CMC Industries Q3FY99 Conference Call Summary.
Matthew Landa, President and CEO
Andrew Moley, CFO
Matthew began by reviewing the financial results as reported
in the press release. He then went on to report as follows:
o Two major customers experienced significant slowdowns
during the quarter:
+ Reltec underwent a transition from their last-generation
fiber-in-the-loop product to their new integrated fiber-
in-the-loop product line.
+ NextLevel Communications (and their customer, US West)
required additional time to train their workforce to
install NextLevel's residential gateway xDSL product.
+ The sales decreases of these two customers make up nearly
the entire difference between their Q2 and Q3 revenue numbers.
+ NextLevel has resumed placing orders for these new products
and US West has announced its intention to aggressively
pursue the integrated services market this year.
+ Reltec's new product line is being well-accepted; as a result,
Reltec is placing orders with CMC at the highest levels they've
experienced to date.
o During the quarter they announced a relationship with Paroxim
and just this week they announced a new partnership with Telular.
Both of these companies are leaders in their respective wireless
niches.
+ CMC is currently building Paroxim's award-winning wireless SOHO
products in support of their recently announced relationship
with Intel as well as other OEM and retail customers.
+ CMC is currently building Telular's fixed wireless terminals
for local loops and cellular transmission in support of their
recently announced relationship with Ericsson.
o As mentioned during the Q2 conference call, they were in the early
stages of projects with two significantly large customers. They've
made significant progress with these programs and they expect to
record significant revenues from these customers by the last month
of the current quarter.
o Sales efforts have put them in the position that their backlog is
now at its highest level in two years and their customer base is
the strongest and most diverse in the company's history. They're
finally in a position now to move consistently forward.
o Icing on the cake is that their outlook is even more positive
as a result of the agreement to merge with ACTM. Strategic
reasons for this merger include:
+ ACT and CMC are currently the 12th and 13th largest publically-traded
companies in this industry. The combination will create the 7th largest
company in the business.
+ Merger brings both increased scale and a global presence to their
customers. They have an entirely complementary customer base with
ACT so the immediate diversification is significant.
+ From CMC's perspective, ACT is an ideal merger partner. It allows ACT's
"front-end" high-tech production centers in Hudson MA and Atlanta GA to
be coupled with CMC's technology production center in Santa Clara CA and
their low-cost volume operations in Mississippi and Mexico. Additionally,
ACT's Dublin, Ireland facility provides a European solution for all of
CMC's current customer base. From a logistics and manufacturing cost
standpoint, the combined company will be well-positioned in the key
locations around the world to provide complete product life-cycle service
in the most flexible, responsive, and cost-effective manner.
+ Both companies have focussed on manufacturing cutting-edge communications
products for the leading OEM's in the communications industry. The combined
customer list reads like a "Who's Who" in the communications world and
includes:
- Motorola
- Nortel/Bay Networks
- Nortel/Aptus
- GE/Reltec
- Harris
- Lucent/Ascend
- NextLevel Communications
- Paroxim
- Comp 21
- Comsaid (?)
- Premisys
- ITT
in computers they have:
- EMC
- IBM
in medical they have:
- Johnson & Johnson
- Becton Dickenson
and in cable they have:
- HP
- Newbridge Networks
- Eastman Kodak
- Northrup Grummon
This is quite a customer base from which to grow and they're quite excited
about the opportunities.
+ ACT also uses the same manufacturing equipment and system's platform as CMC.
This will allow the companies to officially integrate all operations and
quickly provide a seamless organization with greater capabilities and the
ability to reap higher resource efficiencies.
+ The combined companies will have nearly 1 Million Square Feet of capacity,
making them one of the top 10 global EMS suppliers in the world according
to that metric as well.
+ From CMC's perspective, as a standalone entity, they were faced with fighting
many of the key trends in the industry independently. These trends include
competitors differentiating themselves through geographic coverage, better
technology, broader range of services, and lower cost of production. While
they were able to stay ahead of the competition in terms of flexibility and
responsiveness, and abreast of the competition in terms of services and
technology, they needed to accelerate their ability to offer global solutions
and to lower their overall cost of production.
+ This merger will allow the combined company to be more global and more efficient
and thus more competitive and more profitable. A quick financial analysis of the
industry supports this hypothesis:
- Larger companies with over $500M in revenue are growing faster than
smaller companies due to global presence, breadth and depth of services,
and the ability to fund acquisitions.
- Trailing 12 month revenue growth for larger companies with over $500M
in revenues was 30.4% vs 0.9% for companies with under $500M in revenues;
the return on equity was 16.1% vs 5.8%; the forward PE was 28.2 vs 12.9;
the trailing PE was 37.1 vs 16.9; and the ??? margin 5.2% vs 3.0%.
The market has properly awarded these companies higher valuation multiples
due to faster growth, higher margins, and greater financial strength.
+ What they are witnessing is a true split in this industry and what they have
done through this merger is to move ACT & CMC as a combined entity substantially
over the $500M mark and into a position to become a very significant player
in this industry. They believe both CMC's and ACT's positive outlook, coupled
with the extra firepower the combined entity will bring to the marketplace,
makes this a very positive transaction for both organizations.
Next Andrew Moley discussed the Q3 financials:
o Revenues $58.7M marginally up year-over-year and down 21% sequentially from Q2's $74.5M.
o Regards customer diversification:
+ Their top 5 customers were down as a percent of sales (sequentially down to 70%)
and the top 10 customers were down too (from 94% to 90%).
+ They only had 3 customers over 10% for the quarter:
- Diamond 26%
- Premisys 17%
- Reltec 12% (an abnormally low level for this customer)
+ There were 6 more customers greater than 3% including: Logitec, Harris,
Cortelco Phone/ITT business, Midway Games, Cortelco Systems, and Telular.
+ Not included in these figures are the two major programs that Matt
discussed (see above) and that they're ramping up... along with Paroxim
which will be a very solid customer for CMC... and NextLevel who was
one of their largest customers last quarter and fell off for the one
quarter due to the dropoff in US West.
+ So again... certain big programs coming down, not quite offset by a
pretty dramatic growth in new business with new customers that is
ramping and will continue to ramp.
o Gross Margin was 3.9% for the quarter, down from 6.8% a year ago and 4.8% in Q2.
They year-over-year comparison is a result of Mexico costs being included in COGS
and some slight change in mix where a little higher volume with Diamond offsetting
lower volume with other customers. The comparison with Q2 is a result of lower
utilization overall... lower volume running through the operation.
o SG&A was down $170,000 sequentially to $2.9M. This was driven by lower sales costs
(approximately a 1% drop in costs for the falloff of $16M in sales).
o Interest was down fairly dramatically to $280,000 from $420,000 in Q2 due
to very strong asset management in the quarter where they did a good job
collecting and managing the receivables and inventory.
o Working capital cycle was 42 days this quarter, down from 49 days last year
but up from 32 days in Q2. Calculated AR days from quarter-end to quarter-end
average was 51 but that's well in excess of actual experience; their sales in
the month of April were approximately $20M with total AR being $27M... so a
quick calculation there says really about 40 days (a little left over from
the previous month other than the April sales).
o Inventory turns dropped down to 8 from 10.3 last quarter due to lower revenue
volume running through the facility and also a ramp-up at the end of the
quarter to deal with the substantially increased backlog that they're looking
at for May, June, and July.
o Appreciation in the quarter was $800,000 and they had CapEx of $375,000 for
marginal improvements in the facilities, primarily.
o Net of cash, debt dropped $8.4M in the quarter to $9.6M overall which is
their lowest level in nearly 3 years... drivin by cash flow from operations
of $8.7M and solid asset management and collections across the board.
o One other thing of note on the balance sheet: With regard to the preferred
stock position they have, Cortelco Systems Inc (one of the two affiliated
companies they do business with) has gone through some changes and actually
filed their S1 statement on 26 April looking to do an IPO... CMC is listed
as a selling shareholder in the initial offering and, to the extent that
the offering goes off and CMC is able to sell, they believe they will have
the opportunity to substantially reduce the preferred stock position they
have on their balance sheet by generating cash from that IPO. So their
very excited about that possibility not only from the perspective of having
a customer doing better in terms of growth and their business doing well
enough to give the opportunity for an IPO, but also the chance to collect
a long-term asset, bring some cash in, and invest it in the fundementals
of the business.
o So the Q3 story was a temporary reduction in volume from 2 or 3 of their
largest customers... not quite offset by ramps in new business from a
number of new customers. Their outlook for Q4 is actually 32% higher
than the same time for Q3... they have a backlog of firm orders plus
a solid forecast from customers who only really give them 30 days
in-advance notice in excess of $70M. So they're very excited about
this quarter... its a return of business with Reltec, NextLevel
starting ramping back up again, and all of these new customers that
they've won that are growing and they look forward to a much better
Q4 and succeeding quarters than they had in Q3.
Q&A Session:
1. Gene Weber, Bluewater Capital.
They are in the startup phase of new business with two new (unannounced)
customers. Each of these customers has revenues in excess of $1 Billion.
They are seeing some revenues now but volume shipping are increasing and
should become more substantial toward the latter half of this quarter.
Both of them provided, in aggregate, in excess of $1M in revenue to CMC
for Q3... a portion of that being consigned business that they're doing
down in Mexico. They are ramping month-to-month and have been going very
well. They didn't quite ramp to what they'd hoped they would... that's
probably something that's always going to happen in this business. But
both are huge opportunities: one in Mississippi and one in Mexico.
They also won one new job that they're very exited about with a private
company doing xDSL products... in line with CMC's focus & expertese in
communications. CMC just won this recently and really has an opportunity
to do a decent amount of business with them in Q4 because they are pretty
much ready to go... this was a job being built at another contract
manufacturer, they're taking it out, and the gating item for ramping most
of these programs is "can you get the components fast enough?"... this
customer controls the ASIC supply to the extent that they may be able to
route it over to CMC sooner rather than later so CMC can get going
in the June/July time-frame.
2. Bill Cage, JC Bradford (Anton filling in for Bill).
Detail on Telular contract. CMC is currently building in volume for Telular.
Telular is seeing an uptick in their business due to contracts they've
signed recently: one with Ericsson and one with a telco out of Mexico.
CMC expects their business with Telular to go to higher levels than at
present... potentially a $20M-plus program. Its priced according to CMC's
standard business model where they expect to get 9-10% gross margins (or
above) and a fair return... in line with all the rest of CMC's business.
Summary & Closing Remarks:
Any additional questions please call them. They're very positive about
the business going forward and about the merger with ACT Manufacturing. |
