business.

Would you expect that to get back to maybe June quarter revenue levels or September quarter revenue levels, maybe $30 million run rate in the March quarter?

Yes.

We were at $30.7 million in revenue for the Backplane Assembly segment in the third quarter, and that dipped, obviously, to $27.8 million in the fourth quarter.

I definitely think we'll be back north of $30 million, maybe even north of $31 million in the first quarter.

When you look at our Backplane Assembly, just a comment -- Shanghai is growing nicely, and Hayward is holding its own.

But most of the growth is coming in our Shanghai facility.

And then we should expect a subsequent pop in EBIT margins with the revenue rebound?

Keep in mind, obviously, the more revenue that division has, obviously the better they do.

But they don't have the same kind of fixed cost base that the PC manufacturing does, and therefore the same kind of leverage effect.

So on a gross margin basis, an increased revenue contribution from the Backplane Assembly business, related or proportionate to the PC manufacturing business, would probably dampen your gross margin a bit.

You know what I mean?

So we're talking maybe more kind of a 25% contribution margin versus, say, a 40% to 50% for the pure PCB.

Exactly right, because, as we've said before, it's like in the PCB business we have much better incremental contribution margins because of the high fixed cost basis of labor and manufacturing equipment in the PCB business.

But in assembly, about 70%, roughly, is materials just anyway.

So you don't get that same bottom-line impact from your incremental order in the assembly business.

Mark Moskowitz, JPMorgan.

A few questions.

Can we get a sense in terms of the fixed-cost nature of your aerospace and military type business versus your other parts of the portfolio?

I'd say that the same fixed-cost basis exists for our aerospace business as exists for the rest of our PCB manufacturing business.

Obviously, it's a labor-intensive business because you have 20-plus phases that each job has to go through, departments in the business.

And then we also have a lot of money invested in equipment, so we have a fair amount of depreciation on our depreciable asset base.

So it's similar to PCB manufacturing.

Like I said before, on an incremental basis, because your next unit that you move to the shop doesn't require, say, an additional person or an additional piece of equipment, you can actually get incremental contribution margins of 40% to 50% in the PCB business, aerospace or high-tech commercial, doesn't matter.

And that's indicative for us -- only if you have, say, large increases in production would you need to, say, add a lot of equipment or a lot more staff.

And then given that higher-margin benefit or potential with the mil/aero, how should we think about maybe incremental investments in terms of next year or for this year?

What level of your CapEx and just overall sales focus will be more on that vertical versus others?

Let's talk a bit about our CapEx in general.

Certainly, our CapEx for 2007 has ended at about $14 million for the year, and that's for two reasons.

Partly, we focused a lot in 2007 on debt paydown as opposed to CapEx.

We also were able to take some of the assets from our discontinued facility in Oregon and transfer those to our other facilities to defray some 2007 CapEx.

As I mentioned before and as Kent mentioned in his remarks as well, our CapEx will be higher this year, probably more like about 3% of sales in 2008 versus more like 2% number in 2007.

I think most of our CapEx will be aimed towards the PCB manufacturing segment of our business, by and large, and then most of that will be going towards alleviating bottlenecks in our facilities.

Certainly, as we have increased production and, almost more importantly, as the work that we get from our customers is more complex, requiring, say, sequential lamination, multiple passes through plating, more drilling, those kinds of things become bottlenecks in our business.

So we will invest in both the aerospace/defense and our commercial plants to expand that capacity and to alleviate some of the bottlenecks in those areas.

Just let me add to that CapEx explanation.

When we alleviate those bottlenecks, we're also focusing on and addressing technological issues, too, because the changing technology that we go through -- you have to stay one step ahead of that.

And we are definitely investing in technology, which is simultaneously eliminating our bottlenecks or vice versa.

So, as Steve mentioned, we're focused on LDIs, plating capacity, laser drills, those things that advance our technological and enhance our technological capabilities.

I guess as a follow-up, then, just given that investment in the technology and also the influence of military/aerospace, how should we think about your move, potentially, into more of a ruggedized or higher layer count type of PCB?

Should we expect some pretty significant upward pressure there?

Well, as far as layer count, we have one of the highest layer counts on a global basis, if not the highest layer count.

So as far as technology goes and our ability to produce layers as one measure of technology, we're probably the leader on a global basis.

The other technologies that we talked about are more to deal with improved performance of materials and also to look at size and more power and capabilities in the end product.

So you're going to become smaller and so forth.

So that's why we're investing in those technologies to line up with where the marketplace is going.

And just lastly, a question for Steve here.

On the margin guidance in terms of the range, I appreciated and am sensitive to the backplane piece in terms of how that could be a dampener.

But is there any sort of component also in terms of just considering what could happen if one of your top five customers, who reported yesterday -- is there any potential that, given they are starting to see somewhat of a slowing or choppiness in their revenue profile, a little more caution, that they could revert back to their old ways, where they kind of clobber their suppliers when things get a little more difficult for them, and then that's why --

I fully understand your concern, especially given last night's cautious comments from that customer.

I think, for our first-quarter guidance, I think Kent and I and the rest of our management team are quite comfortable with our guidance of $168 million to $176 million and 19% to 21% gross margin.

I think the good news for us with the customer that you're talking about and other customers in that high-tech space is that we have eight- to 10-week leadtimes in the facilities to support those customers and have good visibility for this particular quarter into that customer's demand.

So I think if what you're outlining were to come to pass, it probably would come to pass in future quarters, not the first quarter.

But I also think that we tend to support parts of that business that are a little less buffeted by some of these pressures that the broader product offering of that customer are buffeted by.

So I think that helps us as well.

I also think that some changes at some of our competitors will probably allow us to capture more market share with that customer and others.

I think that's going to be beneficial to us in the future.

So hopefully, that gives you some comfort that we have factored in all this information into our guidance, even though it happened last night, and are comfortable with where we stand.

Kevin Kessel, Bear Stearns.

Just on the deferral orders that you mentioned in your release and on the call, can you give us maybe a sense for how large we're talking about here in terms of what was deferred?

Yes, I think the deferrals would be between $2.5 million to $4 million, something like that.

From the sounds of it, it was Hayward, not China?

It was Hayward, yes.

I don't know if it was an example you were giving or if you were actually speaking to the deferrals, but was it the result of components that you couldn't get in time to take it up?

There's a couple reasons, and part of that was customers just delaying the delivery date, and other parts of that were components.

Those situations are kind of ongoing in that business, and sometimes when you have a component that can't come in and it's tied in with the end of the month, it can cause you a little bit of stress.

But in this particular case, we were able to rectify both of those situations and ship product out in January.

It was $2.5 million to $4 million.

And most of that has been shipped in January; I'm not sure if all of it has.

But you're saying it was originally slated for December and got moved.

So had it come in, it probably would have been towards the higher end of your guidance range?

That's correct.

But then these customers that are delaying because they want to switch delivery dates, I guess, is that a reflection potentially from the customers of concerns over their business or their particular end demand, or is it something that's just totally based on logistics?

I think the particular issue that Kent is talking about here was primarily a desire from the customer to take delivery of that work in 2008, not 2007.

So it was more an end-of-year issue than any kind of, I think, broader statement on the end demand for the goods we build for them.

And then in terms of your medical/industrial business, with that being the only segment that was down, and I calculated down about 4% on a sequential basis, that, if I'm not mistaken, is mainly Redmond-driven, more so than maybe some of your other plants.

But what exactly is going on there and impacting it?

Because I know you said it is somewhat normal, but I'm wondering if potentially maybe it's the industrial or the instrumentation segments that might be somehow tied to things that might be tied into the housing market, for example, or other areas where we have had other companies come out and cite weakness.

First of all, we went from 15% in the third quarter down to 14%, so it was about a 1% decrease.

As a percent of sales, yes.

But, Kent, I'm looking at the sequential dollar change.

Got you.

I think medical/industrial is basically our most stable end market, if you will, and I think there's just normal variances and ebbs and flows that have taken place there.

We don't see any direct correlation between the subprime loans and the housing market has tied into medical/industrial/instrumentations.

I just don't think there's a correlation at all there.

In terms of the mention, obviously, in the press release of macro conditions, challenging macro conditions that you cited, in particular, are you just citing what others are saying, or --

Yes.

Yes.

So it's mainly that.

Right.

And your cues that you guys use that would indicate to you things might be changing at the margin would be, what your quick-turn business and pricing in quick-turn and leadtimes, principally?

Or is it inventories, or what is it that you're looking at that we should be focused on to get a sense for whether or not there's some sort of a change at the margin?

When we look and forecast going forward, we look at a lot of different levers that can come into play, certainly, the mix between our facilities, the mix between segments, the relative mix, again, then, between high-technology, aerospace and so forth.

So we look at all those levers.

We also look at operationally how we're performing, and we look for ways that we can improve our costs and drive more margin to the bottom line.

So from our perspective, when I look at the total picture, I see improvement in all of those areas, but no one area that's going to stand out and say, okay, Kevin, hang your hat on this.

I believe we are going to have margin improvement because we are now through the integration and we're really focused on margin improvement, and I believe we're going to be able to drive our costs down.

We've spent a lot of money this quarter on Sarbanes-Oxley compliance because we had eight facilities that were not Sarbanes-Oxley-compliant a year ago.

So we've had kind of a heavy cost there.

So we have some of those costs going away.

We've got our interest expense going down.

We've got improved operations, and we have a pretty nice mix coming into our facility as far as technology and aerospace and defense goes.

Obviously, one of your customers closed a facility, I think, in Phoenix just around the third quarter or so, and then one of your other competitors is clearly retrenching from the North American market and closing down capacity and trying to refocus itself.

So is it too early to see the benefits of that, or is it something that you guys are already starting to see in terms of bookings?

The first one that you mentioned, in Arizona, I think we have seen some benefits there.

That's always positive.

It's hard to quantify those things, but certainly we know of specific wins that came our way after that closure.

The other closure that you're talking about with a -- I think it's an Asian manufacturer withdrawing from North America, that is benefiting us on a quick-turn basis.

We're seeing an improvement in order demand because of that.

And then just lastly, Steve, anything that you can tell us about expectations for cash flow for 2008?

I can give you some feel for the first quarter.

When I look at the cash flow statement -- let me pull that up -- just a moment.

We actually did a great job.

My staff deserves real kudos for managing payables really well at the end of the fourth quarter.

We have been working very hard throughout the year to improve our working capital management processes.

They just nailed it this time; I was really pleased with that.

Our working capital days benefited by two days from accounts payable days.

Inventory and receivables were more steady, but we actually picked up two days from AP management.

The balance actually went up by $3 million quarter over quarter, which was great.

The cash flow benefit was $3.1 million this quarter.

I think our operating cash flow is $18.6 million this quarter, and I think that's a little bit high.

It's been running right at $14 million on average for the last couple of quarters.

$18 million is high.

I think in that $14 million to $18 million range is probably reasonable for the first quarter.

Also, our guidance range is higher for earnings per share and so forth, but how the working capital pans out will be always a bit of a question.

If sales grow in the first quarter, we may see a pickup of growth in AR, which would be a damper on operating cash flow.

So I'd say for the first quarter, it's kind of a $14 million to $18 million range.

And then that's all we give out as first-quarter guidance, one at a time.

Is your CapEx expected to be linear, or is it back-end-loaded, or how is it expected?

I think fairly linear is reasonable.

It might be more tilted towards the last half of the year because some of [this, actually], when the increment comes in is -- we will place the orders, say, in the fourth quarter and first quarter, and the increment may come in a little later on.

But I think you're reasonable in saying $4 million to $6 million of CapEx each quarter for a total of, say, $24 million-ish for the year.

Keep in mind on that CapEx, we lay out a budget for the year and we look at that.

But we're always evaluating every piece of equipment that we expend money on.

So it's a flowing, make sure we get an ROI on every piece of equipment.

(OPERATOR INSTRUCTIONS).

Rich Kugele, Needham & Company.

Just two questions.

First, does 2007 represent how we should think about your normal sequential progression, given the new mix of the business post-Tyco, or should we think about 2008 rolling out a little different?

You mean by quarter?

Yes.

Well, the one thing I would tell you that's anomalous is, of course, the first quarter of 2007 included $11 million in revenue from our Dallas plant, which we closed down on April 7, I think, of last year.

So that's the one thing that will be -- if you back that out, that's your starting point for year-versus-year comparisons, first of all.

And then, of course, we saw a bit of a dip in the second quarter without Dallas, before we had transferred that work.

That work is now at a pretty steady $5 million per quarter revenue run rate in our other facilities, and it's helping us improve the capacitization of those facilities.

I guess beyond that, Kent, do you feel that maybe the quarterly progression for last year is endemic for this year?

I think we probably increased every quarter last year, once you adjust for the Dallas situation, and I don't think that will be any different when we look at 2008.

The order pattern is such that I think we are looking at enough activity that right now, we feel like we would have a nice, consistent growth throughout the year.

I don't think seasonality will be that big a factor.

I think we'll just be pretty consistent.

Keep in mind, like Steve said, we go one quarter at a time here.

Also, we had the lean manufacturing initiative impact, as we discussed in our prior-year and prior-quarter calls, during the second quarter.

So I think, the more I think about it, the more Q2 -- Q1 and Q2 are anomalous, sort of, from last year.

With your backplane load-balancing improving and the acquisition fully integrated, what do we think is the right gross margin range in the near term, just as a potential theoretical business model?

Certainly, we think for the fourth quarter -- excuse me, for the first quarter, 19% to 21%.

That's our range, as we indicated here.

I think we've discussed before our expectations for improving the margin.

Certainly, we are pretty much through the integration now.

I think we all, as a company, view SOX as a last step of our Tyco integration process, and that's underway, but going well.

So I think at this point now, we are an 11-plant integrated company, and so the challenge is to gradually improve operating efficiency at all the sites and have that help improve margin, increase capacity utilization at all sites because of our fixed-cost nature of our business; we want to improve leverage and so forth, operating leverage.

So I think, by and large, those are the factors that will drive our margin forward.

Obviously, a spike in pricing would be fantastic, but you can't predict that, necessarily.

And that's not what has been true over the last couple of quarters.

It's been more stable.

But I think we've talked before about getting margin consistently north of 20%, and certainly this quarter was a great quarter in that we got there.

I think we'd like to see it stay there and certainly move up in the low 20s, probably, in the future.

And just to add to that, 20.7% for this first quarter -- I think that's a solid improvement over the fourth quarter, and I think there's more room to go up another percentage, a percentage and a half.

I don't know what the timetable is, but it's certainly in the near future.

One of the, I guess, maybe challenges we have is in the fourth quarter, our Backplane Assembly will be a bigger portion of our overall sales.

Well, that has a lower gross margin attached to it.

So we'll probably be up in both Printed Circuit Boards as well as Backplane Assembly, but because the mix is a little more favorable to Backplane Assembly, the overall gross margin could be lower, if that makes sense.

Yes, that's helpful.

Then just lastly, as you're looking across Asia for acquisition opportunities, has any of the changes that have occurred from a Chinese labor law basis or even the environmental laws made China less attractive to you?

They certainly don't seem to be keen on PCB expansion.

Yes, I think you've hit the right chord there, because in China, the currency is stronger by 13% over the last couple years.

Labor costs are going up.

Waste treatment costs are going up.

It's harder to get water permits.

Tax rates are moving up from 15% to 25%.

So that still, if you look at our strategy, doesn't deter us from wanting to have a presence in Asia.

What that has enabled us to do as we've scoured the universe in Asia and narrowed the list of companies that we think will fit with TTM down to a very small number, it's probably helped us in being able to have conversations that are productive in Asia, because I think what it's saying is that being part of a global company and being part of an ideal company on a global basis can have a much better future than two companies going alone.

So it hasn't deterred us.

We still think that there's significant opportunities with an Asian component.

But I think it's actually helped us in maybe helping companies realize that everything changes and that there's a better opportunity to become part of a global company.

Jiwon Lee, Sidoti & Company.

Two quick questions.

What was the proportion of sales to your top five customers in the fourth quarter and in the third quarter?

In the top five in the fourth quarter, 26%; top five in the third quarter, 25%.

And your CapEx goal for this year of $23 million to $25 million, how is that roughly split between your defense and the high-tech business?

That's a question that I don't have immediately here at my fingertips, but there is, as we've reviewed that in the past, there's no major emphasis on those, one aerospace/defense over commercial.

Where we are spending money is in the aerospace/defense and in technology, which overlaps into the commercial.

So those are the two areas that we see a lot of brisk activity in, is our high-technology/aerospace and defense.

Or, then, asked differently, would you be spending more capital in your Wisconsin plant, or geographically where else would you be plowing this money?

I think we can say safely the Chippewa Falls plant is our largest single plant, so it would probably proportionally get a larger share of CapEx, and also it has been challenged with some of the bottlenecks I referred to earlier in terms of the nature of the work is changing more towards [HGI] and sequential lamination, so they have some more areas like plating and drill that are bottlenecks.

So that would be an area that we would probably invest a fair amount in that facility, but also other facilities as well.

We're expanding our technology in all of our facilities.

So when you look at each facility, they have different strengths and different specializations, and so they require different CapEx needs.

But certainly, we're not leaving any one facility behind.

They are all moving forward.

They all have a CapEx budget that moves their technology forward, their capabilities forward.

It eliminates bottlenecks, and that just is how we look at that across the board.

So when you were talking about improving your operations in '08, this capital expenditure has a lot to do with where you want to get to, the higher level of operating leverage?

Yes.

That's the first and foremost in your key objective for this year; is that how we should look at your business this year, and the potential for margin improvement?

I'd say it's twofold.

Certainly, improving operating leverage is always paramount to us, because that benefits the bottom line, has higher earnings per share, helps you and every other shareholder we have.

So we're always focused on that.

But I also think equally important is keeping abreast of our customers' needs.

As the work they do becomes more technologically challenging on a host of fronts, both in military and in commercial, we want to make sure that we can address those needs.

So that's probably, perhaps, a secondary goal, but equally important.

At this time, there are no further questions.

I'd like to turn it over back to Mr.

Kent Alder for closing comments.

Please go ahead, sir.

I'd just like to summarize by saying we're extremely well-positioned to deal with the future.

We're excited about the future.

We thank everybody for their interest in TTM today, and we will look forward to meeting with you next quarter.

Thank you very much.

Thank you, sir.

Ladies and gentlemen, this does conclude the TTM Technologies financial results conference call for the fourth quarter of fiscal 2007.

You may now disconnect.

Thank you for using ACT teleconferencing.