TTM Technologies Inc (TTMI) 2007 Q2 法說會逐字稿

Good day, everyone.

Welcome to the TTM Technologies second-quarter earnings release conference call.

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.

Thank you.

Good afternoon and thanks for joining us for our second quarter 2007 conference call.

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

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 risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to, fluctuations in quarterly and annual operating results, the volatility and cyclicality of the various industries that the Company serves, the integration of the recently acquired Printed Circuit Group business, 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.

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

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

For the second quarter, we posted revenues of 162 million and earnings per diluted share of $0.14.

As we indicated on our first-quarter conference call, we expected lower revenue and earnings in the second quarter of 2007 compared with the first quarter, and that was due to several factors.

First, as previously discussed, we ceased production at the Dallas, Oregon facility on April 6.

Sales from the Dallas facility were strong in the first quarter, totaling 11 million.

As expected with the plant closure, these sales were basically absent in the second quarter.

Looking ahead, we expect to capture 40 to 50% of the quarterly sales volume from the Dallas facility as business is transferred to our other facilities, primarily Logan and our Redmond facility.

We qualified many of the former Dallas customers at our other facilities during the second quarter, and have begun receiving orders for delivery in the third quarter.

The transferred work from Dallas will increase throughout the third quarter and should be fully realized in the fourth quarter.

Secondly, as you know, we experienced a temporary slowdown in orders from a key networking customer as they adjusted inventory levels in their supply chain.

The negative impact of this adjustment was greater than we anticipated in the second quarter.

However, we adjusted to the temporary order curtailment and managed our cost structure with the furlough of 250 employees at the Chippewa Falls plant at the beginning of March.

And now the impact of this inventory adjustment is behind us.

Orders came back to normal levels at the end of May.

At the same time, we have ended the furlough program.

And finally, we had some temporary issues during the quarter related to the operating efficiency and timing of customer orders at a couple of our plants.

Now let's turn to our technological and operational capabilities.

For comparability, our figures now exclude production from the closed Dallas facility.

Products with 12 layers or more accounted for approximately 57% of revenues in the second quarter of 2007, unchanged from the first quarter.

Products with 20 layers or more decreased slightly to approximately 24% of revenues, compared with 25% in the first quarter of 2007.

This decrease was almost entirely related to the inventory adjustment of the networking customer that I discussed earlier.

And the average layer count decreased slightly to approximately 13.5 in the second quarter of 2007 compared with 13.7 in the first quarter.

Turning to lead times, second quarter lead times were largely stable, with the first ranging from three in the first quarter -- with lead times ranging from three to six weeks at our printed circuit board facilities, and four to eight weeks in our assembly facilities, depending on part availability.

Capacity utilization for the quarter was in the low 50s for assembly plants, and ranged from 60 to 85% in our printed circuit board facilities, with an overall utilization rate in the mid to upper 70s for our printed circuit board operation.

During the second quarter, TTM added 23 new customers.

We also continued to reduce our customer concentration.

Sales to our five largest OEMs constituted approximately 23% of revenues in the second quarter of 2007, compared with 24% in the first quarter of 2007.

And due to the PCG acquisition, concentration was less than half what it was in the year-ago period, when the top five customers represented 48% of sales.

Our top five customers in alphabetical order were Alcatel-Lucent, Cisco, Juniper, Northrop Grumman and Raytheon.

And finally, before I turn the call over to Steve, I want to comment on the PCG acquisition.

At the time of the acquisition, we said we expected it to be accretive within the first year.

In fact, it was accretive in its first full quarter, the first quarter of 2007.

PCG was accretive again in the second quarter, and we expect it to be accretive consistently going forward.

We also continue to benefit from the greater size, expanded customer base, end-market diversification, and cross-selling opportunities that resulted from the combination.

We are working hard to improve the Company in all areas.

As you know, we have, and always will have, high expectations of ourselves and our performance.

We will use our size to our advantage, and not let the fact that we are the largest printed circuit board company in North America deter our drive to deliver maximum performance.

Before I turn the call over to Steve, let me mention that during the quarter we were added to the S&P Small Cap 600 Index.

Now I'll let Steve review our financial performance in the second quarter and discuss our outlook for the third quarter.

Thanks, Kent.

Year-over-year, with the addition of the Printed Circuit Group, net sales increased 111%.

Net sales for the second quarter of 2007 decreased 8% sequentially for the reasons Kent has already outlined.

The average price per panel, excluding the production from the closed Dallas facility, increased approximately 4% compared to the first quarter of 2007.

Technology and product mix were the main drivers of the panel price increase.

Offsetting these was a 5% sequential decline in panel production.

Gross margin in the second quarter of 2007 was 18.2%, compared to 19.6% in the first quarter of 2007 and 30% in the second quarter of 2006.

As we have discussed, the year-over-year decline was due to the inclusion of the lower-margin assembly business for the Printed Circuit Group.

Sequentially, gross margins declined due to reduced overhead absorption on lower production levels.

Selling and marketing expense was flat at $7.6 million in the second quarter of 2007, but as a percent of sales increased to 4.7% compared with 4.3% of sales in the first quarter of 2007.

Second-quarter general and administrative expense, including amortization of intangibles, declined to $8.9 million compared to $9.4 million in the first quarter of the year, but as a percent of sales it increased to 5.5% from 5.3% in the first quarter of 2007.

During the second quarter of 2007 we recorded stock-based compensation expense of $884,000.

66% of this expense was recorded in G&A, 29% in cost of goods sold, and 5% in selling and marketing.

Interest expense, including debt amortization costs, for the second quarter declined $1.5 million sequentially to $3.6 million, due to further debt repayment and lower amortization of debt issuance costs.

Net income for the second quarter was $6 million, or $0.14 per diluted share.

As for our balance sheet, as you'll recall, the $226 million purchase price of 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.

We paid down $30 million of debt in the second quarter of 2007, on top of the $50 million we repaid in the first quarter.

As a result, we reduced debt outstanding to $120 million at the end of the second quarter.

We made an $11 million payment at the end of July, so our current debt balance is $109 million.

Also, as you may or may not know, Standard & Poor's raised our debt rating from BB- to BB in June.

Cash flow from operations was $13.4 million for the second quarter.

Net capital expenditures were $3.4 million in the quarter.

Depreciation was $5.7 million.

Looking ahead to the third quarter of 2007, we expect some improvement in terms of revenues and earnings.

We should benefit from renewed strength with our networking customers, and the aerospace/defense sector remains very healthy.

However, the high-end computing market remains soft.

Additionally, we continue to experience competitive pressures and pockets of weakness, particularly in our assembly and high-mix businesses.

We project third-quarter revenues in a range of $160 million to $168 million, and earnings per diluted share of $0.14 to $0.20.

The gross margin percentage for the third quarter is expected to be in a range from 18% to 20%.

We expect that selling and marketing expense will be approximately 4.6% of revenue, and that G&A expense, including amortization of intangibles, will be approximately 5.7% of revenue.

The reduction in our debt balance that I mentioned earlier will result in interest expense, including debt amortization costs, of about $3.1 million, compared with $3.6 million in the second quarter.

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

(OPERATOR INSTRUCTIONS).

Brian White, Jefferies.

Kent, can you talk a little bit about the short-term issues you mentioned at the two plants during the quarter?

We had, I guess, some issues that were just caused by more choppiness of orders coming in throughout the quarter.

When you look at our facilities, now that we have the 11 facilities, it's important to pay a lot of attention to each one of these facilities so that they are all running at a maximum efficiency.

And we're working hard to do that.

And the issues that are somewhat beyond our control, such as the timing of orders as they come into the facilities, can be fairly disruptive for a particular individual facility.

So we're working hard to alleviate those issues and have all of our divisions contribute to the success and profitability of TTM.

Kent, just the high-end computing; you brought it up again.

Not all the high-end computing companies are seeing this softness, so what do we attribute it to?

I think in our high-end, a couple of our larger companies were slow with this.

So I think in -- particularly the IBM, which is one of our largest high-end computing companies, have taken some of the work overseas.

And some of these smaller companies in that segment have back-filled into that.

So we're pretty pleased overall with the direction that the high-end computing marketplace -- where that's going for us.

But it's causing us some short-term challenges where, I think, longer-term we'll be fine with.

Do you think this business will grow sequentially in the December quarter, or not?

I think that the business in that segment on a dollar basis; I don't believe it's going to go down.

It could go up.

But when you look at our other end-markets, the network and communications; we've got some nice growth taking place there, particularly that large networking customer coming back.

And that's providing some upside there.

With our aerospace/defense segment, that continues to be healthy.

The medical and industrial, that was flat in the second quarter, mainly because a lot of those customers were with our Dallas facility.

And we built those products kind of in the first quarter.

So I believe when you look at us going forward, the other end-market segments will be fine and growing more rapidly than computing and storage.

But I don't believe computing, storage, the high-end computing segment, will decrease on a dollar basis.

Shawn Harrison, Longbow Research.

The first question just has to deal with the pricing environment here in the third quarter.

If you could just comment on what you are seeing both in quick-turn price, as well as standard lead time pricing.

Pricing, when we look at our panel price, it was up 4%.

But that panel price was up more of a result of product mix in our different facilities, and some of the different programs that we worked on during the quarter, particularly in the aerospace/defense segment.

That seemed to be -- contribute fairly nicely to some of the pricing.

As -- pricing in the marketplace, I think pricing is pretty stable there.

Our pricing on the quick-turn was down a little bit relative to our standard lead time product, but nothing significant.

So I think the marketplace is pretty stable with regards to pricing.

And our price increase this quarter was, like I mentioned earlier, a result of some product mix between facilities and product mix within our facilities.

What is the expectation, I guess, of mix (inaudible) you can see that type of improvement here in the third quarter?

Was that kind of more of a onetime jump, and there's going to be more gradual mix improvement going forward?

That's a good question, and I wish we could forecast the mix a little more accurately.

As we put together our forecast, it looked as though the aerospace/defense was going to be pretty solid, some of our high-mix facilities would be challenged, and we had some softness in our assembly segment of our business.

So I think overall, though, when we forecast the mix, that goes into the model and grinds out to the EPS forecast that we have.

We're not anticipating the marketplace to be helpful with price.

I think our prices would probably be stable, would be our best forecast.

My second question has to deal with raw material costs.

I know you've been in negotiations with your suppliers.

And then in the marketplace there's been a lot of commentary about suppliers trying to raise laminate pricing due to increases in their copper foil costs.

If you could comment on what you are seeing potentially in the second half of the year for raw materials.

We had some slight increases in our laminate due to the copper foil that you mentioned earlier.

Overall, materials are stable right now.

We don't anticipate that we'll have anything significant going forward.

We just fully expect material prices to be stable for the balance of 2007.

And that increase you saw hit in the second quarter, that small increase?

That was towards the -- I think, towards the end of the second quarter.

I'm not exactly sure of the timing.

Late second quarter, early third quarter.

But it's baked into the guidance?

It's definitely baked into the guidance.

Matt Sheerin, Thomas Weisel Partners.

A question on your guidance, Kent, because you said in the press release that you expect the manufacturing or the production from Dallas which is being transferred will account for 3 million.

So if you take that out, we're looking at, basically, sort of flattish to up a little bit revenue.

But I would expect your networking business to be up, because that production didn't come back until later in the quarter.

You said just before that you didn't think the computing and storage business was going to be down sequentially.

So maybe you can just go over again the different markets, and why you think we're just going to be kind of flattish.

Or is that cautious or being prudent in your guidance?

Good question, Matt.

I think when you try to bridge this, when you look at the 162 million in the second quarter, going to kind of the 164 midpoint of the range, from the second quarter to third quarter we're projecting about 3 million of the Dallas work to come back.

And then in the fourth quarter we should go to the 4 to $5 million run rate.

And the large networking customer that we implemented the furlough as they reduce their inventory levels, that will be a positive to about 3 million impact in the third quarter.

Now, the offset to those comes a lot in our assembly side of our business, where we have some -- about a 3, $4 million decrease in our overall assembly business, and then there's some other weaknesses in the high mix.

So when you balance that out, we are projecting upwards of a couple million dollars on the top-line.

We have some printed circuit board business that's going up where our assembly business is a little bit soft for us.

So overall, you end up to about the -- going from 162 to about 164 midpoint.

Now, if the softness isn't there like we -- as we're projecting, or some other factors take place in the high-mix segment of our business, you could have some nice -- some better numbers.

Could you just explain in detail what you mean by high-mix?

High-mix.

It's a technology product but it's not a very high layer count, like we have in, say, our Chippewa Falls facility.

There's a small quick-turn component, but it's not our quick-turn business like we have in Santa Ana.

It's the mix of work that we service with our Redmond, Logan, LA facilities, where you don't have any volume attached to any orders.

You're dealing with customers that have a lot of different part numbers with no volume behind any of those part numbers.

And it mainly services a little bit of the -- across all of the end markets.

But it to some degree focuses on the medical, industrial, computing, storage segment end markets.

Great.

That's helpful.

What was your book-to-bill at the end of the quarter, and what is it looking like today?

Our book-to-bill at the end of June for printed circuit boards was 1.01, which matched the industry or the IPC book-to-bill.

Our assembly business was lower than that, so the Company overall was 0.99.

But I think the key comparable is the printed circuit board business, the 1.01, which is right on target with IPC.

At the end of July is it similar to that?

We have continued to march at about the same pace that we did through June.

Back to the assembly business, which is going to be down.

It looks like it's a little bit of a choppier business than your PCB business, particularly on the commercial side.

The question is does it make sense for you to stay in that business, particularly on the commercial side?

I understand on the military side there's some complementary features there, customers like you to do both.

But does it make sense for you to stay in the Commercial Assembly business?

That's a good question.

I think at this point in time it makes sense for us.

We look at that business and how it ties into the printed circuit board aspect.

We still believe there's some areas that we can improve that business.

So right now, at this particular point in time, we are going to march forward with the assembly business.

Tom Dinges, JPMorgan.

Just a couple of quick ones from a modeling standpoint for you, and then one longer-term question here.

Didn't hear it, but -- tax rate assumption in the next quarter that you're assuming in the guidance?

For debt paydown?

No, no.

Tax rate.

Probably about 37.5%.

We're skewing a bit higher in our overall tax rate due to the apportionment by state.

With the Chippewa Falls resurgence and Wisconsin being a surprisingly high tax rate state, it's kind of guiding us higher.

So our rate for the year-to-date period (inaudible) 37.4; I think that will be steady for Q3.

Still assuming you're going to pay down debt to get down to less than 75 million by the end of the year?

Around $75 million.

We paid down $11 million, as we said in the script, in July.

We'll pay down probably another $10 million in the rest of this quarter, and then probably about another 25 or so, 20 to 25 in the fourth court, which will get us to right at just about $75 million.

Kent, one of the things that you said was that one of your larger customers had actually moved a little bit of business overseas.

I know you guys have been exploring that option for some time.

As you're seeing some of the pressure here in the States from other competitors, those guys that are left, and then actually seeing one of your larger customers start to move some work over there, does this accelerate any of the plans that you guys have in terms of trying to find a partner over there, or trying to find a facility over there anytime in the near future?

Let me make a few comments first about the customer moving some of that work over.

That's kind of been in the plans for a long time.

That's something that was not unexpected.

And as you look at our business in most of our facilities, being quick-turn technology, aerospace, high-mix, there's not much susceptibility to Asia competition throughout most of TTM.

So now that we have kind of a secure platform to run our North American business from, we think it's very opportunistic if we have a low-cost opportunity or a low-cost option for our customer.

So we look at a low-cost option as something that's very opportunistic for us.

I think we said in the past that our acquisition strategy is basically complete in North America.

And when we say that, we're saying that we have all the capabilities that we need as far as high-mix technology, military, aerospace and quick-turn and so forth.

So our next -- and our total focus on an acquisition front is to explore the low-cost options, and be able to provide that along with our current capabilities for our customers.

And that option has to be strategic.

It has to fit and complement our existing business.

It's not something that should be just a me too operation.

It will not be just a low-cost option that we have that doesn't fit in with our existing business.

In order to have that total package and be a global company, your facilities have to really complement each other.

And as we look at our business today, with the technology and the high-mix that we've got, we're looking to have something that would complement that so that customers would benefit from that acquisition.

Kevin Kessel, Bear Stearns.

You mentioned, Kent, that the orders from large network customers should come back in the third quarter, and you thought it might contribute as much as 3 million.

What else was weak in that category for you guys, because you actually saw a sequential decline there closer to 8 million?

There were some customers that were a little soft.

I don't think there was anything that was out of the ordinary.

There's a lot of customers in that category.

It's a pretty broad range of numerous customers that fit into that category.

So when you look at it, the main impact in that was with that large networking customer.

So as we look forward to the -- as we look forward to the third quarter, I think, that with that large customer coming back, some help with other customers, that segment will continue to do well for us.

And I think dollar-wise, that will go up.

Now whether it -- on a percentage basis, it kind of depends on how the others do, because we'll see some good growth in aerospace and medical, and those other end-markets as well.

In terms of, I guess -- just from the numbers that I have, it appears to me that the computing segment, computing storage peripherals is the only segment up on a sequential basis.

Yet it seems like it's still being (multiple speakers)

When I look at aerospace, that went from 28 to 30, our computing and storage went from 13 to 15, and medical industrial in the first quarter was 16, down to 13.

I think the -- the major reason for that was the Dallas closure and [us building] work kind of ahead in the first quarter.

And then the networking communications from 43% to 42, that could be just timing of orders and so forth.

But most of that was with the large customers.

So I don't think I would get too upset or nervous about just quarter-over-quarter movements.

But I'm just saying -- trying to reconcile the computer being weak with the fact that it went from 13 to 15%, or up about 6% sequentially.

Maybe that's a little bit -- we need to -- I think it's important that we talk about some of the larger customers in each one of these segments.

But within those segments, when you have close to 1000 customers, there's numerous customers in all of these segments that can move those percentages.

There's a broad base of customers in each one of these segments.

What about in terms of gaining market share?

How well-positioned do you feel TTM is to gain market share here in the second half of the year with some of the distractions some of the competitors are going through out there?

And then at the same time, I don't know if photo circuits -- if there's any more impact to come from that, or if that's already behind you.

I think -- just quickly, I think, the photo circuits is basically behind us.

We are extremely pleased about the position of the Company and the capabilities that we have to service our customers.

To some degree we have been focused on just the blocking and tackling as we've merged the two companies together, just making sure that fundamentals are in place.

And over the last now, what, eight months, I think, we've got those fundamentals in place to the point where we can now start to take advantage of the strengths that we have as a company.

I believe there is a lot of cross-selling opportunities out there.

And the cross-selling opportunities a lot of the time come from within existing customers, not necessarily new customers, as we can now introduce new capabilities and so forth to our existing customers.

So I think we're well-positioned to compete nicely against our competitors.

I think one thing that we need to make certain that happens is that we don't get carried away with our size, the fact that we are big, and realize that we have to function and service customers just as we did when we were a $10 million company.

So that's -- we're well aware that our size can be a real plus, and we need to take advantages of our pluses.

But let's don't let it be a detriment at the same time.

And I think we'll come back and be able to do some nice things as we go forward here.

One last clarification.

When you said competitive pressures and pockets of weakness in your assembly and your high-mix businesses, when you say high-mix, you're referring again to the PCB fabrication?

Right.

That's the PCB fabrication.

Okay.

And the assembly is just we're talking about Stafford and Hayward and China?

The weakness that we're seeing is mostly in the North American assembly, when I talked about assembly.

Shanghai still seems to be doing well.

So it's Stafford and then Hayward?

Mostly in Hayward.

Right.

I guess that's what I was getting at.

I was thinking that might be what's driving your network communications segment down a little bit further.

That is part of it, Kevin.

Because the networking -- the assembly operations are high-revenue businesses, so that is actually affecting our overall networking sales quarter-versus-quarter.

Amit Daryanani, RBC Capital Markets.

Just a question on the IBM; sounds like they're moving some revenues away to low-cost providers.

Isn't this something they tried to do, I think, a year or two ago, and they eventually weren't able to find some sustainable quality and they came back to North America?

Is the sense that this time around they found better-quality providers than the last time around?

Or do you think you're eventually going to get these revenues back, much as you did last time?

Amit, I think we've been preparing to lose some of those part numbers, and it's happening.

I wouldn't say that that's going to come back.

I think some of it comes back, and it depends on market conditions, and it depends on technology movements.

As new products come out, we'll see more bigger portion of businesses.

As products stabilize in particular companies, they move.

It's kind of the same thing we positioned ourselves to take advantage of with other customers, where we're just involved in the front-end, the high-technology and so forth.

So I think we're comfortable with the role that we play there, and we're excited to be in that role in the future.

But I don't think that we would -- it would be erroneous to say that a lot of that's gone and it's going to come back.

Fair enough.

Just the Commercial Assembly piece of the business, the 32.2 million this quarter.

How much of that is the military aero versus, I guess, non-military aero business?

Is there a split you could provide on that?

Keep in mind, Amit, that when we talk about our business segments and disclose them both in our earnings schedule as well as in our 10-Q, the military assembly operation that is housed in Connecticut, that kind of works hand-in-glove with our Connecticut military manufacturing PCB plant, is part of our PCB segment.

Because it's really -- it functions almost as a department, if you will, of the military PCB plant.

So, the Commercial Assembly operations are our Shanghai and Hayward facilities, and don't do much military work at all.

Got it.

Kent, it sounded like you wanted to run this business within TTM for a bit longer before you decide if you want to divest it.

It seems to be a fairly non-core part of your business.

I guess I don't understand; why wouldn't you want to divest it right now and kind of get a boost on the margins from there?

It's not like a core part of what your operations have ever been really.

I think at the right -- at the right time, we'll take a look at all of our divisions in that light.

It's not like we're singling out any division.

All the divisions are -- it's important that they each make a contribution to the success of TTM.

And at this particular time, we believe that that's the case, that all the divisions are generally contributing or have the potential to contribute in a satisfactory way.

We are well aware of the interest in that business, but right now we're looking at it as something that can be beneficial to us.

And keep in mind, Amit; another wrinkle to that is that the Commercial Assembly plants are customers of ours, internal customers of ours.

So they do purchase PCBs from our PCB manufacturing sites.

So it's an important factor to weigh in any kind of decision like that.

I'm just thinking of the fact that DDIC, I think, was stuck in a similar spot for a while; eventually decided to sell the position despite the fact they were in-sourcing some of the components.

And I'm wondering why go through the quarters that, for example, DDIC went through before they realized they couldn't make that sustainably profitable and just got out of the business.

But I see your point there.

My other question really is that -- if you look at TTM, when sort of (inaudible) end of '04 timeframe, early '05, you guys are doing about 30% gross margins, 20% operating margins pretty consistently.

Has the combined TTM and Tyco PCB entity changed that long-term operating margin potential at all, or is it the same [all year]?

I think it has.

And I think we have to get comfortable with the fact that the inclusion of assembly facilities, even the best-performing assembly facilities, are going to have lower margins than our historic legacy PCB plants.

And then certainly, on the other PCB side, with the additional plants we acquired from Tyco, a lot of those plants have great performance.

The military customers in particular are great long-term customers.

It's a good business that has real good predictability around it.

But it's a business that's not necessarily characterized by the kind of pricing you might see in a quick-turn environment, which can be quite robust, as you know, at certain times, but is a lot more vulnerable to cycles.

The military work is less cyclical, but also a little bit more stable, I would say, in kind of some of the pricing dynamics.

I think overall, the inclusion of the PCG business has definitely stabilized our margins at a bit lower level, but they're also, I think, more predictable, and it's also a much bigger revenue base as well.

So maybe a lower gross margin on a very much higher revenue base is a good trade-off in terms of cash flow.

Finally, I may have missed this, but what's built into your guidance in terms of expectation for ASPs next quarter on the volume side and quick-turn?

On the pricing side, we aren't expecting to see, say, market conditions change a lot in pricing.

Quick-turn was down a little bit this quarter.

Overall pricing was up about 4% due to shifts in product mix and technology demands on the work, including things like an increased component of gold surface finish work.

But I think overall the pricing market will be pretty stable in Q3.

What we're seeing now that we're an 11-plant company is that price can move a fair amount based on, say, ebbs and flows at certain plants or in certain end-market segments.

So that's a bit different.

Before when we said, say, pricing went up quarter-over-quarter, it was almost always in our old model due to improvements in the overall market conditions.

Nowadays our pricing, I find, is much more moved by mix shift than it is, say, by overall market trends, because of the many different end markets we serve now as an 11-plant company.

Does that make sense to you?

That makes absolute sense.

That's all I have.

Thanks a lot, guys.

Brian White, Jefferies.

You guys, I guess, continue to expect the Tyco acquisition to be accretive in the September quarter.

But if I look at EPS year-over-year, it looks like at the midpoint you're down 30% year-over-year.

So how do we reconcile that, and what do you think has really driven that?

When we look at accretion, we look at the contribution from the facilities that Tyco brought us, net of the costs we took on to do the deal.

So we have, say, the interest expense, the debt amortization costs, and the increased goodwill amortization related to the intangibles that were recorded as part of the acquisition.

So I think -- and we've said before the deal was accretive quarter-over-quarter.

It was more accretive in Q2 than it was in the first quarter.

I think some of the softness we've seen in the operations this quarter, with the softness in that key networking customer in Chippewa Falls, most of the softness came from our legacy operations.

So I think we are seeing significant accretion from the PCG operations.

Just where we have stumbled in general, or had challenges, it's been in our legacy business.

Does that kind of get -- I'd probably have to think about your question more analytically before I could answer it any more robustly than that.

But I think what you're trying to get at it is, on a relative basis, I think, our PCG plants are contributing more than some of our legacy plants have been, just due to some of the softness we've already described in the market that the Chip Falls plant particularly serves.

It looks like to me -- just backing out an estimate for Tyco in the third quarter, it looks like organic sales will be down 20% year-over-year.

So essentially that's what you're saying.

The base business has deteriorated due to the reasons you mentioned, while the Tyco business is in line and has been accretive.

I think I would have to just take a bit of a pause from what you said about third quarter.

Because I think, actually, in the third quarter, the plants -- the softness we're talking about mostly is limited to one key customer at one key plant.

So I think those things are all-systems-go sort of for Q3.

So I think -- I'm a bit uncertain that your conclusion about Q3 is accurate.

But we can talk about it more.

I think there's more thought to that.

I just used a 100 million estimate for Tyco sales in the third quarter.

They were running last year at about a $100 million run rate quarter-over-quarter, so that's not inconsistent with what they have historically done.

Right.

So then I get a base business down 20% year-over-year.

That's all I'm saying.

We have to look at that.

We haven't gone back and just kind of plucked through the numbers to see where our traditional TTM plants are relative to the Tyco.

But --

And nor do we really want to look at that, because again, we are a bigger, broader company now.

We're looking at one entire company.

So that's why we're not -- don't have that number right at our fingertips.

But I think it is safe to say that there has been some deterioration in the traditional TTM plants.

No question.

Understood.

And then China.

What are your thoughts again, Kent, on China?

You've spoken about at some point maybe -- are we closer?

Are we thinking Greenfield acquisition?

What are we looking at?

We don't have any option off the table right now.

We are in the beginning of the process of making some serious attempts to get into China.

In the past we've looked at the low-cost regions, but we've also had a lot of other acquisitions taking place, like the Tyco acquisition and so forth.

So we've kind of been going down a dual path within North America and, then, the low-cost region.

We completed the one now, so that leaves us with one leg of our acquisition strategy remaining, which is a low-cost provider.

And the challenge that we have is to find the right opportunity to make sure that it is very strategic and that it complements our existing facilities, and that it's not just another high-volume me too low-technology shot.

So we're going to be very cautious about that, but we're looking and beginning to start that process, and kind of kick it in high gear.

Is it reasonable in 12 to 18 months to expect you to talk about this?

We're in the beginning -- we're just right in the beginning of making that a real focus within the Company.

So I wouldn't -- I'd have a hard time putting a timetable on.

But we're certainly within the window of finding the right opportunity and taking action as soon as we do.

Matt Sheerin, Thomas Weisel Partners.

The follow-up has to do with your discussion about operating margins, or rather, gross margin goals.

In the past you've talked -- with the combined company, you've talked about the 20 to 25% range.

Is that still a goal that you have?

And what is it going to take for you to get there?

And what kind of potential timeline should we be looking at for you to get back in that range?

A couple quarters or so?

At the 20% level, I think, that's pretty close to where we were in the first quarter; 18.6 in the second quarter.

Now we're forecasting -- I don't know where the midpoint is, but it's up.

So as I look at our company and where we're at today, and some of the improvements, the direction that we're going, I think, a 21, 22, 23% range would be a nice place to get to, and very reachable and attainable.

To go above 25, I think, we would need some more help from the marketplace.

So would you get there just by basic blocking and tackling, a little bit of volume growth, and what else?

I think it's mainly up to us to run the business such that we can move up to those levels at 21, 22, 23%.

I think there's kind of two factors at play here, Matt.

One, of course, would be it's always great to have a tailwind at your back with pricing.

That can definitely propel us forward to 25 pretty easily.

But I think the more reasonable case or method to get to what Kent is describing, at 22, 23% margins, will be improved fixed cost absorption, which is a twofold process.

One is higher revenue, (technical difficulty) we expect our incremental gross margin to be about 35%.

Our analysis kind of indicates about 35%.

So obviously, every additional board we get in the door (technical difficulty) that gross margin, that (technical difficulty) I think that is going to be incumbent on the sales growth, but also on operating efficiency improvements.

I think those are -- now that we've gotten through a lot of the integration dynamics and process implementation, I think, now we're at the point where margin improvement is the biggest focus for all of us, in terms of (technical difficulty) financial, operational, sales (technical difficulty)

It appears there are no further questions.

For closing remarks, I would like to turn the call back to Kent Alder.

Please go ahead, sir.

Thank you.

I just want to thank everybody for joining us today.

We've got a lot of opportunities as we move forward here.

We're excited about the position of the Company.

We appreciate the interest in TTM, and we will see you next quarter.

Thank you.

Ladies and gentlemen, this concludes today's presentation.

Thank you for dialing in today.

You may disconnect your lines.

Have a great day.