Viasystems Group Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Viasystems Group, (VIAS)

Viasystems Group (NASDAQ:VIAS)

Q2 2013 Earnings Call

August 06, 2013 3:30 pm ET

Executives

Kelly E. Wetzler - Vice President of Corporate Development and Communications

David M. Sindelar - Chief Executive Officer, Director and Member of Executive Committee

Gerald G. Sax - Chief Financial Officer and Senior Vice President

Analysts

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Jiwon Lee - Sidoti & Company, LLC

Eric Reubel - Miller Tabak Roberts Securities, LLC, Research Division

Nick Farwell

Operator

Good day, ladies and gentlemen, and welcome to the Viasystems Group Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce Kelly Wetzler, Ms. Wetzler, you may begin.

Kelly E. Wetzler

Thank you, Shannen. We'd like to welcome everyone to the Viasystems' investor conference call for the second quarter of 2013. If you need a copy of today's earnings press release, you'll find it at viasystems.com. We have also prepared some slides, which you will find on our website. Our presenters today are Viasystems' Chief Executive Officer, Dave Sindelar; and our Chief Financial Officer, Jerry Sax.

In the course of our discussion, we are likely to make forward-looking statements. I wish to remind you that any forward-looking information we provide is given in reliance upon the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. The comments we will make today are management's best judgment based on information currently available. Our actual results could differ materially from any forward-looking statements that we might make. The company does not intend to update this information to reflect developments after today and disclaims any legal obligation to do so. Please review today's press release and recent SEC filings for a more complete discussion of factors that could have an impact on the company's actual results.

Some of our discussion today will include non-GAAP measures, in particular, adjusted EBITDA and adjusted earnings per share. These non-GAAP measures are reconciled with our GAAP results in today's press release and in our slide presentation. Management believes these measures are useful for analytical purposes and to assist in comparing results over time and across companies. But I remind you that adjusted EBITDA and adjusted EPS exclude certain material items and are not a replacement for the reported results under Generally Accepted Accounting Principles.

I'll now turn the call over to our CEO, Dave Sindelar.

David M. Sindelar

Thanks, Kelly, and good afternoon, everyone. As usual, I'll begin with comments about our second quarter, including the summary of the results recorded in this morning's press release. I'll also talk about what we are seeing in each of our end markets. Following my remarks, Jerry will cover the financial results for the quarter in more detail, then we'll open it up for questions and answers.

Let me begin on Slide 4 of the presentation material. When we talked in May, we indicated that we would expect modest sales -- sequential sales growth in our second quarter over the first quarter. The overall 4.6% sales -- sequential sales growth that we did achieve came in the form of a 40% increase in our E-M Solutions sales. In part, getting the seasonally low first quarter behind us helped the season -- the sequential growth trend. However, I was happy to see the initial results of our efforts to find new opportunities to backfill the portion of the wind energy product demand that our largest E-M Solutions customer took back in-house last year. As we have discussed in the past, the selling cycle for our E-M Solutions products can be fairly long. The launch of new E-M Solutions products can also be a drag on profitability during ramp-up. So I look forward to future improvements, not only in the E-M Solutions sales line, but also the margin line.

Overall, sales for the PCB products were flat compared to the first quarter. But as usual, that was a result of several moving parts. In 2 of our 3 Chinese PCB plants, we were continue -- where we continue our efforts to recover capacity that was lost last year due to last year's fire and forced closure of, at least, a site. We enjoyed more than $5 million of sequential sales increases. We also saw about a $2 million sequential improvement in sales of 5 of our 9 North American PCB plants. However, those increases were offset by softer demand for computer/datacom PCBs and Industrial & Instrumentation PCBs in both Asia and North America. I'll talk about -- more about the market trends in a few minutes.

On a year-over-year GAAP reported basis, our incremental PCB sales from the DDi acquisition was largely offset by the combined effects of the Guangzhou fire and the Huizhou factory closure. On a pro forma basis, our PCB sales declined 15%, as a result of the lost capacity, combined with soft demand for computer/datacom PCBs and I&I printed circuit boards.

On a year-over-year basis, our E-M Solutions sales declined 20%, driven primarily by the previous reported decision of our larger customer to produce much of their wind energy product demand in their own factories. As I mentioned earlier, we began to backfill for that lost demand, but the reduced wind energy demand created a sizable hole to fill.

One of the more encouraging developments in the second quarter was the solid book-to-bill ratio in both the PCB and Assembly segments. Overall, the book-to-bill ratio was 1:1, meaning that our order activity in the quarter exceeded sales by about 10%. The PCB segment ratio was 1.08:1, and the Assembly segment was 1.2:1. I certainly don't expect to see sustained ratios at this level, particularly during the typical -- typically sluggish summer months, but the quarter's bookings do give me reason to remain bullish on the second half of the year for Viasystems.

Gross margins -- gross margin was down on a sequential basis to 18.6% in the second quarter. The primary contributors to decline were sales mix, increased China labor cost and increased freight cost. To expand on these factors, first, you will recall that the E-M Solutions product normally carry a modestly lower margin than our PCB products. In addition, we incurred higher-than-normal costs during the ramp-ups of these new E-M Solutions products. I looked for the project ramp cost to decline later this year when the processes for the new products are stabilized -- second, manufacturers in China have been talking for some time about the consistent annual increases in our wage costs and social taxes. In addition to the softening of available labor in some areas, I look for labor issues to continue, but the annual minimum wage increase effect is most visible in the second quarter of each year. And third, we began to incur airfreight cost rather than less expensive free -- excuse me, sea freight cost to support some PCB customers' needs for delivery of PCBs more quickly than our depleted Chinese capacity could handle. We continue to work on our capacity expansion and recovery efforts, so I look for this incremental cost to ebb at some point later this year. But I expect to continue through the third quarter.

Let me also note here that even though we have -- we're not back to the efficiency levels we enjoyed before the fire in our Guangzhou factory, we are not specifically attributing margin shortfall to those recovery efforts. I expect to see continued sequential improvement, but not significant step-ups in quarter-to-quarter.

Adjusted EBITDA of $30.7 million and adjusted EPS of $0.28 loss for the second quarter are both improvements over the first quarter. As I mentioned in our last quarter call, I look to the latter quarters of 2013 for continued improvements, as we work to get back to our historical margin levels.

Moving onto Slide 5. You will see the pie chart on the left, representing our end market sales mix in the quarter. On the right, you'll see a table of end markets sales changes, both sequentially compared to the first quarter and year-over-year comparisons to the pro forma second quarter last year.

Automotive billings increased 8% sequentially in the second quarter and continued the upward trend that we noted in the first quarter. This sector represents 30% of our net sales in the second quarter, and we have now seen positive book-to-bill ratios in this sector for 3 consecutive quarters. So I look for sales into this end market to continue to increase again in the third quarter. Compared to the same period a year ago, we are still down with the contributing factors being limitation of available capacity due to the Guangzhou fire and the Huizhou factory shutdown and an increasingly price-sensitive customer base.

Our I&I market represents about 27% of our net sales for the second quarter, and we recorded a sequential increase of just over 11% compared to the historical low point we reported in the first quarter. A second consecutive quarter of positive book-to-bill ratio suggests further recovery of sales in this market in the third quarter. Our second quarter momentum was led by a rebound in our Assembly segment, which is now reducing its previously -- its previous concentration in wind energy products. Our PCB product sales remained relatively constant sequentially and that segment continues to be a broad base of customers.

Our telecom sector sales improved sequentially for the first time in the year, growing by about 9% over the first quarter and representing 17% of our consolidated net sales for the quarter. The solid book-to-bill ratio in the most recent quarter also projects future sales growth in the third quarter. During the second quarter, stable demand for PCBs were supplemented with near record high demand for E-M Solutions offerings and a significant new E-M Solutions customer win for telecom products further diversified our Assembly segment customer base with initial ramp-up of the new product having begun late in the second quarter.

Computer/datacom sector sales declined by approximately 9% sequentially and fell to about 15% of our consolidated net sales in the second quarter. Widely-publicized global softness in this end market appears to be a major factor in our historic low levels of net sales to this end market in the second quarter compared to our experience over the past couple of years. But bookings for both PCB and E-M Solution product lines did improve sequentially during the quarter and an E-M Solution project award by an important new customer.

Our military and aerospace end market business continues to hover just north of 10% of our consolidated net sales, with little change from prior quarters. During the second quarter, we were awarded a significant new PCB project in North America, which would not have been possible without the combined capabilities and capacities of the legacy video systems and legacy DDi businesses that were merged at this time last year. This new project, together with further market penetrations, contributed to a solid book-to-bill ratio in the quarter, which should set us up for a market share growth in the coming quarters.

Moving to Slide 6. In addition to the comments I just shared about our second quarter bookings experience in each of the end markets, I'll spend just a minute on 2 -- 1 minute or 2 on what we see expect to -- what we expect to see in the near term. While visibility remains limited, we continue to pay close attention to what we are hearing from customers and suppliers in order to set our expectations. While general market conditions remain relatively stagnant, there are still some level of optimism for the second half of the year. Mid-summer months are not the ideal time to gauge how the year will end, but the combination of our recent project wins plus our continued recovery from last year's fire in our largest Chinese factory should result in a more meaningful sequential growth in the current quarter. I don't think we'll get all the way back to the historical high watermark at the mid-$300s million, but we should eclipse the $300 million sales level again. From an operating perspective, we've continued to devote the majority of our attention to reviving our margins. The costs of the new product ramps should taper, as those programs mature and we look to catch up production volumes to ease our way back to the sea freight versus airfreight, but labor-related costs will remain to be a challenge.

With that, let me turn it over to Jerry to discuss the financials.

Gerald G. Sax

Thanks, Dave. Good afternoon, everyone. A couple of administrative points. Kelly already mentioned the earnings release and the data posted for the presentation. I'll add to that, that you should also be able to access our 10-Q online sometime over the next couple of days. Just one quick correction, I think, in Dave's notes, he had that the overall book-to-bill ratio was 1:1. What he meant to say was 1.1:1, being consistent with the 10% order intake over our bookings -- our billings, I'm sorry.

Moving to Slide 7 of the presentation shows an income statement for the second quarter that is compared both to the first quarter of 2013 and also compared to the second quarter of last year. As a reminder, the reported results for the second quarter of last year only include the operations of DDi for 1 month at the time that we acquired them, and the information in this table is not pro forma. Dave already talked about our second quarter net sales of $286 million and our 19% gross margin. So I'll begin my comments on our $25 million SG&A expense line. Excluding the $2.5 million of non-cash stock comp expense, which is included in that reported SG&A line, our second quarter cash SG&A costs were just $22.5 million in the quarter. That compares favorably to the $24.7 million we reported for the first quarter, and it reflects continued strict controls over discretionary spending. When we talked at the beginning of 2013, I noted that we expected those cash SG&A costs to be in the range of $25 million to $26 million per quarter during 2013. And later this year, I expect to get back to that level, but we are clearly continuing our cost reduction efforts in the near term.

Depreciation and amortization expenses were both in line with post-acquisition results, and I won't comment on those farther. The resulting $4.5 million of operating income for the second quarter compares to the $30.7 million of adjusted EBITDA that Dave had highlighted earlier. Those 2 figures are reconciled in a table at the back of the presentation materials and in this morning's press release. And you'll see that the table shows that both the nature and amount of the reconciling items is sequentially consistent.

Moving onto the non-operating income and expense items. You'll note that interest expense and the related amortization are, again, consistent with post-acquisition results in previous quarters. The $941,000 of other expense in the second quarter relates primarily to changes in foreign exchange rates, principally the Chinese RMB versus the U.S. dollar, and we had a similar experience in the first quarter earlier this year as the Chinese RMB continues to strengthen against the dollar.

Our income tax expense of $1.9 million in the second quarter continues to relate primarily to our operations in China. And based on the continued cost challenges in our Chinese operations, you'll note that our second quarter run rate was a bit below the $15 million annual estimate that I continue to use in my own modeling. It's important to note that mid-year income tax provisions are based on estimates, so I expect that we'll soon get back to our normal run rate.

Another table at the back of the materials reconciles our $0.52 loss per share on a GAAP basis to the adjusted EBITDA -- or the adjusted EPS of $0.28 loss that Dave highlighted earlier. And again, the nature and amounts of the reconciling items is sequentially consistent.

Slide 8 reflects our June 2013 balance sheet, and you'll note very minor changes from our audited year-end balance sheet that is compared on that page.

So I'll move onto Slide 9 and talk about cash flows. Year-to-date, we've generated $40.4 million of cash from operating results with about $11.3 million of debt having been generated during the second quarter. And as a reminder, our $22 million of semi-annual interest payment on our bonds was paid during the second quarter, and that payment is reflected as a reduction of the reported cash flows from operations.

Cash spent on CapEx was nearly $20 million in the second quarter of 2013, drawing our 6-month total CapEx to almost $40 million. In the second quarter, $12 million is related to recurring or maintenance-type projects and the other $8 million is related to special projects, such as the factory relocations and the replacement of fire-damaged equipment in the Guangzhou factory that we've talked about in the past.

Debt repayments totaled about $1.6 million for the first 6 months of 2013. And as I highlighted on the call last time, $395,000 of that was related to the convertible bonds that we acquired as part of the Merix merger back in 2010, and those bonds had a final maturity date in May of this year. So we paid those up -- paid off the balance as planned. The balance of the debt payments that you see recorded there are reductions of some of the mortgages that we acquired with the DDi acquisition last year.

A new item is $612,000 that relates to the stock awards that, this was paid at Federal and state tax withholdings on a tranche of stock awards that [indiscernible] invested during the second quarter. The net result for the first 6 months has been a use of cash of just under $1 million. And with the ending cash balance combined with our available credit facilities both in the U.S. and China, our liquidity at the end of the first half remain very solid at more than $175 million.

That's the conclusion to my remarks. I'll turn it back over to Dave at this point

David M. Sindelar

Thanks, Jerry. We will open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Matt Sheerin of Stifel.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

So the first question is on your expectations for the September quarter. You sound fairly encouraging on the bookings across the board. And typically, there is seasonality in your automotive business and the industrial business weaker in Q3. It doesn't look like that's playing out this quarter. Is that because of winning back some share that you had lost because of the factory issues or more in demand related?

David M. Sindelar

I think it's more in demand related. The demand in the automotive sector has been pretty strong all year. And I think our biggest issue on the automotive side if there's an issue there, it's just having enough capacity to meet demand. So while we had a positive book-to-bill in the second quarter, I think it would have been higher if we would have had more capacity. So I think it's really the continued strengthening of the market and customer needs.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And is that the case in other businesses? And as a follow-on there, I know, that last quarter, you talked about having to requalify certain customers as you bring on or replace capacity. How far along are you in that process in terms of qualifying those customers?

David M. Sindelar

We've had -- and I quite honestly haven't gone through and come up with a number whether we're 40%, 50%, 60%, 70%. We have gone through and had a number of customers go back and requalify, and we still have a few more to go. So it's -- I think we're further along than 50%, but it -- and it's probably high, high percentages of customers already approving it. So we're in pretty good shape there as well. And I think the bookings level for the Guangzhou facility have improved month-over-month, quarter-over-quarter. So it -- we are starting to see the return of the customers.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And on the gross margin, is it your sense that the gross margin has bottomed here? And as you get the volumes coming back and some of the other issues you talked about that you should see some decent leverage as volumes come back?

David M. Sindelar

;

No, absolutely. And I hope I never have to see another plant fire. But when you have one, you learn some things. And I think as we -- 6 months ago, 9 months ago, we don't look back and say how is thing going to unfold. We thought -- which it was a major task to get the plant back and running and equipment installed. But the piece that we probably didn't focus on enough was making sure that we had the good quality trained workforce. So I think the first quarter, we got most of the equipment back in place, and then the second quarter, we continue to increase our labor force and make sure that we had them properly trained. So the -- I was hoping that in second quarter, we'd see better margin improvement, but it was really kind of the inefficiencies related to new employees and training and things of that nature. So I think during the third quarter, we should begin to see some ramp-up, and we probably shouldn't see the full positive effect of the margin improvement until the fourth quarter.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just lastly, on the strength that you're seeing in telecom, is that fairly broadly based?

David M. Sindelar

I think I'd probably describe telecom as generally one of our better markets from a strength standpoint. And then that, coupled with the new win on the E-M Solutions side, has given us the strength. We picked up a pretty significant order program customer, which just began to ramp during the end of the second quarter. So we should see the full effect in the third and fourth. So we're getting aided a little bit. So it's not all just a strong market. It was a good program win.

Operator

Our next question is from Jiwon Lee of Sidoti & Company.

Jiwon Lee - Sidoti & Company, LLC

Dave, I just wanted to talk a little bit about your growth expectations, modest but you are still expecting some growth in the second half. I mean, if we talk specifically about each of the end market, what kind of an expectation should we be having?

David M. Sindelar

Yes, most -- as we sit here today other than North -- and I'll kind of split the thing in 2 -- the company in 2 because of you've got North America and then you've got the Asian piece. We had pretty strong book-to-bills with about a 10% higher than billing. So if we take -- I guess in the prepared comments, we said that we'd be eclipsed or surpass the $300 million range. So at the risk of giving specifics, I think probably somewhere $300 million to $310 million is probably where we would expect it to be. We would expect continued strength in the automotive, continued strength in telecom. We're starting to see and hear the possibility of some life in the computer/datacom sector. But until we actually book the orders, I'm not declaring victory there. And then, in the Industrial & Instrumentation, it's such a conglomeration of different customers that it's -- that's a hard one to kind of peg 1% one way or the other, but we'd expect kind of some good decent growth there. So I don't know if that completely answered your question, but that's kind of the -- rambled through my thoughts.

Jiwon Lee - Sidoti & Company, LLC

And your thoughts on the computer side and the military, how should we be thinking about that?

David M. Sindelar

Yes. I don't see right now -- again, we started hearing a few -- some things on the computer side, some customers that are starting to talk about life again. But I haven't seen them, so I would expect that to be pretty consistent for the second half. And then, on the military side, it is a bit of a confusing market with sequestration and everything else on a year-to-date basis. I think we've performed very well on the military side. And again, it's a real mixed result. Some customers are up 100% and some customers are up 75%. And it just depends on the application whether or not it's equipment or feet on -- boots on the ground or whatever the application goes into, the more equipment related planes and drones and things of that nature. It appears that those are doing very well. But I guess the government now is just getting back into talking about sequestration and how they're going to affect it in kind of the August, early September timeframe. So I think that will really depend on what's going to happen in military. I think we would expect military market to be stable to down, but I think the combination of the 2 customers in the military side, where we've gained some market share, should help us to hopefully grow a little bit in the second half.

Jiwon Lee - Sidoti & Company, LLC

Okay. And then you commented on some ramp of the Assembly. The wins that you referred to, is that mainly on the telecom side?

David M. Sindelar

Yes, yes.

Jiwon Lee - Sidoti & Company, LLC

Okay, okay. And lastly for me, Jerry, how much of a margin was lost roughly from the ramp of these new assemblies, as well as the freight cost you highlighted? Is that something you could try to quantify for us?

Gerald G. Sax

The -- I think the freight cost is probably easier to quantify. It's something we've been incurring just a little bit south of $1 million a month. So we should see that start to come down. The quantification of the ramp is always a little bit difficult to pin down in terms of what's recurring and non-recurring costs and over what period of time do we expect those to go away. It's -- because we were hiring a lot of labor and training a lot of labor for these new projects in advance of seeing any sort of sales, it's not really sensible to talk about it on a percentage basis, but it's a couple hundred thousand dollars, maybe up to $1 million of costs if I were to take an educated guess.

Operator

Our next question is from Eric Reubel of Stifel.

Eric Reubel - Miller Tabak Roberts Securities, LLC, Research Division

Dave and Jerry, you talked a lot about the difficulties managing the impacts of the fire, and I know you've been doing all you can on -- with the higher freight costs that you've been trying to meet your customer demands. Auto has been very, very -- demand has been very strong. Has there been any -- do you see any long-term effect from where this process you may have lost some designs that don't come back, or qualitatively, if you could talk about how you're feeling about managing your customers' expectations through the challenge that you've had over the past 4 quarters?

David M. Sindelar

Yes, it did. It hasn't -- the whole process hasn't been easy, but I don't think that we fundamentally hurt any of the auto customers. And as Jerry just mentioned the additional freight cost, that is the result of shipping product to some of our auto customers via airfreight versus sea freight, so we have kind of stepped-up and taken it into shins, so to speak, to meet all the customer demands. And I think we've done a pretty good job at that. So I don't think that we've damaged any of those relationships we've shocked and jived [ph]. I mean, early on -- and this may not sound too crazy, but we actually -- to meet some demands, we actually produced some of the auto boards in some of our U.S. facilities. That doesn't sound like a big deal until you look at the cost differential, and it was. So there was a number of things that would affect profitability that we did to make sure we kept up with the customer needs. So, Jerry, specifically on the auto side, I don't think we missed many, if any, the customer demands. We did work aggressively to help meet our non-customer -- I mean, non-automotive customer needs. And in some instances, they went to -- they went back to their second source in a bigger way. And in a few, they actually added a new source. But I think we're able to -- for the most part, we probably have 1 or 2 customers that have shifted to a third source that we may not be able to get back. But I don't think it's a significant effect on our -- will be a significant effect on our revenue.

Eric Reubel - Miller Tabak Roberts Securities, LLC, Research Division

I know it's difficult to manage customer relationships, and it sounds like you've been doing everything that you can. Dave, if I can think back to the Merix acquisition, there was also a big sort of push to increase exposure to the commercial side of aircraft. Can you talk about the headwinds you're seeing on military budgets? But are you making some progress on the aerospace market in nondefense?

David M. Sindelar

Yes, yes, we are. And it's -- and I have a tendency to talk about the mil/aero and military side of it, and we jumped to the military because it's -- our market segment is defined as mil/aero also, but we are. And I think we do have a pretty solid position in the kind of commercial aerospace side. We do a significant amount with most all the producers. I don't have -- when we talk about our mil/aero segment that is the combination of those, and I don't have a split between the 2, but it wouldn't surprise me that it was in the 60-40 range. But I'd have to go back and do the math. That's just kind of a gut feel.

Operator

Our next question comes from Nick Farwell of Arbor Group.

Nick Farwell

Dave, you've commented I think for at least a couple of years now about escalating employment costs in China. Given the worldwide general sluggish environment, have you seen any signs of labor cost stabilizing?

David M. Sindelar

The only time labor cost in China is stabilized was probably back in the '08, '09 timeframe where they took about an 18-month period off on the minimum wage. In the last 2 or 3 years, we've seen anywhere from 8% to 18% increase. So that's kind of the heart attack answer. The good news is, is that the labor in China is substantially less than in most of the other worlds, at least in the Western world. But I believe that if you operate in China, and you don't plan on a 10% increase in your labor costs over next 3 to 5 years, I think that you're going to be disappointed on the bad side because we expect and continue to see labor cost increases.

Nick Farwell

How would you compare those now with all-in labor costs in your Southern California and Portland facilities? Has it narrowed notably?

David M. Sindelar

I would -- I haven't done the math. So I stumble a little bit, so I can't tell you that it's 33% of the Western world labor cost. But it's probably 20 -- 25% to 30% of what it is in the U.S. today.

Nick Farwell

So that had sounds like even with the escalating labor costs in China, it hasn't narrowed notably with North America -- versus North America?

David M. Sindelar

No, that's true, that's true. And then you -- then on top of that, you have to -- and again I think labor cost is a good gauge of what's going on with inflation over there. But you have to also look at all the other things that go into the product. And they all have labor in it. So when you kind of -- you cost a product out in Asia, and it's a different production process, low volume, medium volume versus high volume. But it's still the cost to produce a board -- a similar board is probably 5x more expensive in North America than it is in China. So when you pack it all together, it's still the place you have to be to be competitive. It's just that we're starting to see inflation. And we need to start seeing that in the pricing of the product and the whole competitive landscape has to, in my humble opinion, wake up and realize that we need to be a little bit more aggressive on price.

Nick Farwell

And in terms of looking again at relative production costs and obviously the longer the run, I assume the more efficient it is to locate it in Asia or China. Are you shifting any of your lines or products from North America to China, or is that transition pretty much been completed?

David M. Sindelar

The -- I think the major shift is completed. I think you'll see some markets that are looking to shift some product to Asia. For example, the military and commercial aerospace market has historically been U.S.-bound production. Military is going to continue to do that. I think as most Western world commercial aircraft producers form joint ventures with various Chinese entities. I think you're going to see that portion of the commercial side be produced inside of -- in China just as a result of the relationship. So I think you're going to see some of that. But on the other side, we're actually seeing some of the components transfer back. We have a few of our telecom computer/datacom customers that are requiring us to do the prototyping and production inside North America because they're afraid that someone's going to kind of steal their design. So the long and short of it, there's a lot of little bits and pieces here, moving back and forth. But I think generally speaking, the major exodus of production out of U.S. has essentially stopped.

Nick Farwell

You made a comment earlier in today's presentation that I think I heard you or Jerry say you don't expect gross margins in China, maybe it wasn't specific to China but might have been corporate-wide, to achieve prior, sort of, peak levels. Has that changed your target for what you think a reasonable gross margin is looking out over the next couple of years in the, specifically, the print and circuit board business, now given the DDi, the Merix and the China acquisition, obviously, the completion of the new plants in China and assuming that, that's stabilized. What do you suggest or sort of the outlook for reasonable target margins for the print and circuit board business?

David M. Sindelar

Yes. I think -- and I have to go back in -- but I think my comment is right. I wouldn't expect -- I think the comment was that we weren't expecting to get back to be pre-hired levels of that was all just because our sales peaked to $350 million. So, while I think our sales are going to increase in the third quarter, it's going to be, as I said, in that $300 million to $310 million range. As it relates to the margins, I would expect to see some minor improvements as we get our workforce kind of back trained and up to efficiency levels that we'd like to see in our scrap levels that we're likely see. So I would expect the margins in the second quarter -- excuse me, the third quarter, to be slightly better than the second, and that we won't get back into our full swing until the fourth quarter. And so, I don't think that we are coming down dramatically different from where we were as kind of target margins.

Nick Farwell

Okay. And were you referring to gross margin -- referring to corporate wide in this case not just printed circuit board? Or you're specifically commenting on printed circuit board?

David M. Sindelar

Kind of, corporate-wide.

Nick Farwell

Okay. And you're also seeing corporate-wide gross margins in the, say, low 23% to 25% range could still be achievable if the world were ever to optimize, which I realize it never is? But is that still a target you think would be a reasonable target in a perfect "world?"

David M. Sindelar

Yes, yes.

Nick Farwell

Okay. And to what degree do you find lower copper prices beginning to advantage you from a pricing standpoint -- from a production and a price -- therefore pricing standpoint?

David M. Sindelar

Yes, I think, obviously, lower copper prices. The unfortunate side of the world is just that in the old days, you'd have copper prices go down. It would take you at 3 to 4 months for your customers to figure it out. But it's a pretty efficient system today. We're seeing some benefit, but you're looking at the customer base, not all of them, but a fair amount of them coming back and looking for a price reduction. And as we've done in the past, when copper typically goes up in a significant way, we're out asking for price increases. So it's a -- I think we'll see a little bit of benefit, but I don't think it's going to be significant.

Nick Farwell

Okay. So basically, it's being arbitraged away?

David M. Sindelar

Yes, right, correct.

Nick Farwell

For all intents and purposes?

David M. Sindelar

Yes.

Operator

[Operator Instructions] I'm showing no further questions at this time. I would like to turn the call back over to Dave Sindelar for closing remarks.

David M. Sindelar

Great. Thanks a lot, everybody, for spending the time, and we look forward to talking to you in the next quarter call. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.

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