Sameer Desai - Senior Director, Corporate Development and IR Thomas Edman - President and Chief Executive Officer Todd Schull - EVP and Chief Financial Officer.

Matt Sheerin - Stifel Sean Hannan - Needham & Company Steven Fox - Cross Research Paul Chong - JP Morgan.

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 date 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 will 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 results 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 non-cash foreign exchange loss due to the weakening U.S. dollar. The second quarter results validated many of the elements of the strategy we have communicated over the past year.

First, the diversification of our end-markets helped to reduce quarterly volatility and stabilize 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 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 advanced technologies.

We see four key mega trends driving automotive content growth, one, vehicle safety and autonomous driving, number two, increased adoption of hybrid and electric vehicles, number three, 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, forecast expects 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 engagements.

TTM is uniquely positioned to take advantage of these mega trends 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 the 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 ten automotive customers and are in the qualification process with an additional nine customers. This includes engineering level engagement with four new RF customers for autonomous driving applications.

The autonomous driving market requires advanced 360 degree cameras and a LIDAR system to assist in navigation for which we can meet PCB needs. We are also seeing adoption of HDI technology for both autonomous vehicles 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 improvements 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 EM 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-markets 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 a 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 revenue growth is being impacted by the slower start of the normal seasonal ramps. Next I would 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-markets. 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 the 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 five customers contributed 33% of total sales in the second quarter of 2017, compared to 34% in the first quarter of 2017.

Our top five 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 three months ending July 3rd.

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 continued 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 a 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 a $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 on to 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-market.

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 the 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 non-cash expense items and other unusual or infrequent items, as well as the associated tax impact of these items.

Additionally, we exclude non-operational 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 using investors 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 to cost of goods sold that we 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 begin multiple new products and technology ramps. The impact of the annual salary increases and a change in the mix of our revenues with increased CMS revenues.

In addition, the $3 million benefit in the first quarter for 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 cost 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 of 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 in 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 the second quarter net income of $28 million – or $28.4 million or $0.28 per diluted share in the first quarter of 2017 – excuse me – 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 comment.

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-markets.

The sequential increase in revenue was due to increases in both the automotive and networking and communications 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 increase year-over-year is mainly due to increased volumes.

The sequential increase was due to increased volumes and the absence of an inventory write-off 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 EM Solutions segment 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.

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. And I'd like 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 the 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, non-cash 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, 3rd, the Drexel TMT Conference in New York City on September 6th, the Deutsche Bank Technology Conference on September 13th in Los Vegas, and the Deutsche Bank Global High Yield and Leverage Deck Conference in Scottsdale, Arizona on October 3rd.

That concludes our prepared remarks. And we now like to open the line for questions.

Johnny?.

[Operator Instructions] And we will take our first question from Matt Sheerin with Stifel..

Yes, thanks. Good afternoon. Just a couple of questions for me. Starting with the guidance, Tom, on the cellular business, it looks like some push outs 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 are early in the cycle. What I can say is that, the volume – here the volume ramp is occurring later than what we would have 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 are 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 and 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 some cellular, just also wondering if there is any yield issues within cellular that have – could near term hurt margins? And then also, if you could talk about raw materials such as copper or copper pricing and copper clad laminate pricing going up and whether that impacts your margins going forward?.

Hi, 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 are right to observe that we are going to be down a little bit sequentially in terms of margins.

Our operating margin as we look at Q3, we are projecting right now at about 8% and that would compare to 8.8% in the second quarter. As we look at the major drivers there, I think you got two 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 the – 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 are baking it into the forecast in the guidance that we are providing.

The other aspect to is a little bit in the SG&A area, we had some favorable spending results in the second quarter spread across several relatively in smaller items, but those are not necessarily projected to repeat in the third quarter. So, those two are really the bigger elements with the cellular start-up being the bigger factor obviously. .

And so raw materials….

Overall EPS from quarter-to-quarter, we are obviously assuming the absence of the big FX, unrealized FX cost down below the line. So when you net the three of those things out that’s how you end up with the guidance. .

Okay, but just any comments just in terms of the raw materials and whether that you are seeing any impact there. The ability of that continues to increase pass that along to customers..

Yes, so 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 and 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 are tending to negotiate more frequently.

There is more frequent ASP resets because of the innovation that’s occurring there. So there – you are always, collectively we are looking at raw material pricing as we price our PCBs. So hopefully that gives you a feel..

Absolutely, very helpful. Thanks, so much, Tom..

Thank you, Matt. .

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

Yes, thanks. Good afternoon.

Can you hear me?.

Yes, we can, John. .

Okay, great. 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 yields rates that we are looking at or 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 our ramp is occurring slower than expected. What happens is, there are multiple factors, right. One is, volume is lower. So, volume is lower, what does that mean, well that means that you are 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 significantly technology transition. So the fact that the ramp is coming later in the quarter then would be considered normal. That leads to – and the fact that there is a significant technology transition there.

Those two factors, absolutely, you are looking at yields that or yield curves that would be occurring later in the quarter and then ramping improving as we 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. So – and then significant performance in Q4 and then carried on into Q1. That’s probably a good cycle to compare to. We will 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 have 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, all of what I am trying to also get after is, the yield curve that you mentioned is the shape for the path of the yield 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 is always going to be a situation where you are 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, little bit too early to tell. We are – our goal is to make that yield curve as similar as we have 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 little bit late in coming and that coupled with a significant technology transition. .

Okay. That’s helpful, thank you. On the aerospace side of your business, it sounds like you are yet again continuing to see some great momentum there. Can you express to us if you feel that, now that we are 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 at this point, it has given us some very strong momentum or even visibility into, say the fourth quarter and 2018 or going out as far as 2018 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 is a program backlog. So many of those programs will carry – be carried out over multiple quarters. Sometimes over the course of two to three 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 are really pleased to see those bookings – 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 again a good year-on-year growth performance in the third quarter.

And as we head into next year, a lot of – a 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 are again very pleased to see program backlog at record levels.

We are 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. So that’s great to hear.

Last question here, automotive, you have – I think pretty consistently mentioned, where the viewpoints are in terms of average dollar content per vehicle as well as the current expectations and trajectory, say, 60 to 70 I think what by 2020 or so.

It seems that, as these months and quarters have progressed here in 2017, that there is an accelerating conversation that the dollar content or even electronic proliferation within vehicles, that path is accelerating itself. And so, just want to see if we could get some color around that.

If you think about those – that 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’s a very beatable type of number as it relates to trends that will be affecting your business? Thanks. .

Sure, so, the best example of that, last year, we were – everyone was talking about the fact that that $60 mark would be hit in 2018, 2019. So, 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.

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 I’d say, 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 will see where the numbers come out at the end of this year. .

Great. Thanks so much for all the color..

Thank you..

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

Hi, 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 am trying to understand based on the current volumes you are shipping whether the yields are in line with what you would expect with those current volumes? Or whether you are having your own internal problems? Can you talk about that first off?.

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

Okay, so your execution isn’t really the issue at this point?.

And we, and again, last quarter, we talked about it as well. Last quarter we were at that pilot production stage and we are feeling confident that we were meeting yield estimates and we are positioned well and as we are – as we stand with the volume that is out there today, 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 an 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 sort of a step-up in terms of cleanliness in the process.

What we have an advantage here and several of our competitors do as well, and that we have a substrate line in operation in our Shanghai facility. So, we’ve had this process in place for our substrate production for about five years, close to five years now.

And so, with that experience base, you are talking about scaling up the size of the panel to the 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..

Thanks very much.

And then just lastly on this, as sort of the pools increase, are you still expecting say, over the course of the – say, this quarter or rather Q2 through, say, Q4, Q1 that the total volumes you are going to ship are going to be 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 to the ramps.

But the absolute volume is so much in the control of the consumers out there and as well as our customers. So, I am 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 zero. 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 or 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 U.S. dollar. But there is some differences from time-to-time. .

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

That’s where we ended last quarter. .

Yes, okay..

So, if the currencies tend to strengthen or weaken off of that, that’s what will drive gains or losses below the lines. And again, they are unrealized, they are more related to capital structure and balance sheets, they are really not economic losses. They just show up on the P&L, you are going to get a technical accounting answer here.

They tend to be offset when you convert it back to US dollars which that’s the gain for that shows up an 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 this is not an economic gain or loss. .

Understood. Thank you. .

[Operator Instructions] And we’ll go ahead and take our next question from Paul Coster with JP Morgan..

Hi, thanks, it’s Paul Chong on for Coster. Thanks for taking my question. So just on operating margins, given the strong start to the year, which were helped by auto, so you got achieved as promised from a first half increase in margins now, your longer term 10% target seems very achievable, especially in cellular ramps materially in 4Q.

So how is your longer term operating margin target changed during 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 our four quarters, we got better every quarter and we traditionally peak in Q4, because it tends to be our seasonally strongest quarter and last year, I think our Q4 it’s a 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 are 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. Q2 here is way better than last year’s Q2. So we are definitely in a positive mode. Q3 is 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 am not sure, if we are going to make it this year or not, we are pretty close and we are going to drive and continue to drive the company to get there. And so, that’s really our objective and we are not ready to change that goal post if you will at this point until we’ve actually delivered on it. .

Gotcha.

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 are very pleased with. We have smaller facilities that are very specialized, provides special – to 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 are really looking at – we look at plating capacity to calculate this number and usually, these facilities are a high mix low volume and so, they tend to – the bottlenecks tend to be elsewhere in the process.

What I’d - from a profitability standpoints they are 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 are meeting.

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

Gotcha. 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 possibly high single-digit, maybe double-digit year-on-year growth for the year and given TTM is growing well out of the market projections, can you talk about the leverage there and how your market share has evolved? And where you expect fiscal year 2018 given your high visibility into the backlog? Thank you..

Sure, Paul. The – so the forecasters, the longer term growth rate in aerospace and defense is between 2% and 4%. We’ve already said that that we believe we are going to grow above that level. We are still confident in that belief.

We do see this is going – certainly this year, we will be ahead of that – 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 are looking at for Q3, we will be certainly at the high end of that growth rate.

So, as we go into 2018, certainly gives us confidence that, again that we will certainly be at that – able to get to that high end of that rate and we will see how that program backlog continues to come together in Q3 and Q4 and then, how our facilities perform, because at the end of the 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, we are doing not just PCB here. We are actually having an engineering services organization as well as an assembly capability.

So that we are engineering assembled solutions when – 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 build up of demand and then, performing to – and exceeding customer expectations. .

Thank you very much. .

Thank you..

And gentlemen, it appears we 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. Just I’d like to thank everybody for joining the call. I’d like to just quickly summarize some 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 would like to thank again our employees, our customers and our investors for your continued support. Thank you, and good bye..

Ladies and gentlemen, that does conclude today's conference. We’d like to thank you all for your participation. You may now disconnect..