Q4 2019 Earnings Call
Good day my name is Erica and that will be your conference operator today.
This time I would like to welcome everyone to the Rogers Corporation fourth quarter 2019, and full year earnings call. At this time all participants are in to listen only mode. After this piece. The speakers presentation. There will be a question and answer session to asking question. During this I shouldn't even need to press star one on your telephone.
Now I'll turn the call over to your host Mr., Steve Hey, Mark Director of Investor Relations. Sir you May begin your conference.
Thank you good afternoon, everyone and welcome to the Rogers Corporation fourth quarter 2019 earnings Conference call.
Slides for today's call can be found on the Investor section of our website along with a news release it was issued today.
Please turn to slide two.
Before we begin I would like to note that statements in this conference call.
They're not strictly to historical are forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
And should be considered a subject to the many uncertainties that exist in Rogers operations and environments.
These uncertainties include economic conditions market demand and competitive factors.
Such factors could cause actual results could differ materially from those in any forward looking statements.
Also discussions during this conference call may include certain financial measures.
We're not prepared in accordance with generally accepted accounting principles.
Reconciliation of those non-GAAP financial measures the most directly comparable GAAP financial measures.
He found in the slide deck for today's call, which is posted on the investor section of our website.
Turning to slide three with me today, as Bruce Hoechner, President and CEO, Mike Ludwig Senior Vice President and CFO, and Bob Daigle, Senior Vice President and CEO I will now turn the call over to Bruce.
Thanks, James Good afternoon, everyone and thank you for joining us today.
29 chain was in many ways a tale of two has for Rogers in the first half of the or our strategic positioning enabled us to take advantage of strong market growth and achieve consecutive quarters of record sales in the second half of the you're changing macro economic conditions trade tensions and a pause in the way.
Wireless infrastructure markets combined to temper full year results.
Even with these headwinds we recorded modest growth in revenue and earnings in 2019.
Net sales for the year were $898 million, an adjusted EPS was $6.14.
In addition, we delivered record cash from operations of $161 million and strong free cash flow of $110 million for the year.
As mentioned challenging market conditions impacted the second half of 2019, and specifically Q4.
For the fourth quarter net sales were $194 million and below our guidance range, primarily due to a greater than anticipated clause in the five G build out and lower Fourg demand.
This decline was partially offset by stronger sales of power semiconductor substrates for the easy pay TV market and aerospace and defense demand.
Q4, adjusted EPS was $1.14, which was near the high end of our guidance range.
I will take a moment here to briefly discuss the Corona virus outbreak.
Mark to other multinationals with sales and operations in China. We are closely following the situation.
The safety of our employees is top priority and I'd like to acknowledge our China team for their effect of handling of a very difficult situation.
Wow Rogers is well positioned in a variety of growth areas still unfolding situation is expected to have a near term impact on market demand, which is affecting our Q1 outlook Mike will discuss this in more detail during his comments.
Please turn to slide five.
One of the key pillars of Roger strategy is a commitment to market driven innovation, which has enabled us to advance our position in a number of high growth global markets, our diverse portfolio and market strategy enabled us to mitigate the impact of the challenging business environment in late 2000.
The 19th.
Relative strength in areas, such as aerospace and defense portable electronics, Ada Es and easy AGV, partially offset headwinds in industrial and traditional automotive markets and slower wireless infrastructure demand from China.
We believe our market driven innovation strategy creates a competitive advantage for Rogers and will enable us to continue to drive growth no diverse set of markets.
Turning to slide six.
Next to provide our latest outlook for the advanced conductivity and advanced mobility markets.
Beginning with advanced conductivity, the expectations for Fiveg deployments over the next several years continues to be very strong.
Recent estimates from third party experts projected nearly 4 million Fiveg base stations will be installed globally by 2023.
With the around 880000 deployed in 2020.
However, these 2020 deployments do not take into account the potential impact of the Corona virus.
Got it could have on the China deployment timeline.
In the U.S. there are encouraging signs for the Fiveg market as the FCC continues to take steps to free up additional mid band spectrum that is needed to facilitate a large scale rollout of fiveg in coming years.
Overall, there are some challenges and uncertainties that we face in the wireless infrastructure market.
These include first the ongoing trade tensions that continue to push Chinese Oems to diversify their supply chains, thereby putting pressure on the market share of U.S. suppliers.
Second substantial capital required for Fiveg infrastructure is reducing fourg deployments and putting pressure on Oems to reduce base station costs, leading to some reductions in content.
With these changes we expect that our opportunity for Fiveg content will be around three times data for GE or approximately 175 to $225 per base station.
Third uncertainty around the impact of the Corona virus is adding timing risk to 2020 deployments in China.
In summary, with forecasts for strong multi year fiveg deployments, we see the wireless market as a promising growth opportunity for Rogers.
While we have imperfect visibility to market share and timing of the near term Fiveg rollouts given the challenges and uncertainties discussed we expect to retain a substantial share of this growing market.
Yeah, that's kind of activity sector also includes portable electronics and we saw strong growth in this market in 2019, despite the decline in the global smartphone market last year, we expanded our market share based on our broad portfolio of ceiling and protection technologies, which continues to.
Be a leading choice in this market for major smart mobile phone manufacturers.
Turning to advanced mobility.
The growth outlook for sales of E bees in HCV East continues to be robust industry experts project that through 2024 sales of Eason AG. These will continue at a compounded annual growth rate of approximately 30%.
In response to this trend automakers worldwide continue to make multibillion dollar commitments to electrify their fleets and invest in electric vehicle battery technologies.
For a number of years Rogers has targeted investments towards innovative technologies that have put us in a strong position to take advantage of these significant opportunities.
For example, in our P.S. business, we have a leading market position based on the strength of our new generation Y. bandgap semiconductor silicon nitride substrates for the E V a TV market.
We are encouraged by our progress here based on multiple active programs and recent design wins.
In our Dms business battery pads and battery pack sealing solutions for electric vehicles is another exciting opportunity, where we saw a solid growth in 29 gene and which also provides significant growth potential for 2020 and beyond the superior performance of our product.
Developed for this market has firmly established Rogers as a leading provider to a large number of easy bad your battery manufacturers and automakers.
Additionally, the outlook for Adas continues to be very positive based on trends in adoption of automotive safety systems, and the push by automakers to higher levels of autonomy.
Our leadership position has been reinforced by positive customer responses to our new products for the next generation auto radar and we continue to maintain high share with leading global auto suppliers for existing and new designs.
Please turn to slide seven.
And 29 team AC US net sales were $317 million, an increase of 8% compared to 2018 or 10% on a constant currency basis.
The higher sales were driven by demand in wireless infrastructure aerospace and defense and Ada Es.
Wireless infrastructure as highlighted on slide five accounted for about 14% of total Rogers revenue in 2019.
Sales increased for the full year, but as noted we saw a slowdown in demand in the second half of the year and the Corona virus may impact timing of the next wave of Fiveg deployments.
With that said the multiyear growth outlook for Fiveg deployments remains very strong with 4 million base station deployments expected over the next four years at three times the content of Fourg.
Aerospace and defense grew at double digit rates in 2019 is and has delivered consistent growth over the past three years with a compounded annual growth rate of about 10%.
The outlook for aerospace and defense remains positive as the U.S. government increases its the fence budget and as we continue to secure a design wins.
Hey, guys grew at a solid rate in 2019 and has also demonstrated a strong multi year growth profile with a three year compounded annual growth rate of more than 15%.
We expect growth for the full year as new vehicles increasingly adopt auto radar systems and as the average number of sensors per vehicle increases with higher levels of autonomy.
In addition to the significant AC us opportunities discussed we continue to pursue growth opportunities for high frequency circuit materials used in consumer receivers or low Earth orbit Internet service as well as next generation advanced antenna materials and components.
Turning to slide eight.
E.M.S. net sales were $362 million, an increase of 6% versus 2018 or 8% on a constant currency basis.
Higher Fms sales resulted from strong growth in applications for portable electronics mass transit and E V H TV as well as contributions from our recent acquisitions.
This growth was partially offset by weakness in general industrial and traditional automotive markets.
As mentioned, we believe there's a substantial growth opportunity for the company and battery pads and battery pack sealing solutions for the easy HCV market.
The application of our innovative technologies add value by enhancing the life of lithium ion batteries.
We are encouraged by our growing sales in this market in a significant design progress in a number of battery suppliers.
Please turn to slide nine.
2019, PS net sales were $199 million, a decrease of 11% as compared to 2018 were 7% on a constant currency basis.
Double digit growth in mass transit power Interconnects and power semiconductor substrates for aviate TV or areas of strength, however, weakness in the industrial power and traditional automotive markets in the second half of 2019 more than offset these increases.
We made significant improvements in P.S. operations in the fourth quarter.
As we indicated in the middle of last year, P.S. operational improvements, where a top priority for the company and we established a detailed recovery plan.
In Q4, we continue to successfully execute on that plan as we achieved yield improvements and other efficiencies, which contributed to meaningful gains in gross margin and segment operating margin, even as volume remained low from softer demand and non Hebei HGV markets.
There is still a great deal of improvement that needs to be made and we are making good progress.
With the substantial growth outlook for silicon nitride ceramic substrates, we significantly increased capacity in 2019 and additional capacity is planned to come online in 2020.
This investment positions us well to take advantage of the rapidly growing E V HCV market opportunity.
Lastly, turning to slide 10, I'll discuss our vision for the future.
As indicated on our last earnings call. There was increased uncertainty that we would a chain. These targets as a run rate in 2020 due to the challenging market conditions and effects of the trade tensions.
With the business environment remains challenging and near term uncertainty related to the impact of the Corona virus, we see the timing of attaining these financial targets as being extended beyond this year.
However, as a company we remain committed to achieving annual revenue growth of 15% driven by both organic and synergistic M&A opportunities.
We also remain committed to achieving greater than 20% adjusted operating margin as we drive topline growth and continue to execute on operational improvements.
We believe there that our investments in innovation and growth markets and our broad portfolio, our positioning the company well to achieve these future targets.
Now I'll turn the call over to Mike to discuss our full year and Q4 results in more detail.
Thank you Bruce and good afternoon, everyone.
In the slides ahead, I'll review, our fourth quarter and full year 2019 results followed by our first quarter guidance.
Turning to slide 12 fourth quarter revenues as previously noted were $193.8 million.
Below our Q4 guidance range of 200 million to $210 million.
The slowdown in demand for products, serving the wireless infrastructure market for both Fourg and fiveg applications and seasonal weakness in the portable electronics market, where the primary drivers of the lower revenues in Q4.
In addition continued soft demand for products, serving the general industrial and conventional automotive end markets also contributed to lower sequential revenues.
Our gross margin for the fourth quarter was 33.1% gross margin was within our guidance range of 33% to 34%. Despite the lower revenues as we took steps to reduce our manufacturing spending.
It all business segments to compensate for the adverse impact of significantly lower volumes.
Adjusted operating income for Q4, 2019 was $22.5 million or 11.6% of revenues down sequentially due to the lower revenues in the quarter.
The company had a GAAP loss in the fourth quarter of $28.8 billion or $1.55 cents per share.
That included a 43.9 billion dollar or two dollar and 35 cents per share noncash after tax charge, which resulted from terminating a pension plan in the fourth quarter.
This decision continues our strategy to improve cost competitiveness and de risks the balance sheet.
On an adjusted basis, the company delivered EPS of $1.14 cents per fully diluted share within our guidance range of one dollar to $1.15 cents.
The good earnings performance on an adjusted basis resulted from a lower than forecasted income taxes for the fourth quarter.
The company generated $32.9 billion, a free cash flow and the fourth quarter at $109.7 million for all of 2019 compared to $19.7 million in 2018.
Turning to slide 13 revenues for calendar year, 2019 of $898.3 million were 2% higher than 2018 due to organic growth of just under 3% on a constant currency basis acquisitions added approximately 2% incur.
Currency had a negative impact of just over 2%.
Organic growth resulted primarily from advanced conductivity related applications, both in wireless infrastructure and HCS, primarily in the first half of 2019 as well as portable electronics NMS.
Growth in advance mobility, and advanced productivity was tempered by week general industrial and conventional automotive demand.
Adjusted operating income for 2019 of $141.4 million or 15.7% of revenues.
Was 10 basis points lower than 2018.
The lower adjusted operating margin resulted from a 40 basis point decline in 2019 gross margin versus 2018, due primarily to operational challenges to add capacity and wrap new products in our Pts business throughout the year, an incremental costs for integration of Vms acquisitions, and the first half of two.
Thousand by team.
In addition, trade tensions between us and China, resulting in terrorists decreased gross margin by 66 basis points in 2019.
Despite the challenges outlined above both AOCF in Fms increase our gross margins compared to 2018.
[laughter] EPS for 2019 was $2.43 per fully diluted share.
Compared to $4.70 per fully diluted share in 2018.
As discussed in our Q4 results 2019 results include a significant charged to terminate a pension plans.
Adjusted EPS for fully diluted share for 2019 of $6 of 14 cents.
I was 37 cents higher than 2018.
Due primarily to a decrease in the effective tax rate to 14.2% in 2019 from 20.7% in 2018.
Adjusted EBITDA of $188.2 million or 21% of revenues in 2019 was slightly higher than the $184.8 million or 21% of revenues in 2018.
Returning to the fourth quarter on Slide 14, our Q4 2019 revenues of $193.8 billion decreased 13% compared to the third quarter of 2019.
The sequential decrease was experienced in our HGS business segment down 18%.
And our SMS business segment down 16%.
[laughter], while the Pts business segments saw its revenues increased 2% over the third quarter.
Currency exchange rates negatively impacted fourth quarter revenues by $1.1 million compared to Q3.
The decrease in HCS revenues resulted primarily from a further slowdown in fourg demand and a continued delay in the fiveg rollout in China.
As a result, our wireless infrastructure revenues declined 30, 434% sequentially.
Fourg revenues ended the year, 23% below 2018 revenues.
The five year revenues for the year 2019 resulted in wireless infrastructure revenues growing 10% over 2018 levels.
Corp. fourth quarter revenues from aerospace and defense programs grew 4% sequentially over strong third quarter, an increased 16% for the year.
Hey, Das revenues were down 8% sequentially, but are up 7% annually compared to 2018 in the face of a week auto market.
Revenues in our E. M. S segment decreased sequentially due to weakness in our end user applications in all markets led by an expected seasonal softness in portable electronics, which declined 19% in the fourth quarter.
Despite the fourth quarter demand decline revenues for portable electronics, which comprise greater than 27% of the segment revenues grew 16% in 2019 compared to 2018 due to our strong product portfolio, which led to share gains a new handset and tablet designs.
General industrial application revenues, which comprise approximately 40% of the business segments revenues were down 9% compared to the third quarter and down 5% annually compared to 2018, reflecting ongoing weakness in certain industrial markets.
Yes revenues increased in the fourth quarter due to a strong increase in our power semiconductor substrates for easy HCV application.
These revenues, which represent close to 20% of the segment revenues increased 42% compared to the third quarter.
And grew 14% annually.
Power semiconductor substrates for general industrial applications.
Which comprise over 30% of segment revenues grew 2% in the fourth quarter.
Principally from the completion of inventory corrections in the quarter.
For the year revenues from general industrial applications.
Down 16% as demand for factory automation audit automation capital was weak, particularly in the second half of 2019.
Revenues from conventional vehicle electrification applications showed continued weakness in the fourth quarter declining 11% sequentially.
21% for the year.
As a result of weak auto sales, particularly in Europe.
In our power interconnect business revenues for mass transit applications grew nicely in 2019 due to strong first half demand from a couple of key customers increasing 35% for the year.
Turning to slide 15.
Our gross margin for Q4, 2019 with $64.2 million.
Were 33.1% or revenues.
Significantly lower than our third quarter gross margin.
The decreasing the gross margin percentage was due to lower volumes, resulting in less factory absorption of manufacturing expenses, particularly fixed cost.
We were able to reduce manufacturing spending at all business segments, thereby mitigating a portion of the negative impact from the reduced volumes.
Terrorists were $1.6 million lower in the quarter due primarily to reduced wireless infrastructure infrastructure production.
Gross margins declined significantly for both AOCF in Fms in the fourth quarter due primarily to the meaningful volume declines experienced in the.
In addition, Dms had a negative impact from product mix as a higher profit portable electronics revenues experienced the seasonal decline compared to Q3.
In the fourth quarter, we continued to execute on the CES recovery flat as Bruce mentioned and we are encouraged by signs of progress made in in the quarter for manufacturing yield and cost structure.
Improvements led to a significant progress on the business segment profitability, increasing PS gross margins by over 600 basis points, resulting in over 100 basis point improvement to the company gross margin.
While encouraged we still have significant work to realize the additional expected improvement an incremental 600 basis points improvement at Pts.
Driven primarily from increased yields and continue to believe that will take us through the first half of Twentytwenty to realize the majority of the remaining improvements.
These efforts are critical to maintaining our ability to support the increasing demand and the wide bandgap semiconductor power applications.
Tariffs, resulting from trade tensions continued to be headwind to gross margins in the fourth quarter, although less so compared to Q3.
The impact to gross margins was approximately point $8 billion were 41 basis points, a decrease of 65 basis points sequentially.
The decrease was due primarily to lower shipments subject to tariffs specifically less wireless infrastructure materials.
We are working aggressively to lead to leverage our factory footprint.
And to optimize our supply chain to mitigate the effects of tariffs and expect to see the benefits of these actions throughout 2020.
As we have discussed previously the path to higher gross margins continues to be through improved operational execution, primarily in Pts.
Mitigating the impact of tariffs and increased volumes and all businesses.
Slide 16 details the changes to adjusted net income for Q4 2019 of $21.3 million compared to adjusted net income per.
For Q3.
Of $28.2 million.
As discussed earlier the adjusted operating income for Q4 2019 was lower than Q3's, adjusted operating income both on a dollar and a percent of revenue basis.
Adjusted operating expenses for Q4 of $41.7 million or 21.5% of revenues were $1 million lower than Q3, adjusted operating expenses, 19.2% of revenues.
The lower dollar expenses resulted from reduced performance based expenses.
The company had lower interest expense in the fourth quarter as a result of paying down $65 million of death in the third quarter.
Roger is effective tax rate for 2019 was 14.2% compared to 20.7% in 2018.
The 2019 rate decreased price decreased primarily due to the increased utilization of research and development credits and excess tax deductions on stock based compensation.
Mostly offset by the tax effect of the pension settlement charge and an increase in reserves for uncertain tax positions.
Turning to slide 17, we ended 2019 with the cash position of $166.8 million, an increase of $26.1 million from September Thirtyth and a decrease of point $9 million from December 30, Onest 2018.
In Q4, the company's spent $12.8 million on capital expenditures.
We spent $51.6 million in 2019 with significant expenditures the increased capacity at both HCS and PDF.
The company paid down $7.5 million, a debt and the quarter and pay down $105.5 million of debt in 2019 and ended the year and a net cash position of $43.8 million.
The company generated $45.7 million from operating activities in Q4, including a decrease in working capital of $17.4 million.
For 2019, the company generated a record $161.3 million from operating activities, including $13.4 million from a decrease in working capital.
Cash generation in 2019 from fair compares favorably to the cash generation to 2018 of $66.8 million from operating activities net of the $46.2 billion used for increases in working capital and $25 million the funded pension plan.
The company ended 2019 with a healthy balance sheet and is well positioned to fund growth in 2020 and beyond whether it be organically or through M&A activity.
Taking a look at our Q1 2020 guidance on slide 18, several of the headwinds Bruce described it as Q4 comments, we will continue into the first quarter and are expected to be exacerbated by the near term impacts and uncertainties from the Corona virus.
While we have been able to restart our factory near Shanghai, We expect the outbreak will have near term negative impacts on global supply chains, and our China business, which accounts for approximately one third of our revenues.
The impacts will be felt by all three of our business segments, but it will have the most severe impact on our HTS business segment, specifically the continued push out of Fiveg deployments.
As a result, we believe the Corona virus will reduce our revenues in the first quarter by approximately 7% to 10%.
We are however, projecting to see a continued uptick in advance mobiliti business.
Both an easy HCV and Adas applications.
Therefore revenues for Q1 are estimated to be in the range of 185 million to $200 million.
The ranges wider than historically provided due to the increased level of uncertainty from the potential impact of the Corona virus.
We will continue to flex our spending for manufacturing infrastructure, SGN day, and capital expenditures to address the anticipated lower demand levels.
We will also continue our progress improving yields at PS as discussed earlier.
Even with these actions the lower volumes will continue to negatively impact our gross margins in Q1.
And we will continue to carry some incremental cost in our HTS business to address our customer needs when the fiveg rollout resumes.
As a result, we are guiding gross margin in the range of 32.5% to 33.5% for Q1.
We guide a GAAP Q1 earnings in the range of 50 cents to 70 cents per fully diluted share.
On an adjusted basis, we guide fully diluted earnings in the range of 75 cents to 95 cents per share for the first quarter.
In 2020, we expect the effective tax rate to be 20% to 21%, excluding the impact of discrete items, which have historically lowered the effective rate.
Lastly, we expect to spend $40 million to $45 million on capital expenditures in 2020.
I'll now turn the call back over to the operator for questions.
As a reminder to ask your question you will need to press star one on your telephone to withdraw your question pressed upon Kane, please standby when compared to Q1 day roster.
And your first question comes from Daniel Moore with CJS Securities.
Good afternoon, thanks for taking the questions I'll start with the toughest one first I guess.
And I know, it's a crystal ball, but if the situation with the krona virus were to.
Resolve itself in the coming weeks months, what is your sense Bruce for how much inventory is in the channel how much supply chains have been disrupted just trying to get a feel for how quickly things could potentially ramp back up.
As it relates to the the wireless telecom Buildout and.
There.
End markets that you might want to discuss.
Thanks, Dan.
Our view is that production is returning to China right. Our plant is up were.
We're running somewhere between 50% to 70% of capacity.
We've heard similar situations.
Four areas outside of Wu Han.
That you know the industrial areas outside of one not in India that majorly affected area.
And so our sense is that things are starting to return to normal to do it let's say an equilibrium and I think if if the infection rate continues to decline.
We would anticipate as we move into Q2.
To see a return to normalcy, let's say.
From our perspective.
We're ready to go.
Our we've had a on inventory within our system. We're in very good shape, we've made arrangements and our I have put in place the appropriate.
Amounts of material. So overall, we're I think we're in good shape ready to go when this.
Resolves itself.
And the extensive lingers a little bit do you see any risk or incremental risk or potential impact on your market share with with Chinese telecom Oems, obviously, we're always specifically.
I'm looking to displace as many American providers as possible you guys providers, but.
I guess any impact to that you'd see over the next one to two years something resolves itself normally on on market share.
Yes, so the way we look at it.
I think a couple of things here first the the roll the 880000 base stations.
That are projected for 2020 that might move into 2021 those volumes a certain portion of those depending again when things get started back up but let me be clear from our perspective.
We still see this fiveg opportunity as a substantial growth driver for Rogers.
Again from our perspective, it's a multiyear deployment.
We think its b it's begun.
We saw some of it certainly last year, obviously with the Corona virus, it's held back a bit but it has begun and we think will have.
Very significant share of the market moving forward specifically.
Our view is for the next round of the Fiveg tender, we expect to be near our historic share with non wild way Oems and the wrong way situation is dynamic and less certain but but we feel pretty good about.
About this as we move forward you know our customers look at us and depend on our products in terms of performance reliability and we still do come in price premium in the marketplace. So this is an ongoing competitive situation. We continue to work with our customers on commercial arrangements.
And even within our company, we have a robust product cost reduction program in place. So overall, we continue to see fiveg.
As a very very strong opportunity for Rogers, and we're well positioned to capitalize on it.
Very helpful. One last one and while I'm, beating the wireless telecom horse here.
Just fourg.
Any change over the last thing one to two quarters and it was hard to tell given all the moving parts and Corona, but any change in sort of the rate of decline or sunsetting of Fourg I'll jump back in queue with any follow up thanks.
Dan I I think there was we had looked at Fourg in 2019 and anticipated decline.
I don't think we anticipated the decline to be at the level that it was in 2019 and wasn't anticipated in 2020, but.
Really the what's happened here is that.
The Capex capex pressure that the carriers are putting on the Oems has really driven a fourg down that in conjunction with the adoption of the dynamic spectrum sharing technology to allow fiveg systems to function is fourg as well also as cut in two.
The need for additional rollout for substantial rollout of Fourg.
Very good as I said I'll jump back thanks.
Thanks, Dan.
Your next question is from Craig Ellis with B. Riley FBR.
Yes, thanks for taking the question and guys. Thanks for all the color just on all the different dynamics that are going on tough environment out there.
I wanted to start Mike just for clarification, so it looks like we're.
We're looking at.
First calendar quarter, where revenues are pretty flattish sequentially, but can you just help us understand where there might be some material gives or takes within the different segments as you'd look at the the performance of the business sequentially into the March quarter.
Yes.
I would say that.
The Pts side, we're encouraged by the EPA TV.
So we certainly believe we'll have we'll see some slight increases there.
There'll be some gives and takes on the.
On the on the on the CMS side, but in general I think it's going to be relatively flat.
Quarter on quarter, and I think again, the wildcard becomes a becomes HCS and around the fiveg.
As you can see from if you look the let's say the midpoint of the guidance that would it would suggest that the hds business is pretty close to what where they were in.
Q4 as well.
That's helpful and then Bruce I wanted to just follow up in a different way.
Some of the occur there are questions regarding communication infrastructure. So I know surprise given all the news that's been out there that the fourg opportunity is less on what all of US thought it would be six months ago and with the timing of of China's Fiveg launch, but the question is this is.
As you look at the business and and look at it on more of a half on half basis and not looking for specific quantitative guidance, but would it be fair to say that.
The calendar 20, it could be really the mirror image of 19 in two ways one.
Starting very low and ending high but also.
With a with a business that that ends the year with just a much slower fourg component given what carriers are deciding to do around their fiveg in fourg dollars or do you see fourg coming back more strongly in the back half of the or even as we get more of that 880000 Fiveg base station units.
Yeah, I I think the Fourg decline and what's being projected for 2020 is about a 25% decline and we don't really believed that will change as we go through the year, but what I think is really encouraging is that.
The public.
Pronouncements that have been out there in the 880000 base stations that are some of the the.
Consultants are projecting that might be shifted but when we look at that and the content. That's in there and so forth for Rogers, we see this as really being a a nice growth.
Tailwind for us overall for our wireless business.
Makes sense and and putting a finer point on that.
Is it your view given what you can see now that with that growth towards 880000 anything for when exactly we get their bench, but can we get back to near record revenue levels in the back half of this year or really is that something that.
Much more realistic next year.
As we get even more of the Fiveg help and maybe some are trying to fourg in some of the continued growth in businesses like PS and.
In an eight assets.
Well.
Very interesting question I think if we take you take it by segment and we look at Fiveg.
And look at wireless in general for a for AC Yes, I think it could be a good year, if things get going again, and we see this 880000 base station really come to fruition I think we do have some macroeconomic headwinds that go across the businesses we talked about.
Industrial automotive traditional automotive that are flattish to down our view is in things like industrial things could come back pretty quickly historically, we've seen this return maybe one or two quarters.
It things could could could roll that rolled back in so the second half of the year certainly could be.
A strong half and whether we get to record revenues.
I think you know number things have to fall in line, but it's not beyond the realm of possibility.
Okay. That's helpful. And then lastly, a gross margin question from I can that I'll hop back in the queue, Mike I thought I heard you say that.
Gross margin improvement sequentially was 600 basis points in the quarter. One did I hear you correctly into if so what comprise that 600 basis points and you can you help us see the shape of the things that are driving the improvement as we look ahead.
Through calendar 2000, thank you.
Sure.
Yes, Craig you did hear that you didn't hear that correctly. So we did see has 600 basis points improvement.
And to gross margin, which also helped their profitability.
In the quarter and help the company's profitability.
So, yes, and what really drove that there were there were two pieces of that so we've been taking costs out of that structure become much more efficient over the last two quarters. So we certainly saw a good chunk of that was cost reductions, but we also saw some benefits from the yield programs that we put.
In place and the new.
I'd call it the new.
Operations management, both at the corporate level as well as at the Pds level have certainly I think help.
With a better approach to some of the some of the challenges that we have there. So we certainly have seen some benefits from the yield as well I would say probably odd that I'd, probably say was probably more towards the cost structure benefits than yield, but certainly we are seeing improvements in yield and so we look out.
220, 20, as we said, we're still looking for an incremental 600 basis points improvements and the gross margin of four Pts as we as we move through the year here and I think the majority of that now is going to come from I'd say, the harder work of characterizing processes ad.
Again, improving yield so I think thats got to its going to come it's going to come slower than the first 600 basis points, but I think we're on a path to get that Ed and I would expect we'll see a small improvement in Q1, and we should see incremental more incremental improvement in Q2.
And can you just refresh us on what the other programs are for gross margin enhancement and how they could play out through the year. Thanks for indulging the follow up.
Hey.
Also on all of our businesses and PS as part of this.
I have some fairly aggressive.
Cost reduction programs that we have in places that center around both supply chain as well as well as yield so while while the yield challenges are probably more pronounced in CES. We believe we have yield opportunities both in HCM and the at mass business as well.
And again I think from a supply chain standpoint, and procurement standpoint, we believe those are those are big opportunities for us. So.
When we think about.
You know as as we progress into a 2020 right we're expecting to see some nice fall through on incremental revenues right I would expect that going forward. We should we should be seeing fall throughs in the 60% above adjusted gross margin. So I think we're pretty encouraged by by the program.
But we haven't place to really kind of fuel our gross margin improvements.
Thank you very much.
Your next question is from Patrick Ho with Stifel.
Thank you very much maybe first off in terms of be Fiveg rollouts and your thoughts there.
In terms of the delays and push out. So you believe this mortgage capacity digestion or are there other variables that you believe our work.
In that marketplace.
I really I mean, our view is that the push out is really on on two fronts. One certainly the corona viruses is causing a lot of disruption there.
And as we had talked about I think in the last call around rep see in the redesign that's going on at Wawa that is also pushed out.
The implementation as they went through that redesign and.
Our understanding there's still.
Engineering through their way through that so.
You know our view is as the things settle in here with the Corona virus Q2, we should start seeing the rollouts begin.
Interest.
Right that's helpful and maybe Mike in terms of.
Mitigating the supply chain issues that all technology companies are going through right now as it relates to the Corona virus. One what are some of the things you can do on the supply chain and maybe the kind of a question I'm looking at it are you building inventory in certain areas from other suppliers.
And then how does that impact the gross margin line at least in the near term.
In terms of mitigating some of the supply issues.
I would actually say the one thing that we're trying to do Patrick is to leverage our global footprint with respect to.
Where were weak but be producing some of the these materials. So again, if we struggle.
What are the challenges in terms of getting getting product or getting either product into or out of our China factories mean that we'll we'll look to move production to other areas that we have qualified for similar materials.
So that probably puts a little bit of a strain on the gross margin in terms of looking at maybe incremental freight costs and whatnot.
I don't think it will have a material impact on gross margins in the quarter certainly not nearly as much as what we're seeing from from reduced volumes, but that's that I think thats, how were more or less managing managing through that is through our global footprint.
Great and final question for me I, you mentioned that take another quarter or two or a markets like industrial automotive to a to filing turn around.
On the industrial segments side, where do you believe you will see the initial turn it kind of what marketplaces and how you I guess, how fast do ramp up to meet demand because.
When you talk to some of the semiconductor company. It looks like a lot of those markets are out of bottom. Some are beginning to turn how do you look at from your business perspective.
So for me industrial side, we would see we think that turnaround coming in a more in the industrial equipment, which would be in our Pts business.
Specifically in the variable frequency drives and as as business starts picking up.
Now a little capital.
Spending goes equipment spending increases and so we think thats, where we would see it and certainly that's.
An area in the past, where we've seen it recover very very quickly. It goes down quickly comes back quickly we know that the inventory in this stone.
In the supply chain system is now down to reasonable levels. So if there's any uptick in industrial activity, we'll see it come through pretty quickly.
Great. Thank you very much.
Your next question is from Daniel Moore with CJS Securities.
Thank you again, just since you mentioned that Bruce is going to tease the long term goals a little bit.
Obviously, you know understood given all the moving parts pushed out beyond 2020, no surprise to anybody.
Do you if things come back and given your Incrementals is that those most of those numbers still achievable in the 2021 timeframe.
Again, crystal ball, but but just given the leverage and business is that a one year push out or potentially longer.
Well I think Dan. This is so this is like so if you think about Oh, the drop through that we talked about and you think about kind of whoa <unk>.
I.
The 1.2 billion you know that was that was out there.
Yeah, I much I'm not sure when we hit that but in terms of.
Getting to the 20% adjusted operating profit target from our perspective I think.
If we think about droppers and whatnot, it probably will take a 1% or 100 basis point improvement in gross margin is going to take somewhere in the $10 billion to $12 billion of incremental revenue of course that depends on the mix. So so if you think about it for us to get to about a 20% operating profit which would require.
About a 39% growth.
Gross margin thereabouts, but we need to be somewhere in the 250 to 60, a quarter I think what the right mix would allow us to get that so.
I don't know so much that I'd say what year that happens I think it really is going to depend more on leased at this stage kind of how particularly how the fiveg market develops ad.
Again, and the improvements and the PS business, which I think we're on it we're on a good track to achieve those.
That's helpful. Mike and then the you know the second part of the growth is that obviously the M&A piece.
Are you seeing any additional dialogues pick up finding opportunities given some of the disruption and challenges.
Yeah, We you know as we've said in the past. This this remains a a high priority for US we've got teams working on it and ER and we're sifting through we have our lists of targets and so forth. So its things could start shaking.
Could shake loose a you know we're anticipating trying to do something this year, there's a lot of work focused on that.
Got it and I'll ask you I know invest in the past Bruce but just given the perfect storm that we're kind of living through.
Just a capital allocation question would would the board and I would consider.
Adding to the mix looking at your own stock.
Given some of the near term challenges in the marketplace me, maybe create a pretty interesting opportunity.
Certainly you know certainly our priorities are funding growth, whether it's organic or inorganic growth and.
Stock buyback is always something that's that's looked at periodically with the board and at the appropriate to.
Levels here.
We're always looking and thinking about it so it's it's again not a priority, but maybe opportunistically.
Got it and then lastly, just a housekeeping what's the tax rate.
Related to the Q1 guidance that consistent with the full year, 2021% Mike.
Yes. It is all right. Thank you.
And there are no further questions at this time in base I'll turn the call that property for closing remarks.
I just want to thank everyone for joining us today and have a good evening.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating can you may now disconnect.
Oh.
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