TTM Technologies Inc (TTMI) 2017 Q2 法說會逐字稿

Good day, and welcome to the TTM Technologies, Inc.

Q2 Earnings Call.

At this time, I would like to turn the conference over to Sameer Desai, Senior Director of Investor Relations.

Please go ahead, sir.

Thank you.

Before we get started, I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to TTM's future business outlook.

Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the factors explained in our most recent annual report on Form 10-K and our other filings with the Securities and Exchange Commission.

These forward-looking statements are based on management's expectations and assumptions as of the day of this presentation.

TTM does not undertake any obligation to publicly update or revise any of these statements, whether as a result of new information, future events or other circumstances, except as required by law.

Please refer to the full disclosures regarding the risks that may affect TTM, which may be found in the reports on Form 10-K, 10-Q, 8-K, the registration statement on Form S-4 and the company's other SEC filings.

We will also discuss on this call certain non-GAAP financial measures, such as adjusted EBITDA.

Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release, which was filed with the SEC and is available on TTM's website at www.ttm.com.

I would now like to turn the call over to Tom Edman, TTM's Chief Executive Officer.

Please go ahead, Tom.

Thank you, Sameer.

Good afternoon, and thank you for joining us for our second quarter 2017 conference call.

I'll begin with a review of our business strategy, including highlights from the quarter, followed by a discussion of our second quarter results.

Todd Schull, our CFO, will follow with an overview of certain key balance sheet and cash flow metrics, our Q2 2017 financial performance and Q3 2017 guidance.

We will then open the call to your questions.

Revenues for the quarter were $627 million, growing 4% year-on-year, representing the third consecutive quarter of organic year-over-year growth.

In addition, this was the highest revenue second quarter in the history of the company.

We also demonstrated solid operating result, with non-GAAP operating income growing 18% year-on-year to the high end of guidance.

Non-GAAP EPS of $0.31, although higher than last year's $0.28, was negatively impacted by approximately $0.05 in the quarter by a noncash foreign exchange loss due to the weakening U.S. dollar.

The second quarter results validated many of the elements of the strategy we've communicated over the past year.

First, the diversification of our end markets helped to reduce quarterly volatility and stabilized our revenues, in what was a challenging quarter in one of our end markets.

On a year-over-year basis, most of our end markets grew, more than offsetting some difficult conditions in the networking and communications end market.

Of particular note, we achieved record revenues and the program backlog in the aerospace and defense market.

Second, the automotive market continues to be a core growth driver due to increasing electronic content as well as the adoption of our advanced technologies.

We see 4 key megatrends driving automotive content growth: one, vehicle safety and autonomous driving; number two, increased adoption of hybrid and electric vehicles; number 3, advanced infotainment; and four, increased connectivity.

Market forecasters expect the PCB content per vehicle to grow from $60 in 2016 to $70 by 2020.

Some hybrid and electric vehicles currently employ well over $150 of PCBs per vehicle.

While hybrid and electric vehicles make up only 1% of automotive production today, forecasts expect unit volumes to increase significantly, following price parity with traditional combustion engines as early as 2022.

Just last week, Tesla began deliveries for the new Model 3, its first mass-market electric vehicle.

And earlier this month, Volvo announced that starting in 2019, all new models would have an electric motor.

Both autonomous vehicles and electric vehicles are in the early stages of adoption, but already represent a strong focus area for our customer engineering engagement.

TTM is uniquely positioned to take advantage of these megatrends and content growth due to our focus on radio frequency, or RF, and advanced technologies such as high-density interconnect or HDI.

TTM has a long history of RF technology leadership, which is currently being applied to the automotive industry in radar and LiDAR technologies used in safety systems and autonomous driving.

As radar technology evolves from 24 gigahertz to 77 gigahertz, customers are looking for the proven solutions we provide.

For RF, we are currently qualified by 10 automotive customers, and are in the qualification process with an additional 9 customers.

This includes engineering-level engagement with 4 new RF customers for autonomous driving applications.

The autonomous driving market requires advanced 360-degree cameras and the LiDAR systems to assist in navigation for which we can meet PCB needs.

We are also seeing adoption of HDI technology for both autonomous vehicle and electric vehicle applications.

Finally, I'd like to comment on our cellular market.

We are seeing a slower start this year in our normal seasonal ramp of cellular products, which will impact our results in the third quarter.

But we still expect this ramp to occur and accelerate over the coming quarters.

As we've discussed on previous calls, we are implementing a technology transition in support of this business and are focused on ongoing yield improvement as volumes grow.

Now I'd like to review our end markets.

Automotive sales represented 20% of total sales during the second quarter of 2017 compared to sales of 19% in the year-ago quarter and 20% during the first quarter of 2017.

We saw an acceleration of year-over-year growth in Q2 to 8%, driven by increased adoption of electric vehicles.

We expect year-on-year revenue growth to continue to accelerate in Q3, particularly in our E-M Solutions segment, and expect automotive to contribute 23% of total sales.

Networking/communications accounted for 20% of revenue during the second quarter of 2017.

This compares to sales of 25% in the second quarter of 2016 and 20% in the first quarter of 2017.

Sales declined on a year-over-year basis, largely due to weakness from the telecom market, with the networking market relatively stronger.

In Q3, we expect this segment to be 20% of sales as we see moderate, sequential growth in the networking market.

The Aerospace and Defense end market represented 17% of total second quarter sales compared to 16% of Q2 2016 sales and 15% of sales in Q1 2017.

On a year-over-year basis, we saw a solid growth of 9% across a broad set of defense customers.

Program backlog rose to $206 million from $193 million last quarter, which is a record level for TTM.

We expect sales in Q3 from this end market to represent about 16% of our total sales.

The medical/industrial/instrumentation end market contributed 15% of our total sales in the second quarter compared to 16% in the year-ago quarter and 15% in the first quarter of 2017.

We saw flat revenues year-over-year.

We expect sales for this end market to represent approximately 15% in the third quarter.

Sales in the computing/storage/peripherals end market represented 14% of total sales in the second quarter compared to total sales of 13% in Q2 of 2016 and 15% in the first quarter of 2017.

For the second quarter in a row, we saw a year-on-year growth of 20% from increased adoption of advanced PCB technologies in high-end laptops as well as strength in the semiconductor sector.

We expect sales in computing to represent approximately 13% of third quarter sales.

The cellular phone end market accounted for 13% of revenue in the second quarter compared to sales of 10% in Q2 of 2016 and 14% in Q1 of 2017.

We saw substantial year-on-year growth due to improved inventory control and sell-through by our primary cellular phone customers.

We expect cellular to represent 16% of third quarter sales.

In Q3, year-on-year growth is being impacted by the slower start of the normal seasonal ramp.

Next I'd like to talk about details from the second quarter.

TTM delivered solid results in the second quarter.

Revenue came in at $627 million and in line with the midpoint of prior guidance of $605 million to $645 million.

Non-GAAP earnings per share came in at $0.31, ahead of $0.28 last year, but at the low end of our guidance due to a foreign exchange loss as earlier discussed.

Excluding this foreign exchange loss, EPS would have been $0.36, at the high end of our guided range.

Most end markets grew year-over-year with particular strength in the cellular and computing end market.

I continue to be pleased by our strong operational execution, which amplified the revenue upside.

As evidence of our improved operating efficiency, our non-GAAP operating profit grew 18% year-over-year, while revenues grew 4%.

During the quarter, our advanced technology business, which includes HDI, rigid-flex and substrate, accounted for approximately 33% of our company's revenue.

This compares to approximately 29% in the year-ago quarter and 35% in Q1.

The year-over-year growth was driven by the cellular and computing end markets, while the sequential decline reflects typical seasonality.

We are continuing to pursue opportunities and increase design activities that will leverage our advanced technology capabilities in new markets.

Capacity utilization in Asia Pacific was 83% in Q2 compared to 81% in Q1.

Our overall capacity utilization in North America was 54% in Q2 compared to 56% in Q1.

Our top 5 customers contributed 33% of total sales in the second quarter of 2017 compared to 34% in the first quarter of 2017.

Our top 5 OEM customers during the quarter, in alphabetical order, were Apple, Bosch, Cisco, Huawei, and Raytheon.

Our largest customer accounted for 16% of sales in the second quarter, the same level as in Q1.

At the end of Q1, our 90-day backlog, which is subject to cancellations, was $433.7 million compared to $380.7 million at the end of the second quarter last year and $414.4 million at the end of Q1.

Our PCB book-to-bill ratio was 1.08 for 3 months ending July 3.

In summary, we delivered solid second quarter operating financial results.

Following our strength in Q1, we demonstrated the benefits of our diversified end market mix, registered strong growth in our cellular and computing end markets as well as our automotive and aerospace and defense end markets, and continue to focus on operational execution.

We continue to be optimistic about the future of TTM.

Now, Todd will review our financial performance for the second quarter.

Thanks, Tom, and good afternoon, everyone.

We had a solid operating quarter in Q2.

And let me just summarize a few of the financial highlights.

As Tom mentioned, revenue in the second quarter was $627.2 million, grew 4% year-over-year, and represents an all-time high for second quarter for TTM.

We achieved a non-GAAP operating margin of 8.8%, an improvement from 7.7% operating margin in Q2 one year ago and the highest level for any second quarter since 2011.

Non-GAAP EPS was $0.31 in the second quarter compared to $0.28 last year.

The EPS was negatively impacted by $6.5 million unrealized foreign exchange loss due to the depreciation of the U.S. dollar.

Excluding this impact, EPS was $0.36 at the high end of our guided range.

We generated $85.5 million of adjusted EBITDA versus $90.2 million a year ago.

The decline year-over-year is due to the foreign exchange loss previously mentioned.

Lastly, we made a $50 million payment on our term loan during the quarter.

So onto the details.

So for the second quarter, net sales were $627.2 million compared to net sales of $601.8 million in the second quarter of 2016 and compared to first quarter 2017 net sales of $625.2 million.

The year-over-year increase in revenue was across most of our end markets, led by growth in our cellular, computing, aerospace and Defense and automotive end markets, partially offset by lower revenue in our networking and communications end markets.

GAAP operating income for the second quarter of 2017 was $45.1 million compared to $34.7 million in the second quarter of 2016 and $52.6 million in this first quarter of 2017.

On a GAAP basis, net income in the second quarter of 2017 was $20.6 million or $0.18 per diluted share.

This compares to $18.5 million or $0.17 per diluted share in the second quarter of last year and $33 million or $0.28 per diluted share in the first quarter of this year.

The remainder of my comments will focus on our non-GAAP financial performance.

Our non-GAAP performance excludes debt extinguishment costs, restructuring costs, acquisition-related costs, certain noncash expense items and other unusual or infrequent items as well as the associated tax impact of these items.

Additionally, we exclude nonoperational changes in our tax expense, such as the impact of retroactive changes in the tax law and non-cash discrete items.

We present non-GAAP financial information to enable you, the investor, to see the company through the eyes of management and to provide better insight into the company's ongoing financial performance.

Gross margin in the second quarter was 15.4% compared to 16.3% in the second quarter of 2016 and 16.9% in the first quarter of 2017.

The year-over-year decrease in gross margin was mostly due to the reclassification of certain costs from G&A, the cost of goods sold, that we've discussed on previous earnings calls, also the impact of our annual salary increases, and this was partially offset by higher revenues.

The sequential decrease was due primarily to lower volumes and yields in our cellular end market-focused manufacturing facilities as we began multiple new product and technology ramps, the impact of the annual salary increases and a change in the mix of our revenues with increased EMS revenues.

In addition, the $3 million benefit in the first quarter for an insurance settlement due to the fire at our Anaheim facility was not present in the second quarter.

Selling and marketing expense was $15.5 million in the second quarter or 2.5% of net sales compared to $16.3 million or 2.7% of net sales in the same quarter a year ago and $16.4 million or 2.6% of net sales in the first quarter.

The year-over-year decrease in the amount of sales and marketing expense was due to our synergy initiatives.

Second quarter G&A expense was $25.9 million or 4.1% of net sales compared to $35.2 million or 5.8% of net sales in the same quarter a year ago and $27.7 million or 4.4% of net sales in the previous quarter.

The year-over-year decrease in G&A as a percentage of sales was largely due to the reclassification of certain costs from G&A into cost of goods sold as well as lower spending.

Our operating margin in the second quarter was 8.8%.

This compares to the 7.7% in the same quarter last year and 9.8% in the first quarter of 2017.

The improvement year-over-year demonstrates the benefits of diversifying our revenue base and our focus on operational execution and cost management.

Interest expense was $10.2 million in the second quarter, a decrease of $4.3 million from the same quarter last year due to the repricing of our debt as well as prior debt repayments.

We recorded $6 million of foreign exchange loss and other income net in the second quarter compared to a net gain of $3 million in the second quarter of last year.

The loss in the second quarter of 2017 was due primarily to the appreciation of the RMB versus the U.S. dollar during the quarter.

Our effective tax rate was 15% in the second quarter.

It was 19% in the same quarter a year ago.

Second quarter net income was $33.3 million or $0.31 per diluted share.

This compares to second quarter net income of $28 million -- $28.4 million or $0.28 per diluted share in the first quarter of 2017 -- and first quarter 2017 net income of $39.2 million or $0.37 per diluted share.

Adjusted EBITDA for the second quarter was $85.5 million or 13.6% of net sales compared with second quarter 2016 adjusted EBITDA of $90.2 million or 15% of net sales.

In the first quarter, adjusted EBITDA was $95.6 million or 15.3% of net sales.

Moving on to our segment performance.

The PCB segment had net sales of $574.3 million in the second quarter, up from $561.4 million in the second quarter of 2016 and down from $583.6 million in the first quarter of 2017.

Gross margin for this segment was 16.1% in the second quarter compared to 17.1% in the same quarter a year ago and 18.2% in the first quarter.

The year-over-year change in sales and gross margins were noted in my earlier comments.

The PCB segment's second quarter operating income was $69.4 million compared to $65.6 million in the same quarter last year and $82.2 million in the first quarter.

The electro-mechanical segment had net sales of $52.9 million in the second quarter, up from $40.4 million in the second quarter of last year and $41.7 million in the first quarter of this year.

The year-over-year revenue increase was due to an increase in the automotive end market.

The sequential increase in revenue was due to the increases in both the automotive and networking and communication end markets.

Gross margin for this segment was 10.1% in the second quarter compared to 8.5% in the same quarter a year ago and 2.7% in the first quarter.

The gross margin increased year-over-year mainly due to increased volumes.

The sequential increase was due to increased volumes and the absence of inventory writeoffs, which we incurred in the first quarter of this year.

The electro-mechanical solutions segment's second quarter operating income was $2.9 million compared to $0.7 million in the same quarter last year and a loss of $1.4 million in the first quarter.

Corporate SG&A expense, not directly associated with the PCB or E-M Solutions segments, was $15.9 million in the second quarter of 2017, $18.3 million in the same quarter last year and $17.8 million in the first quarter of this year.

Adjusted cash flow from operations was $59.1 million in the second quarter versus $80.7 million in the year-ago quarter.

And we do experience fluctuations quarter-to-quarter due to a variety of factors, such as the timing of customer payments and seasonality of revenue.

Our fundamental cash operating metrics, however, remain consistent and are approximately 10% better this year than last year.

For the first half of the year, adjusted cash flow from operations was $108.8 million compared to $100.9 million in the first half of 2016.

Cash and cash equivalents at the end of the second quarter totaled $246.9 million versus $282.9 million in the first quarter.

During the quarter, we repaid $50 million of principal on our Term Loan B.

Depreciation for the second quarter was $36.1 million and our net capital spending for the quarter was $45.6 million.

Now I'd like to turn to guidance for the third quarter.

Taking into account Tom's earlier comments regarding our cellular end market, we expect total revenue for the third quarter of 2017 to be in the range of $625 million to $675 million.

As a reference point, our third quarter revenue last year was $641.7 million.

We expect non-GAAP earnings to be in the range of $0.29 to $0.35 per diluted share.

This compares to an EPS of $0.39 per diluted share reported in Q3 of 2016.

The EPS forecast is based on a diluted share count of approximately 109 million shares.

Our share count guidance includes dilution from dilutive Securities such as stock options and restricted stock units as well as roughly 6 million shares associated with our convertible bonds, which is a function of our future stock price.

As a reminder, for every dollar increase in the average share price above $14.26 during a quarter, our shares outstanding would increase by approximately 1.5 million shares.

We expect that SG&A expense will be about 6.9% of revenue in the third quarter.

We expect interest expense to total about $10.4 million, and we estimate our effective tax rate to be between 15% and 19%.

To assist you in developing your financial models, we offer the following additional information.

We expect to record during the third quarter amortization of intangibles of about $6 million, stock-based compensation expense of about $5 million, noncash interest expense of approximately $2.7 million, and we estimate depreciation expense will be approximately $37 million.

Finally, I'd like to announce that we'll be participating in the Needham Industrial Conference in New York City tomorrow, August 3; the Drexel TMT Conference in New York City on September 6; the Deutsche Bank Technology Conference on September 13 in Las Vegas; and the Deutsche Bank Global High Yield and Leverage Debt Conference in Scottsdale, Arizona, on October 3.

That concludes our prepared remarks.

And we'd now like to open the line for questions.

Johnny?

(Operator Instructions) And we'll take our first question from Matt Sheerin with Stifel.

Just a couple of questions from me.

Starting with guidance, Tom, on the cellular business, looks like some pushouts there, and it looks like the revenue in that segment will be down year-over-year.

Obviously, visibility into Q4, probably, limited at this point, but would you expect to grow that business, that segment year-over-year in the fourth quarter?

And I think your statement -- first of all, thank you for the question, Matt.

I think your statement is right that visibility in the cycle, always limited, particularly when you're early in the cycle.

What I can say is that the volume here -- the volume ramp is occurring later than what we would've considered normal in the past several years.

We are continuing to work very hard on our yield performance.

We are certainly supporting our customers as they gear up for the fall introductions.

And, of course, we're very hopeful that the sell-through will be strong and the sell-through will, in turn, determine that volume as we would head into Q4 and then Q1.

So that's probably the best feeling I can give to you, Matt, at this point.

Okay.

Fair enough.

And on the EPS guidance sort of backing into gross margin, it looks like gross margin will be down sequentially.

If you could just talk about some of the drivers there?

And I imagine, A, the lack of the volume growth that you would have expected from cellular.

Just also wondering if there is any yield issues within cellular that have -- could near term or hurt margins?

And then also if you could talk about raw materials, such as copper where copper pricing and copper collateral laminate pricing are going up, and whether that impacts your margins going forward?

Matt, this is Todd.

Let me start off and try to address your question.

As we look at the sequential growth or changes in our forecast relative to how we did in Q2, you're right to observe that we're going to be down a little bit sequentially in terms of margins.

Our operating margin, as we look at Q3, we're projecting right now at about 8% and that would compare to 8.8% in the second quarter.

As we look at the major drivers of that, I think you got 2 components.

One, obviously, is this slower start to the seasonal ramp that we typically have seen in the past.

And that reflects itself in lower volumes, obviously, but also in our ability to climb our production -- our productivity curves and our yield curves, which are typically very critical for us as we go through that ramp phase.

So you are seeing some negative impact from that as we're baking it into the forecast here and in the guidance that we're providing.

Now the other aspect, too, is a little bit in the SG&A area.

We had some favorable spending results in the second quarter spread across several relatively smaller items, but those are not necessarily projected to repeat in the third quarter.

So those 2 are really the bigger elements with the cellular startup being the bigger factor, obviously.

And so raw materials are...

The overall EPS from quarter-to-quarter, we're obviously assuming the absence of big FX, unrealized FX costs down below the line.

I mean, you net the 3 of those things out, that's how you end up with the guidance.

Okay.

And just -- any comments just in terms of the raw materials and whether that you're seeing any impact there?

The ability of that continues to increase, pass that along to the customers?

Yes, this is Tom.

I'll answer that one.

So from a copper -- so copper has a relatively indirect effect on raw materials.

What really was driving the raw material situation earlier in the year related to copper foil, which is a critical raw material, goes directly into some of the automotive PCBs, it also goes into laminate.

And just to give you a feel for that, we saw some increases early on in Q1.

And on top of that, of course, we had our usual annual labor increases -- merit increases that we administered in Q2.

I would just point to our operating margin and operating income performance in Q2 where we really absorb those.

At this point, Matt, the situation is actually very stable from a raw material standpoint.

In terms of how we then negotiate with our customers, as you can imagine, that's a mix.

We have a set of customers that are on longer-term contracts, which we negotiate yearly, for example, networking/communications and automotive customers, aerospace and defense customers tend to be in that category.

And then you have the commercial customers that -- where you're tending to negotiate more frequently, there's more frequent ASP resets because of the innovation that's occurring there.

So there -- you're always -- collectively we're looking at raw material pricing as we price our PCBs.

So, hopefully, that gives you a feel of that.

And we'll go ahead and take our next question from Sean Hannan with Needham & Company.

Can you hear me?

Yes we can, Sean.

So just if I could follow-up on some of the information you provided around cellular, should we be assuming that versus last year or last few years those yield rates that we're looking at for this year might be a little bit lower.

It just seems that the compression around the margins might be a little bit more pronounced, so just trying to understand that a little bit better.

So to give you a feel for the dynamics, when we talk about the fact that a ramp is occurring slower than expected, what happens there is -- there are multiple factors, right.

One is, volume is lower.

So volume is lower, and what does that mean?

Well, that means you're going to have or we have more of a challenge in terms of going up that experience curve.

So that's a factor on yield.

The other is technology innovation and technology change.

And as we've covered on previous calls, this is a significant technology transition.

So the fact that the ramp is coming later in the quarter than would be considered normal, that leads to -- and the fact that there is a significant technology transition there, those 2 factors, absolutely, when you're looking at yields that -- or a yield curve that would be occurring later in the quarter, and then ramping, you know, improving as to get into real volumes.

And what I would point you to is more of what we saw in 2014, if you look back in history.

And in 2014, there was another significant technology transition, both on the end-user side and also on our side.

And so that led to a delayed ramp in Q3, and then significant performance in Q4 and then carried on into Q1.

That's probably a good cycle to compare it to.

We'll see how it all rolls out as we go forward here.

And as you can imagine, our job, number one, is to continue to improve yields, support our customer.

And I can't thank our employees enough.

They've done a tremendous job handling this transition, and they continue to work 24/7 pretty much in terms of their focus on yield improvement, on improving performance and continuing to satisfy our customers.

That all makes sense, Tom, and thank you for those comments.

I suppose part of what I'm trying to also get after is the yield curve that you mentioned is the shape or the path of that yields curve any different than if we were to look at, say, your reference point of 2014, is there a difference?

Is this a little bit more unique this year?

I think -- so, again, it's early.

And so as you can imagine, when you look at the yield curve and as we look at how the units are priced, there's always going to be a situation where you're looking at essentially a price reset because of a technology challenge.

And in that context, you then start working on your yields.

And so from that standpoint, again, a little bit too early to tell.

We're -- our goal is to make that yield curve as similar as we've seen in past years as possible.

And that's what our team is working towards.

So hopefully, that gives you a little bit of a feel for it.

The major factor here is just the fact that volumes have been a little bit late in coming and that coupled with a significant technology transition.

Okay.

That's helpful.

On the aerospace side of your business, it sounds like you're yet, again, continuing to see some great momentum there.

Can you express to us, if you feel that -- now that we're seeing these types of backlog numbers often times hitting a lot of these recently reported quarters hitting a record in terms of your backlog, do you feel that at this point, it has given us some strong momentum or even visibility into, say, the fourth quarter and 2018 or going out as far as '18, is that, maybe, perhaps a little bit too premature at this point?

I think you made a great point, Sean.

So when we talk about the program backlog of $206 million, that's a program backlog.

So many of those programs will be carried out over multiple quarters, sometimes over the course of 2 to 3 years.

So what it gives us confidence in as we fill in and as we build that program backlog is the go-forward, really, not Q4 as much as carrying into next year and beyond.

It gives us confidence that we've got a strong base of business on which we can then rely and on which we can build our own plans to service customers.

So it's that confidence factor.

And yes, we're really pleased to see those bookings.

The program bookings are translating now into year-on-year growth.

Certainly, in the second quarter, growing 9% year-on-year is excellent performance.

We are looking forward to, again, a good year-on-year growth performance in the third quarter.

And as we head into next year, a lot of very -- the tailwinds that you'd be looking for in the aerospace and defense business going into 2018.

So certainly very helpful for us.

And we're, again, very pleased to see program backlog at record levels.

We're also really pleased that we have a footprint now that can meet customer demand in the defense area and that is prepared to accommodate ongoing customer build-up requirements.

That's great.

That's perfect.

Last question here, automotive.

You have, I think, pretty consistently mentioned where the view points are in terms of average dollar content per vehicle as well as the current expectations and trajectory, say, $60 to $70 by 2020-or-so.

It seems that as these months and quarters have progressed here in '17, that there is an accelerating conversation that the dollar content or even electronics proliferation within vehicles, that path is accelerating itself.

And so just wanted to see if we could some color around that as you think about those types of estimates getting to a $70, do you feel, at this point, that, that might even be something that's moving higher?

Do you feel that, that's a very beatable type of number as it relates to trends that will be affecting your business?

Sure.

The best example of that, you know, last year, we were, everyone was talking -- talk about the fact that, that $60 mark would be hit in 2018, 2019.

And suddenly, at the end of last year, when the numbers were published, we hit $60 per vehicle.

I would expect something similar to happen this year.

I think your premise there is spot on.

I think the growth is happening much faster than the forecasters have been able to keep up.

And you have to remember, these forecasters are certainly in the printed circuit board world.

They are covering multiple end markets as they look at trends.

And I think in the case of automotive, it's a case of catch up and would expect that we -- I think and we've been consistent about this.

I think the $70 forecast is an extremely conservative forecast by 2020.

I would expect to get to that $70 mark earlier -- far earlier than that.

We'll see where the numbers come out at the end of this year

And we'll go ahead and take our next question from Steven Fox with Cross Research.

Just a couple other questions on some of the near-term issues.

First off, in terms of the yield issues and the ramps going on right now, I'm trying to understand, based on the current volumes you're shipping, whether the yields are in line with what you would expect with those current volumes?

Or whether you're having some own -- your own internal problems?

Can you talk about that first off?

Given where the volumes are, I think they're right where we would have expected them to be.

Okay.

So your execution isn't really the issue at this point?

And again, last quarter we talked about it as well.

Last quarter, we were at that pilot production stage and were feeling confident that we were meeting yield estimates and that we're positioned well.

And as we are -- as we stand with the volume that is out there today, we are -- we continue to be on schedule.

Okay.

And then can you give us -- is there any way without tipping your hand too much, if you can give us some appreciation for what the incremental challenges are in terms of ramping this versus, say, prior -- previous printed circuit board designs?

Yes.

So the process that has been incorporated is, a substrate, comes from the substrate side of the business.

And it's really all about getting lines and spacing down below 30 microns.

And that requires the incorporation of several additive steps.

And also a sort of step-up in terms of cleanliness in the process.

What we have an advantage here, and several of our competitors do as well, in that we have a substrate line in operation in our Shanghai facility.

So we've been -- we've had this process in place for our substrate production for about 5 years, close to 5 years now.

And so with that experience base, you're talking about scaling up the size of the panel to a PCB size, and then meeting those line and spacing requirements by incorporating the additive steps.

And so that's really where the requirement or the core of the requirement.

Again, a little bit more difficult to do if you don't have substrate experience.

But certainly, we are tapping into that experiences as we go through the scale up.

And then just lastly on this.

As sort of the polls increase, are you still expecting, say, over the course of, say, this quarter or rather Q2 through, say, Q4/Q1 that the total volumes you're going to ship are going to similar to what you would have expected before you started this process?

So much of that, Steve, relates to sell-through.

I just -- I really can't -- we can't comment.

It's our intent, and I think the question was asked earlier on in terms of yields.

It's our intent to meet our yield estimates and fully satisfy our customers as we go through the ramps, but the absolute volume is so much in the control of the consumers out there and as well as our customers.

I'm sorry, I can't give you any further visibility on that.

No.

I understand.

And then last question from me is just on the RMB.

So what is factored into guidance for the dollar-RMB exchange rate for the current quarter?

So generally, Steve, we do not forecast gains or losses on the unrealized gains or losses on that exchange rate.

So we always -- our forecast is always a 0. And so in terms of where you are benchmarking off of relative to our ending number, probably I recall it's somewhere in the upper 6.7 -- 6.77 somewhere around there exchange rate.

And it's not just the RMB against the dollar, it's also the RMB against the Hong Kong dollar, which tends to move with the US dollar, but there is some subtle differences from time-to-time.

And the 6.77 is the average that you -- for the quarter or is that the ending point for the quarter?

That's where we ended last quarter.

So if the currencies tend to strengthen or weaken off of that, that's what will drive gains or losses below the line.

And, again, they are unrealized.

They are more related to capital structure and balance sheet.

They're really not economic losses.

They just show up on the P&L.

You're going to get technical accounting answer here.

They tend to be offset when you convert it back to U.S. dollars, which -- but that's the gain for that shows up in equity.

The negative is in the P&L.

And so you have a mismatch, if you will, on this.

And so the key takeaway is there's not an economic gain or loss.

(Operator Instructions) And we'll go ahead and take our next question from Paul Coster from JPMorgan.

It's Paul Chung on for Coster.

So just on operating margins, given the strong start for the year, which were helped by auto, so you've executed as promised on the first half increase in margins.

Now, your longer term 10% target seems very achievable, especially if cellular ramps materially in Q4.

So how have your longer-term operating margin targets not changed, given the strong start?

We talk about this every quarter.

We set a goal out there to get 10% on the average, right?

And last year if you look at four quarters, we got better every quarter, and we traditionally peak in Q4, because that tends to be our seasonally strongest quarter.

And last year, I think our Q4 was 11.5%.

But even with that for the year, I think we finished at around 8% or 8.8% for the year, if I recall.

So we're trying to get our average to 10%, okay.

We had a great start in Q1.

We had a couple of tailwinds that helped us there.

We're having -- Q2 here is way better than last year's Q2.

So we're definitely in a positive boat.

Q3 is going to be a little more challenging.

And then Q4, it will depend on how that ramp comes together as Tom has explained.

But typically, we see our strongest numbers late in the year.

As far as will we hit 10% or not this year?

Really, we got to wait and see how that plays out and how strong Q4 is.

Our goal is to get there as an average.

I'm not sure if we're going to make it this year or not, we're pretty close.

And we're going to drive and continue to drive the company to get there.

And so that's really our objective, and we're not ready to change that goalpost, if you will, at this point until we've actually delivered on it.

Got you.

And then just on the global footprint.

Do you see any other opportunities to consolidate facilities, particularly in North America increase your utilization rates?

So I think I talked about the defense situation and the program backlog as it's been building.

What we have in North America in terms of footprint, we're very pleased with.

We have smaller facilities that are very specialized, provide -- meet specialized requirements and very technical requirements from our customers.

We then have several larger commercial facilities as well.

If you look at that 2% drop in utilization rate, which is really meaningless, given the fact that in our North America facilities, we're really looking at -- we look at plating capacity to calculate this number, and usually these facilities are high mix, low-volume, and so they tend to -- the bottlenecks tend to be elsewhere in the process.

What I -- from a profitability standpoint, they're performing -- all the facilities are -- most of them are performing very well.

And what we are very focused on right now is making sure that each of our facilities has a clear charter, that they continue to serve their purpose, both the larger commercial facilities for pilot manufacturing and engineering engagement with our customers, the defense facilities for the specialized nature of the requirements that they're meeting.

We're -- and overall very, very pleased with what we have in place in North America.

Got it.

And then my last question is just a follow-up on aerospace and defense.

I don't see much seasonality there, but is it fair to assume you can hit possibly high single-digit, maybe double-digit year-on-year growth for the year?

And given TTM is growing well ahead of the market projection, can you talk about the levers there?

And how your market share has evolved?

And where you expect fiscal year '18, given your high visibility into the backlog?

Sure, Paul.

So the forecasters had the longer-term growth rate in aerospace and defense is between 2% and 4%.

We've already said that we believe we're going to grow above that level.

We're still confident in that belief.

We do see this is going -- certainly, this year will be ahead of the high end of that number.

And you can see that, again, reflected in our Q2/Q2 compare of 9%.

And also if you run the numbers on what we're looking at for Q3, we'll be certainly at the high end of that growth rate.

So as we go into 2018, it certainly gives us confidence that, again, we'll certainly be able to get to that high end of that rate.

And we'll see how that program backlog continues to come together in Q3 and Q4 and then how our facilities perform.

Because at the end of day, our facilities need to perform well.

We need to meet customer requirements.

We need to execute against those customer requirements, and that in turn allows us to build orders or build backlog.

And I would also, just as a reminder, remind you that we're doing not just PCB here, we actually have an engineering service organization as well as an assembly capability so that we're engineering assembled solutions as we bring product to our customers.

So, again, I think the team is doing a great job there.

We just need to remain focused on meeting demand, preparing that footprint for what we think is going to be an ongoing buildup of demand, and then performing and exceeding customer expectation.

And gentleman, it appears we have no further questions in the queue at this time.

So I'd like to go ahead and turn it back over to you for any additional or closing remarks.

Okay.

Great.

I just like to thank everybody for joining the call.

I'd like to just quickly summarize some of the key points in the call that we made earlier.

We delivered solid results for the second quarter of 2017.

We delivered in line revenues and operating income at the high end of our expectations.

Our goal is to continue to improve our operating and financial performance in the coming quarters.

I'd like to thank, again, our employees, our customers and our investors, for your continued support.

Thank you and goodbye.

Ladies and gentlemen, that does conclude today's conference.

We'd like to thank you all for your participation.

You may now disconnect.