Q1 2020 Earnings Call

Thursday for gentlemen and welcome to the I court system first quarter 2020 earnings conference call at this time. All parties are in a listen-only mode later. We will conduct a question-and-answer session and instructions will be good at that time. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder. This conference is being recorded. I would now like to introduce your host for today's conference Claire McAdams investor relations for iqor, please go ahead. Thank you Jessie. Good afternoon. And thank you for joining today's first quarter 2020 conference call as you read or earning wages release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal Securities laws these forward-looking statements including those made about the impact.

Of the ongoing covid-19 kemik on our operations in the industry at large are subject to a number of risks and uncertainties many of which are beyond our control and which could cause actual results May differ materially from such statements these risks and uncertainties include those spelled out in our earnings, press release those described in our annual report on form 10-K for fiscal year in June 2019 on file with the SEC and those described in subsequent filings with the SEC as noted in the aforementioned filings. We remind you that the covid-19 pack continues to create significant volatility uncertainty and turmoil in our industry limiting our ability to provide longer-term forward-looking statements.

You should consider all forward-looking statements in light of those and other risks and uncertainties. Additionally. We will be providing certain non-gaap Financial measures during this conference call or earnings, press release and the financial supplement posted to our our website each provide a Reconciliation of these non-gaap Financial measures to their most comparable gaap Financial measures off on the call with me today are Jeff and recent our CEO and Larry Sparks. Our CFO. Jeff will begin with an update on our business and a review of our results and Outlook, and then Larry will purchase additional details of our first quarter results and second quarter guidance after the prepared remarks. We will open the line for questions. I'll now turn over the call to Jeff Anderson Jeff.

Thank you Claire. Welcome to our q1 earnings.

I hope that all of you on the call today and your families are healthy and safe.

During the first quarter. Our operations were impacted by the global covid-19 pandemic with each of our locations being affected by shelter-in-place requirements.

We had several of our sites temporarily experience full shutdowns most notably our California and Malaysian operation.

In spite of these challenges are flexible manufacturing strategies and the exceptional efforts of our employees worldwide enabled us to achieve strong quarter-on-quarter Revenue growth at 16% off ahead of the vast majority of our peers in the semiconductor equipment supply chain, total sales 220 million dollars also represents industry-leading organic growth of 60% compared to the same period last year we are immensely proud of our teams globally for their q1 performance to achieve this level of Revenue growth in light of the obstacles associated with the covid-19 pandemic.

Before I moved to an update on our strategic growth initiatives, I'd like to provide you with more detail regarding the impact of the covid-19 pandemic on ichor.

Our first priority Remains the safety of our Workforce and business partners and their families. We are complying with all public health directives in place in for each of our sites. We have estimated procedures in each site that includes facing temperature monitoring and additional cleaning procedures to protect the safety of our employees as well as have design plans to quickly react to any potential exposures. We met face additionally all employees who can perform their jobs remotely are working from home.

During periods of shutdowns. We kept all our employees on our payroll. It is an integral part of our values to care for all our employees and to treat them with respect while furloughs would have saved us money in the first quarter. We believe the long-term benefits of our approach will always outweigh the near-term costs.

Our second priority is to maximize our output in support of our customers delivery requirements while continuing to drive our strategic growth initiatives. We are working closely with our customers to ensure that we support their shipment plans and light of challenges both in capacity and supply chain.

the initial impacts of the pandemic were mainly associated with our supply base in China during February as we had several key suppliers that were closed for three to four weeks delaying our ability to ship of our back lot those suppliers largely recovered by the end of the quarter and our operating well now,

In mid-march, California and Malaysia announced the first shelter and place orders affecting our operations with similar requirements following shortly thereafter at our sites in Texas, Oregon in Minnesota off for repairs about two weeks. This essentially shut down our ability to provide certain weldments and components to our customers more recently Singapore expanded their shelter-in-place practices as well. Malaysia in particular has experienced the most prolonged disruption in their factories. Malaysia is a critical country in the world wide w f e supply chain. We are very pleased to a manufacturing facility. They're our customers prefer suppliers to be close to their factories and we will continue be committed to Malaysia is great news that our Malaysia operation was just recently took up to resume full operation and we expect to be near pre Kovac capacity level in the next several weeks as we readjust the factory for the new spacing requirements.

And each of the countries in which we operate we have been designated in essential business supporting the critical infrastructure.

T industry which allows us to operate that being said our capacity levels have been somewhat impacted by the spacing protocols that we are now required to follow. So while March and April are very challenging we are seeing the situation improved here in early May our supply chain is strong. We are working closely with our supply base and supporting them during these challenging times in real life counterparts flowing. We have built a strong inventory position in order to continue to support the strong level of demand from our customers.

I heard it's been doing an excellent job in executing our business continuity plans to address these challenges and uncertainties and I want to thank everyone for their dedication and commitment to supporting the company as we navigated for the covid-19 pandemic now, I'd like to discuss the demand environment. We are operating in today in general the demand for Semiconductor equipment remains strong. And is it all changed much over the course of the last quarter. We are seeing increased demand from each of our largest customers and across all of our business is driven by continued strong levels of Foundry and logic investment and a modest degree of recovery and memory spending.

However, and many injured many in the industry are experienced manufacturing output limitations primarily as a result of the social distancing requirements, which is stretching lead times. We often steady improvements in those constraints and any unfilled backlog exiting the second quarter. We expect will roll into the following court before I discuss the outlook for the second quarter back. I will I will review the progress that we are making against our Revenue growth objectives for the year.

In spite of the current challenges our team has executed on the fastest ever 3/4 ramp in the company's history growing quarterly revenues organically by 60% since the second quarter of 2019 given that we believe the underlying industry Improvement was between twenty and thirty percent over the same. At least half of this Revenue growth was a direct result of our increased market share and growing footprint within are served markets and gas delivery. We are continuing to execute on opportunities to increase our share with our largest customers and with a customer base and agent and well minutes and in Precision Machining we continue to work on additional qualifications across our customer base.

We are on track with our plans so far this year with some of these games contributing to our Revenue growth in the first quarter another Factor driving our Revenue growth in 2020. Please suggest in penetrating new customers, especially those in Asia in the area of chemical delivery and specifically with our proprietary liquid delivery module the largest opportunity for this business's with customers in Japan and Korea and we are actively in discussion with several potential new OEM customers. Is that reported on our last call. We shipped the first beta unit to a Korean OEM in the first quarter and we are in discussion with other potential new OEM customers all of which will position us for Meaningful contribution from this region starting in 2026.

and finally

We are benefiting from the continued ramp of UV lithography with year-over-year growth in shipments expected for both 2020 and 2021. Each of these factors wage believe will enable us to achieve Revenue growth outperforming the overall industry in 2020 further. We continue to make progress on our strategy to increase engineering and IP content for I course we started with our liquid delivery module and are making good strides there and are continuing to work on our next Generation cast panel. We continue continue to invest in this area and are making good progress in the development of this proprietary gas delivery solution and expect to have our first beta units deliver this year these proprietary products suck cornerstones of our strategy to increase the engineering and I'd be content for iqor in order to drive longer-term expansion of our share of our serve markets as well as to drive the operating model towards in club.

levels of profitability

Before I turn the call over to Larry I will share our outlook for the second-quarter revenues. We expect revenues in the range of 180 million to 220 million dollars. We have a guy ended the range given the level of uncertainties that remain with the high end of the range of corporate incorporating no additional restrictions on our manufacturing sites. And it quicker than anticipated recovery overwhelming capacity at the midpoint of our Revenue guidance. Of course, I course first half a 2020 will be up over 50% from the same period last year approximately how long the level of growth of our overall peer group the range is wide however, as well we are seeing improvements. We are still operating in a dynamic and changing environment.

To summarize the team did a great job in managing through the challenges we've encountered as a result of the pandemic to deliver the third highest revenue quarter in the company's history delivered solid financial performance and make good stride against our strategic growth initiatives. We continue to operate in a strong demand environment and believe that the long-term growth drivers remain intact. I'll now turn the call over to Larry to provide an update on the financial performance and our Outlook Larry. Thanks Jeff first. I would like to remind you that the p&l metrics discussed Thursday our non-gaap measures unless identify the measures gaap-based these measures exclude the impact of share-based compensation expense amortization of acquired intangible assets non-recurring charges and discrete tax items that adjustments

There is a very helpful schedule summarizing our gaap and non-gaap financial results, including the individual line items for non-gaap operating expenses such as R&D and sg&a in the adjuster section of our website for reference during this call.

As Jeff mentioned the covid-19 pandemic created a challenging operational environment for the company and the first quarter in spite of these challenges first-quarter. Revenue was two hundred thousand dollars an increase of 16% from the fourth quarter and up 60% from the same period last year. This was our fourth straight quarter of sequential Revenue growth and reflects continued strength and customer demand.

gross margin

The quarter was 13.8% unchanged from Q4 on the strength of higher revenue and improved Factory utilization. We had forecast a sequential Improvement in gross margin of approximately 100 basis points in q1. However, the disruption to our operations resulting from the covid-19 pandemic had a negative impact on margin completely off the expected increase in the quarter.

The pandemic affected gross margin from both the factory output and higher cost perspective. Most of the impact was the direct or indirect result of shelter and place orders and temporary shutdowns over operations in multiple locations. These disruptions had a negative impact on factory overhead absorption and the mix of products we were able to ship during the quarter. For example, our higher-margin weldment business was significantly constrained in the quarter and represented a smaller portion of our sales than expectations.

We also incurred a number of additional direct costs related to managing the covid-19 disruptions to our operations and changing customer priorities to support our customers while ensuring the safety and health of our Workforce required us to change production workflows increase expedited freight increase Factory cleaning expand employee TP deployment and incur hire overtime and shift premiums in total the covid-19 pandemic had at least a hundred basis point negative impact on gross margin and we expect a similar impact in the second quarter.

Operating expenses came in above forecast for the quarter at 14.6 million dollars due primarily to hire seasonal legal and other G&A expenses versus forecast off the impact of covid-19 on operating expenses was not significant and we expect operating expenses to Trend slightly lower in the coming quarters.

Together the negative gross margin impact due to covid-19 and the higher operating expenses resulted in operating profit of $16. Approximately 3 million dollars lower than we forecast at the low end of our original Revenue guidance. This equates to 12 cents per share of impact on EPS with our reported q1 EPS at $0.52 versus the $0.64 down at the low end of our original Revenue guidance range.

Our interest expense in the first quarter declined is expected to about 2.4 million dollars and our tax rate for the quarter was 10.2% are planning rate for tax over the next couple of years continues to be in the range of 10 to 13% didn't come from the quarter was twelve million dollars up 10% from Q4 and more than doubling from the same period last year.

Now I will turn to the balance sheet. We ended the quarter with $42 million dollars of cash compared to $61 a year end. We generated approximately $13 off from the p&l. However, working capital increased by $34 million dollars in the quarter resulting in negative operating cash flow of 21 million dollars the primary increases in working capital or an inventory to support the significant ramp and revenue volumes and lower payables inventory turns remained at 5.6.

Day sales

Standing were thirty-six days and Improvement compared to the last couple of quarters.

We ended the quarter with total debt of $184 billion dollars an increase of 3 million dollars from your end with a net increase on our revolver of five million dollars offset by $1,000 reduction in our Term Loan. Our revolver balance was $24 out of the $125 million dollars available.

In the current covid-19 environment. We are laser focused on our situation and ensuring adequate liquidity and the company to support projected long-term business growth or revolving credit app and gives a significant flexibility and we are highly confident. We will remain within all Bank covenants governing our credit facilities.

We continue to forecast much higher Revenue levels than we sustained during the recent five quarter long industry downturn even during the lowest 12-month Revenue. Which ended September 2019. We remain below our contractual three times ebitda coverage calculation. We feel very comfortable with our debt levels and capitalization given our current Outlook page. Now, I would turn to our second quarter Guidance with Revenue guidance in the range of $180 to $220 our earnings guidance of $32.54 per share reflects. Our gross margin levels is q1 and slightly lower operating expenses. We are forecasting similar interest expenses and tax rate to Cuba 1 and 23.2 million volt shares outstanding.

Well, it is too early to say with great confidence. We expect the majority of the gross bars and headwinds related to covid-19 will be behind us after this quarter or historical gross margin phone now is in the low 20s and the longer-term goal remains to drive greater gross margin accretion through incremental cost reduction programs growing our share with in higher-margin component markets and increasing our content of proprietary IP within our products.

Operator we are ready to take questions. Please open the line.

Thank you. We won't have you conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation will indicate that your line is a question Q. You may press star to if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.

Our first question comes from the line of Quinn Bolton with Needham & Company. Please proceed with your question on the way to start off with recent Commerce Department actions last Monday where they're changing some of the export licence requirements for military use and Military end-users in China wondering if that's had any impact if if you been able to take a look at those new regulations and what that might mean for the business.

well

It's Jeff had it had a feeling this might come up giving some of the headlines in the last few days. But in general we don't have to provide the license. So that would come from our customer. I would say we haven't seen any effect of this. We're keeping a close eye on it. Many many years ago licenses were required for virtually everything that's been to China from the semiconductor industry and and getting the license, you know, take some time but haven't really gotten a good feel on whether there's going to be any limitations. So unfortunately, it's probably better asked of one of our OEM customers as they're they're the ones that will actually do the licensing.

Understood I figured I just asked cuz it's been topical over the last week moving on to the business. You guys obviously had a big Revenue ramp over the last few quarters inventory is sort of followed suit. I just kind of wondering how you're thinking about inventories. You come into the June quarter and is the higher inventory balance sort of a you know, reflective of what you think the second hug me older. Is there anything we can read and how you're thinking about the second half of the Year given that hire inventory balance? Well, what I would tell you is that the demand environment is still very very strong. We we opted to not overly constrain inbound inventory in light of some of the challenges as we get through those challenges. We want to make sure we have the home link and and turn it as well our inventory turn stayed pretty healthy. I would say as we look at next quarter. It'll probably be likely pretty flat number may be down slightly dead.

Depending on where we come out in the range and so we'll we'll manage it down to some some level but we still see a relatively strong demand environment as we go into Q3 as well.

Crema just last question for me obviously during you know periods of uncertainty and downturns. I think some of the suppliers some of your customers may look to tighten the supplier base. Wondering if if you're seeing any increased activity from your customers to to try to tighten up the supplier base, especially, you know, given some of the, you know, covet driven off why effect that that we've seen around the world

By Titan, you mean reduce? I think reduce the number of suppliers kind of consolidate to the larger folks like yourself. Yeah. I I would I would tell you that. I actually think it's kind of miraculous what the industry's been able to accomplish given the global nature of this and the global supply chain. So I'm not seeing that happen. I would tell you that as the industry gets bigger and bigger some of the smaller players become more challenged to ramp and things like that. So I'd say it's more of a function of ability to grow than it is to kind of rejigger the entire Global Supply Chain. I mean, we just, you know, you know, they most companies have reported have done pretty well in addressing the Rampage.

Thanks, Jeff. Thanks Lori.

Thanks. Thanks Glenn.

Thank you. Our next question comes from Sidney Hall with Deutsche Bank. Please proceed with your question.

Thanks for taking my questions. I have a few the first one is maybe can you help us quantify what Revenue would have been for q1 and Q2 if there were no supposed constraints?

That that is a good question. I would say when we look at q1. I think certainly we would have probably been towards the upper end of the revenue range that we we had provoked had. We not run into the headwinds beginning in with the China's Supply base and then ending with you know, a couple of weeks of shutdowns of two of our large operations, so and but I think if you look at the cute too, I think the underlying demand is higher than the revenue guide should probably hear from the industry mainly because everyone in the industry's kind of had to adjust Reflow and realign with our customers.

And they you know, our customers have been obviously impacted too because they're spacing requirements for everybody out there. So everybody is working their factories over to adjust

Okay, kind of related to that based on your comments or your your competitors, It sounds like you have lost some market share in q1 because Parts can get a relationship one. Would you be able to quantify that impact and kind of relate to this? Can you talk about your expectation? When you think you will regain those shares? It's simply just when you factor is open. You can start shipping your you get those back.

I think there was an a comment made by one of our competitors about market share gains the way we we know we haven't lost any share in gas delivery. They do have duplicate weldments, but we think that's fairly small. So I think I think the inference said it came from us is maybe not a hundred percent. Correct as we don't one hundred percent overlap product lines it also just you know point out when you compare our year-over-year Revenue growth that we talked about since you know a year ago, you can see that we're significantly outgrowing of what the industry is seen and that's just the effect really largely due to the market share that we put in games last year that we won and some additional market share gains this month as well.

Okay, maybe my my last question is you have talked about these share gain opportunities in the past and you have gave us some progress today as well. Can you talk about what your life Revenue expectations of these opportunities in aggregate this year? Maybe a range would be more appropriate now and how do you rank order these opportunities for calendar? 2025. I think we sat on the edge call Sydney. We weren't going to try and do the quarter-by-quarter score card. What I would tell you is is that we're working on opportunities on the component side of our businesses and Wildman's and in Precision Machining, there's opportunity in Gas Distribution to some degree and then obviously with our chemical delivery. We're looking at expanding that geographically really around some of the success we may have in qualifying additional customers here in the US and the initial impact that may may start late in the year of birth.

ldm outside of the US

Okay. Thank you.

Thank you. Our next question comes from the line of Carl. Please proceed with your question.

Hi, this is Sam Mazda Carl with many other semi cab companies reluctant to put out guidance near-term. What kind of visibility do you have for the next few months that gives you confidence in the guide off and I guess to say the different way. How do your different exposures play into comparability here with your customers? And then I have a follow-up, please.

Yeah, it's a good question. I I think as we as we look at where we're at today and what we can do operationally, I think we were comfortable we could set a range. We've widened it quite a bit from what we typically do. It's nearly twice as twice as wide. I'd say you think of the top end of our recovery of our range is is being able to come back online faster than we're anticipating. But right now I think we're pretty comfortable with where our supply chain is and it's recovery Malaysia is a big challenge for us. And now that we've been approved to operate completely now, we're bringing all of our employees back on their put in the spacing protocols in place and we should be back to kind of pre.

With providing a range now if something.

Happens where a lot of you know places but other restrictions in which does appeal is going to happen, but we can't predict the future.

Got it, that that's helpful. Thank you, and then we talked about gross margins a bit on the call already. But how should we be thinking about linearity through the rest of the year given how impressive your Revenue ramp has been brought a date? I think we were expecting them to Trend positively through the rest of the year, of course, but how long could it possibly take for your labor cost structure to catch up with the demand you've seen in public speaking Beyond Junior covid-19 not considered. Thank you.

Well, I think before what we said when we were projecting a growth from the kind of 189 range to the midpoint of 227 Thursday. We said that should contribute around a hundred basis point Improvement in margin. I I think we're still confident that as we kind of execute to and is Jeff mentioned sort of took it back to more normal capacity and kind of flow through the factories. We would expect to see at least that and a lot of it then beyond that will depend on a customer demand and the strength of that demand and what kind of volume leverage we can see in addition to where we are in Q2. And also there's some cost programs that we have with the timing of which may happen in two or three or four. It's just depending upon how quickly we can get those done and then how how much were responding to kind of changing birth

customer Dynamics, so we expect

Like to get at least a hundred basis points back and then as we mentioned before as we as we increase the amount of of higher mix of products in the weldment and precision Machining areas, we will go beyond that and try to get closer down the road to our model.

Got it. Thank you very much.

Thank you. Our next question comes from Tom Davidson. Please proceed with your question. Yeah, good afternoon. So Larry taking the the margin one step further when you get back up from 1:50. Sorry $252 and sixty million dollar range. Are you going to be back at the 17 plus minus margin as well similar to what it was a couple of years ago.

I would say as we get towards the end of this year and we're if we're at that Revenue level will probably still be slightly slightly under that but very close to that. I think a lot of it's going to depend on the mix of product that we have at that point. If we can continue to capture the share that we expect to walk in the Wellman areas and precision Machining. I think you know, that's definitely in the range of where we expect to be. Yeah. I think, it's Jeff. I think we're you know, we we're going to try and increase obviously the mix of our well-meant and our precision machine. I think we I think we've got a good uh, initial wave of market share gains and not working on others in that space. So that will be helpful as well. And as Larry said as we kind of go through the year, we'll have our cost-reduction programs be, you know, continuing to kick it off.

Okay, and then on the subject, why was that a little weaker in the quarter? Was it at just a a facility that was you know hit more than the rest. Yeah. I mean we have some kind of three large weldment facilities. The largest is in Malaysia. Malaysia was shut down for the better part of three weeks before we were even allowed to bring in about 30% of our production laborer. And and so and then Alameda County here locally. We have our Wellness facility as well that is is the vast majority of of that and then a smaller one up in Portland the when California shut down. Obviously. We were closed for about a week for the definition or we were added to the essential Industries list. Then it takes you a while to kind of bring the facility up and get people back so they were down.

The better part of two weeks as well. So you do lose that Revenue stream for almost two straight weeks there and in Malaysia Malaysia is a combination of weldments that they make for the gas panel that we use internally and well minutes that we sell externally but the vast majority is is internally used and so that had a effect on you know to operations at that point which is why Malaysia is so critical to come back up for us. They're doing a very good job. I mean it's only been a week since they've been you know, notified to bring everything back and it's and they're coming up the capacity crowd quickly. Yeah. I know it can be a little tough to wield at home sometimes and then finally when you look at the the social distancing inside the factory has that reduced Your Capacity or do you have enough kind of empties sort of that?

know what so the answer is yes it limits our capacity to

And agree, I would say is you look at us our integration sites where the actual gas panels are all assembled. I think the spacing and requirements are not as impactful there because of the space they have in the clean rooms. In other areas where we're we're seeing a little more of an impact is really in the well mention the Machining and not necessarily out where I'm doing Machining and on the C & C's but you know, there's clean room operations and there's final, you know, Q&A and things like that where the space gets a little constrained. So we've created a few bottles. We're trying to work around those and creative ways and and and I think the operations teams doing a really good job to try and eke out all the capacity that can we certainly have enough capacity to do the range of Revenue that we see for next quarter that we just guided too. So

Okay. Well, no, we really appreciate you actually giving guidance and appreciate your time. Thanks.

Thank you. Our next question comes from the line of Steve's with RBC Capital markets. Please proceed with your question.

Hey guys. Thanks for taking my question. The first the first one I had is just kind of it too bad side. So I think it's first pretty good. You guys are guiding the relatively flat is for here over to just given the environment too worried. But how do we think about faith and destruction or potential demand destruction out? Let's say 12 months from now, I guess my question there is what gives you guys confidence at this kind of Demands that a continued I realized it last year was very very often cyclical down here but going forward here. Just giving all the news we're seeing what type of visibility you guys have in terms of orders. It's giving you confidence over the next twelve months or so. Yeah, Well, we we certainly don't get input from our customers Out twelve months. I will tell you that, you know, the the message from them is that the demand is still remaining fairly strong and I think some of this is driven by the strength and Foundry and logic that we've seen in the first half. We do expect some recovery on the memory side. It's very difficult to predict wage.

Could happen as we come through. This is a global economy at this point. So I don't want to be the first one to go and do this but you you know, if there's going to be an impact to it. It may have some trickle-down effect obvious life to the semiconductor industry itself, but having said that there's there's a lot of kind of secular technology things going on right now just taking transition to 5G. I think the work from home and all of that infrastructure has been kind of an upside to the downside. I think we're you may see some of it is in the hand phone seems like that eventually but PCS are very strong obviously right now as well. So I wish I could predict the future, you know, we we operate the company with one foot on the gas and one foot near the brake and we apply the brake fairly quickly. I think you you can see that, you know in in the last cycle we were able to right-size the infrastructure fairly quickly wage.

You'd be so that you know will.

Monitor, the situation and will react to as we see the demand, but right now the signal is from our customers is there and you've heard them say it that and Still Remains fairly strong.

Okay, then it's a couple of small ones. Just the other one I had in mind was just the idea that the u.s. Is probably going to incentivize I wouldn't be surprised incentivized semiconductor companies bring manufacturing state to kind of start building up ABS here. Would that benefit you guys or does it not really matter? If the Fab is built or new fads our bills vs. I guess filling in Old bad. So that makes sense. If you build a new one and that benefit you guys versus trying to fill an old one and then the very just last one is just it's a SML should be a 10% cash or do you think this year? I know it was closed last year. Just curious if you had a thought of that month. I you know, it was it was getting there last year in a very, you know loan Revenue year. So this year they the other customers just given the magnitude of the business and stuff. They'll grow grow. Asml is growing but just the law of large numbers well make them they can't grow fast enough to get the 10% and then the question.

in about whether building fads in the US has beneficial to us I I would say it's we're probably in different on location unless there's some you know you know the impact around this Department of Commerce licensing they they may end up with more Greenfield that would be slightly beneficial to us but we do like Greenfield Babs wage they fill them all with tools whereas you get a technology nodes shift and they'll they'll fill up yeah tools for partial parts of the Fab so and fill in fact they need to do address the new technology node so if that should have been it probably would be in that benefit

Okay. Thank you so much.

Thank you. Our next question comes from Patrick ho with stifel please proceed with your question.

Thank you very much. And I'm glad to hear everyone as well maybe for you Jeff or Larry in terms of the gross margin impact specifically the covid-19. You said 100 basis, and based on at least to prepare Marcus house like a lot of it in the March quarter was on manufacturing utilization the shutdowns and things of that nature as you look at the June quarter and that 100 basis-point impact. Is that still the biggest variable for that one hundred basis point of impact or Logistics supply chain or a billion maybe bigger impacts in the June quarter as manufacturing kind of gets back to quote more normal operations. Yeah, Patrick. I think you've answered the question. I think you see the around Logistics. Obviously the freight we're seeing significantly higher freight costs.

and that'll impact most of the

Order as opposed to sort of the back end of last quarter. We're also as we socially distance and bring our factories up. We've had to change that a win people work and shift coverage. So we have more people on on The Late Shift switch have shift premiums and other things so I think you'll see a little bit on average kind of higher hourly rates that will people is we end up, you know, getting production up to where we want it to be. I think the the direct shutdown is Jeff mentioned, you know, we ended more time with a lot of the factories are a good number of them shut down or significantly impaired with the shelter-in-place orders trying to figure out you know, what what we needed to do. I think it's Jeff said we understand what to do. Now. We will have some some costs around, you know, cleanings and extra equipment for folks. We've also looking at moving around 5 a.m.

Operations inside the factory to kind of optimize output and and distance distance kind of operations further away from from where they would normally be. So there's a total amount of energy going on inside of the factory and inside of how we structure our Labor Force and and and where we where we put them and and when they both work that I think it's a little bit different composition, but the end result is a is a similar impact to margin as as what happened in q1.

Quite that's really helpful. And Jeff maybe as my follow-up question. It's evident obviously in your year-to-year growth in revenues about the share gains, you've talked about and wellness and precision Machining given that the focus of yourself and your your largest customers are right now on the current situation and just making sure the customers get products. Have you seen any changes in the timing of the evaluations and the qualifications for the share gains and what I'm looking at that is does this Thursday push out potentially. It's a 2021. It's everyone's focused on the near-term environment. Do you believe these you know evaluations are still on track?

So I probably split this into pieces Patrick. I mean, I think that if there is a continuity of supply and you have to go get something out of it. I think those are going really quickly now. So if you need to change vendors or something you you would generally work with your customers to ensure that they qualify with us new product qualifications. I I have not seen them slow. I I think as I kind of talked about the operational aspects of the industry is handled this. I I think they're largely, you know, maintaining their R&D and development. So we have a couple of obviously, you know liquid delivery module bettas. And we home and by the end of the year the Next Generation gas panel paid out there. I think those are still progressing quite well in light of all of this as well.

Great. Thank you.

eccentric

Thank you. Our next question comes from Craig Ellis with FB are pleased to see what your question. Hey guys. This is Carmen Lynch on for Craig. Just wanted to jump on the gross margin point and Ed follow-up looking Beyond kind of the covid-19 impact, you know, you talked last quarter about the impact from Plastics Division. I was wondering how you guys were thinking about that business through the year and what kind of impact it has, uh, you know as revenues ramp and then I had a quick follow-up.

Your question was around Plastics.

Yeah, just a marginal tax like through the year as revenues kind of come back. Yeah, well, you know the the Plastics business certain aspects of it are growing in certain aspects not scaling right now with that. We still have some activity that we're we're doing there but we do expect at that margin will start to improve but it's probably going to be a second half of effect.

Got it. And then just on the objects point you mentioned that affects is, you know going to come down slightly in the second quarter, but, you know given all the R&D projects and you know, new customer qualifications month is, you know, what are the kind of puts and takes their through the year just any color, that would be great. Thanks.

You do to prioritize execution on those programs. I mean, we're we're we've been doing that for a couple couple of quarters now, especially in the package delivery module and and the development of the kind of next-generation gas panel efforts. I think that you know that we we have no intention to kind of short Change activity. We will probably adjust the G&A and other spending kind of around making sure that the R&D is preserved and I think overall I'm trying to hold the spending levels kind of to that they'll lower level $14 range that we communicated last time. So I think no no change in strategy. If we have to prioritize, you know, where to make those investments will do it in R&D and adjust on G&A and sales if we have to yeah Dad that we're we're kind of when I say, yep.

X-lite, I mean, um, we generally don't um, we don't add objects until we have to a perfect example of this year as we have to become Sox compliant by the end of the year inventory next year's that costs money that's funded in there. And then the rest of our growth this year is is largely around kind of what we acquired last year in the development of new Authors programs. When we do the acquisition of the flow control unit. We get the full impact of it this year. So that's another reason why it's up a bit having said that if if we see any softening in the month, you know, the second half we we have a few levers to pull on that as well.

Got it. All right. Thanks guys.

Thank you. We have no additional questions at this time. So I'd like to pass the floor back over to mr. And reason for an additional concluding comments.

Thank you for joining us on our call this quarter. I'd like to thank our employees suppliers and customers for their support as we manage through these challenging times. We look forward to updating you again on our next earnings call in early August. In the meantime. We were scheduled to participate in the virtual Tech conferences hosted by Kalin and late May and stifel and early June which would be available via webcast on our our website operator that concludes our call.

Thank you. Ladies and gentlemen. Once again, this does conclude today's teleconference. We thank you for your participation. And you may disconnect your lines at this time.