Q2 2019 Earnings Call
Ladies and gentlemen, this is a feel for your conference is scheduled to begin momentarily until that time your ones will once again be placed on hold thank you for your friendship.
Thank you Jason.
Good afternoon, everyone and welcome to the Rogers Corporation second quarter 2019 earnings Conference call.
The slides for today's call can be found on the investors section of our website.
Along with the news release that was issued today.
Please turn to slide two.
Before we begin I would like to note that statements in this conference call that are not strictly.
Historical are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in Rogers operations and environment.
These uncertainties include economic conditions market demands and competitive factors.
Such factors could cause actual results to differ materially from those in any forward looking statements.
Also the discussions during this conference call May include certain financial measures that were not prepared in accordance with generally accepted accounting principles.
Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be 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 is Bruce Hoechner, President and CEO .
Mike Ludwig Senior Vice President and CFO , and Bob Daigle, Senior Vice President and CTO.
I will now turn the call over to Bruce.
Thanks, Steve Good afternoon, everyone and thank you for joining us on todays call. Please turn to slide four.
Rogers delivered strong Q2 results achieving record quarterly net sales of $243 million and adjusted earnings of $1.64 per share, which exceeded the top of our guidance range.
The results for the quarter were driven primarily by demand for Fiveg wireless infrastructure applications as we indicated on our last earnings call a meaningful five g. demand emerged in Q1 and orders accelerated into Q2 solid demand for Fourg LTE wireless infrastructure and growth in portable electronics also contributed to the strong quarter for advanced productivity applications.
Advanced mobility applications, specifically advanced driver assistance systems, or Adas and E V. HCV battery pads also helped to drive our Q2 performance.
Following a return to growth in Q1, eight gas market demand remained strong in Q2 and group for a second consecutive quarter.
The uncertainty that followed the restrictions on sales to claw away had some impact on the quarter, we had a short interruption to ensure compliance with the U.S. rules before resuming shipments to our direct fabricator customers. However, as I'll discuss later the collateral effects of these restrictions and the ongoing trade tensions are creating uncertainty and our outlook for the second half of the year.
In addition, our Q2 results were tempered by weakness in general industrial and conventional automotive markets, which correlates with a number of recent reports pointing to declines in these sectors in Europe , China and other regions.
Hi, tariff costs, which as Mike will discuss later affected gross margins and operational challenges in our PS business, which I will discuss in more detail shortly.
Despite these near term challenges, we remain very confident in the opportunities for Rogers in advanced mobility and advanced connectivity markets, we have aggressively cultivated a leading position in these areas over the past several years and are poised to execute as we work through the short term market dynamics that are influencing our cautious Q3 outlook.
Turning to slide five as I mentioned, we continue to see significant long term growth opportunities for Rogers in the areas of advanced conductivity and advanced mobility.
In advanced connectivity, we are encouraged by the strong fiveg demand that we saw in Q2 and the growth opportunity associated with the expected fiveg build out over the next several years a number of recent data points validate that the long term global Fiveg rollout is moving forward.
For example in early June China granted Fiveg spectrum licenses to the country's major telecom operators and important step that will allow for full commercial deployment of fiveg.
Subsequently one of the leading telecom operators in China announced that they plan to launch Fiveg services in more than 50 cities by the end of this year.
In addition industry X where experts project that the total combined 2019 and 2020 global Fiveg deployments, primarily in China will exceed 800000 base stations reinforcing their prior projections.
Taken together, there is more clarity and strong momentum behind the Fiveg rollout.
There have also been signals that fiveg deployments in the U.S. could accelerate recently the FCC approved the auction of an unused portion of the 2.5 gigahertz band until now the availability of mid band spectrum, which is critical to widespread fiveg deployment.
Has been limited.
This move to free up additional spectrum is an important step towards an initial five g. buildout in the us.
Near term visibility to wireless infrastructure demand is clouded by the collateral effects of the restrictions on walk away and its impact on the rate of Fiveg deployment in China.
It is uncertain, whether we will be able to it said access critical components needed to continue with fiveg deployments and to what extent they may try to utilize Chinese suppliers.
Also not clear yet is how we always share of the China market may be impacted.
Despite these uncertainties we are encouraged by the ongoing fiveg orders and as we move into Q3.
Rogers is well positioned to benefit from the Fiveg deployment due to our design wins with all major telecom equipment providers.
Turning to advanced mobility, the outlook for easy HPV growth remained strong and we continue to see this as a substantial long term opportunity.
Year to date, our E V. HCV power semiconductor substrate business has continued to grow at a double digit rate compared to 2018 and market demand remains much stronger and the conventional automotive market.
Automakers are also increasingly shifting their future production plans to encompass more easy and HGV models. For example, a recent Hs market analysis found that based on announced plans by automakers. The number of E. The HPV models available in Europe is expected to triple by 2021 to more than 200.
The study also concluded that by 2025 E. the atps comprise more than 20% of all vehicles produced in Europe .
With consumer demand driving sales and global markets the momentum behind the transition to ease and HGV continues to grow.
The longer term outlet outlook for Ada Es demand growth continues to be robust despite the near term slowdown in global conventional automotive sales.
I CIS market forecast that automotive radar units will grow at nearly 20% compounded annual growth rate over the next five years as Adas penetration of new vehicles grows and as the number of sensors per vehicle increases.
Turning to slide six I'll discuss results for each of the business units.
AC S achieved record net sales of $93 million in the second quarter, a sequential increase of 15%.
As mentioned these strong results were driven by Fiveg and Fourg wireless infrastructure demand and strength in Adas applications.
This is the second consecutive quarter that HCS has achieved record quarterly revenue.
This is due in great part to our emphasis on developing innovative solutions to meet our customers' fiveg performance requirements and the strategic investments, which have enabled us to support a rapid increase in demand our operational excellence initiatives combined with improved utilization have also helped to drive significant improvements and operating margin. We continue to move ahead with product innovations new capacity additions and further operational improvements in order to position Rogers to take advantage of the Fiveg rollout.
For Q3, we expect softer fourg and Fiveg demand due to uncertainties discussed.
In addition, we believe that the weaker auto market will have some impact on Ada Es sales.
For the full year, we expect Ada es to grow at high single digits relative to 2018.
Please turn to slide seven.
In Q2, Dms net sales were $94 million, a slight increase compared to Q1. The higher revenue was a result of growth in portable electronics.
He the HCV and mass transit applications, which was mostly offset by weaker demand for general industrial and conventional automotive applications.
We are especially pleased with the performance of applications for ERP, HGV battery pads and battery pack sealing systems.
2019 year to date sales in this segment are up over 40% relative to 2018.
This growth has been driven by significant design wins in battery powered applications and the performance of our innovative products such as our new poor on xtend material, which enhances lithium ion battery life.
In addition, Dms operating performance improved meaningfully in Q2.
Our efforts to optimize the operations of acquired companies is progressing well and gross margins are improving as a result.
Lastly, as it relates to our Q Q3 outlook, we expect to see a lower than normal seasonal increase in sales due to the weak portable electronics market.
Turning to slide eight.
PE as second quarter net sales were $52 million a decrease of 14% from Q1.
The decline in PS revenue was primarily due to weak end market demand for power semiconductor substrates and industrial power and vehicle electrification applications for conventional automobiles.
Operational improvements in PE us remain a top priority and we are executing the detailed recovery plan that we previously developed.
However, we did not make the progress expected in Q2 for two primary reasons.
First the pace of implementing our recovery plan was disappointing and as a result, we made several key organizational changes second the lower production volume compounded the operational challenges and more than offset the progress we did make.
To mitigate the impacts of the lower demand, we are flexing our cost structure to minimize the margin impact.
As I mentioned, the HCV market opportunity is extremely compelling and we are committed to making the necessary operational improvements and adding capacity in PS in order to take advantage of this opportunity.
Please turn to slide nine.
We remain focused on the four strategic elements of our growth strategy, which serves as a roadmap to our long term financial objectives, we continue to drive towards achieving a net sales run rate of $1.2 billion subject to additional acquisitions and an adjusted operating margin run rate of 20% in 2020.
We have achieved strong Q2 results and are optimistic about the growth opportunities and advanced mobility and advance kind of activity. We will continue to execute our disciplined strategy to best position Rogers for the future.
Now I will turn the call over to Mike to report on our Q2 results in greater detail Mike.
Thank you Bruce and good afternoon, everyone and the slides ahead I'll review, our second quarter 2019 results followed by our third quarter guidance.
Turning to slide 11, we will review the financial results for Q2 2019.
Second quarter revenues as previously noted were $242.9 million within our Q2 guidance range of 240 million to $250 million.
Q2 revenues increased slightly on a sequential basis, but increased 13% over the second quarter 2018.
The wireless infrastructure market for both Fourg and Fiveg applications, along with a das portable electronics and mass transit markets were strong contributors to the sequential revenue increase.
The company experienced weaker demand and lower revenues, primarily from power semiconductor substrates for general industrial applications as well as conventional vehicle electrification applications.
Why we were able to achieve a gross margin of 35.3% within our guidance range of 35% to 36%. Our continued execution challenges in PS exacerbated by lower volumes in the Pts business offset significant improvements in gross margin and improved gross margin performance in our Gms segment.
The company's gross margin was also measurably impacted in the quarter by the increased tariffs, resulting from an escalation of the trade tensions between us in China.
Adjusted operating income for Q2, 2019 was $41.7 million or 17.2% of revenues compared to $41 million or 17.1% of revenues for Q1 2019.
Adjusted operating expenses decreased by $8.3 million in the second quarter compared to the first quarter.
GAAP EPS of $1.30 cents per fully diluted share and adjusted EPS of $1.64 cents per fully diluted share for Q2 2019 were at and above respectively. The upper end of our guidance range for Q2, but below Q1 levels.
The strong earnings performance, both on a GAAP and adjusted basis resulted primarily from good expense control and a slightly lower than forecasted effective tax rate for the second quarter.
Turning to slide 12, our Q2 2019 revenues increased $3.1 million vertz versus the first quarter of 2019.
The sequential increase was experienced in both our HCS and Dms business segments, while our.
With our ABTS revenues growing 15% and our Fms revenues growing 1%.
The PS business segment saw its revenues decreased by 14% sequentially.
The increase in EPS revenues resulted primarily from strong wireless infrastructure applications demand.
Growing greater than 20% compared to Q1 as both Fourg and Fiveg revenues grew significantly in the quarter led by strong antenna application demand.
The strong Fourg revenues were driven by the previously announced 416000, China Unicom Fourg LTE installations, we highlighted in our previous conference call.
In fact, Fourg has held steady through the first six months of 2019 as it was basically flat compared to the same period of 2018.
As Bruce noted Fiveg orders accelerated in the second quarter, and we were able to act quickly to mitigate the negative impact in the quarter to both Fourg and Fiveg revenues, resulting from the restrictions on sales to walk away.
Revenues from Ada Es showed continued strength in the second quarter with a slight sequential quarterly increase but growing approximately 15% over the second quarter of 2018.
Revenues in our Dms segment increased sequentially due to strong demand in both portable electronics and automotive applications.
The increase in portable electronics revenues up 9% sequentially and 44% compared to Q2 2018.
Was due to the timing of our customers commercialization of new handset and tablet designs.
The increase in automotive application revenues resulted from increase in E V HGV battery pads and battery pack sealing systems.
Which grew slightly compared to Q1, and almost 75% compared to Q2 2018.
The growth in the application is another example of where Rogers technical capabilities of amplified our growth by solving our customers' difficult technical challenges.
General industrial application revenues were down slightly compared to the first quarter.
As noted in a bruce's prepared remarks, Pts experienced weaker demand and lower revenues, primarily from power semiconductor substrates for general industrial applications as well as conventional vehicle electrification applications as revenues for these applications decreased sequentially by 10% and 7%, respectively and each declined by 11% compared to Q2 2018.
For power semiconductor substrates for E.. The AGV applications demand remained strong in the second quarter, but revenues declined sequentially due to production challenges that were separate from ongoing yield challenges.
These issues were resolved in the quarter, but resulted in revenues being down 6% compared to Q1 for these applications.
Even with the production and yield challenges revenues for E.. The HCV power semiconductor substrate applications were up 45% compared to Q2 2018 and year to date are greater than 35% ahead of 2018.
Despite the slow down in our power semiconductor substrate business for general industrial and vehicle electrification applications. We continue to see increased current demand and expect to see significantly increasing demand over a multiyear period for our wideband gap semiconductor substrate business, serving each TV applications. As a result, we will continue to bring on additional capacity to address the increasing demand.
Currency exchange rates negatively impacted 2019 second quarter revenues by $8.5 million compared to Q1 2019.
Turning to slide 13, our gross margin for Q2, 2019 was $85.8 million or 35.3% of revenues 30 basis points lower than our first quarter gross margin of 35.6%.
The decrease in gross margin percentage was due to a significant decline of the gross margin in the PS business and meaningful increases in tariffs, resulting from the us and China trade tensions.
Combining to offset the increases in gross margin of both the AC Aston Dms businesses.
We were pleased with the increased gross margin percentage from the US business in Q2, resulting from a favorable product mix increased efficiency and improved factory utilization.
The excellent results were delivered in the midst of a significant demand increase which was planned and invested four beginning in 2018.
In the second quarter. The Fms gross margin percentage also increased due to increased efficiency improved factory utilization and progress on NMS performance issues discussed on past calls we expect to see further gross margin improvement in Q3, and Q4 from resolving the CMS consolidation and optimization issues.
Consistent with comments from our prior calls we anticipated the decline of the gross margin and PS in Q2 due to the continued challenges with productivity and yield issues with our new generation wide bandgap semiconductor silicon nitride product.
In addition, the PS gross margin was negatively impacted in Q2 by the significantly reduced volumes, resulting from the reduced demand in general industrial and conventional vehicle electrification applications.
We continue to follow our yield and productivity and commercial recovery plans as Bruce discussed in his remarks, we made organizational changes to address the pace of the execution of our PS gross margin recovery plan and anticipate seeing progress in the second half of 2019 into the first half of 2020.
In addition, we are addressing our cost structure and PS to compensate for lower volume, while still maintaining our ability to support the increasing demand in the wide bandgap semiconductor power applications.
The increase in tariffs due to trade tension escalation during the second quarter impacted our gross margin by over 60 basis points compared to the first margin due to both the increase in the tariff rate and the increased shipment of inventories subject to tariffs primarily HCS inventory.
In total tariffs impacted gross margin in the second quarter by over 80 basis points.
We are working aggressively to leverage our factory footprint and to optimize our supply chain to mitigate the effect of tariffs.
We expect to see the benefit of these actions in the form of lower tariffs as a percent of revenues in the first half of 2020.
The headwinds on gross.
On company gross margin from performance issues from the PS in Dms business segments increased to approximately 230 basis points from approximately 175 basis points discussed in our Q1 call due primarily to greater inefficiencies from the lower volume of power semiconductor substrate business discussed earlier.
The achievement of our financial target of 20% adjusted operating profit in 2020 is predicated on a gross margin of greater than 39%.
The path to the higher gross margin is through improved operational execution in PS and CMS, which we expect to contribute 230 basis points.
Mitigating the impact of tariffs, which can contribute from 40 basis points with the actions described above to 80 basis points of trade tensions are resolved favorably and an incremental 100 plus basis points from increased volumes in all businesses, particularly fiveg revenues.
We saw improvements in Dms in the second quarter and believe with the management changes in PS. We're on an enhanced more timely path to executing on the performance opportunities.
We discussed our plans to mitigate the impacts of tariffs and we remain confident in the Fiveg aid asset he TV markets and expect them to continue to grow into the future. As a result, we remain confident in our path to achieve a gross margin of greater than 39% and adjusted operating profit margin of 20 of 20% in the back half of 2020.
Slide 14 details to changes to adjusted net income for Q2 2019 of $30.7 million compared to adjusted net income for Q1 2019 of $34.6 million.
As discussed earlier the adjusted operating income for Q2, 2019 was slightly higher than Q1's, adjusted operating income both on a dollar and a percent of revenue basis.
Adjusted operating expenses for Q2, a $44.1 million or 18.2% of revenues were $43 million lower than Q1, adjusted operating expenses of $44.4 million or 18.5% of revenues.
The lower expenses resulted from reduced SG M&A costs.
Other income and expense for Q2 was unfavorable compared to Q1 2019 as a result of increased expenses from currency and commodity hedging activities.
Lastly, our effective tax rate for Q2, 2019 was 22.9% compared to our Q1 2019 effective tax rate of 14.2%.
The first quarter 2019 effective tax rate incorporated discrete tax benefits that were not expected to and did not repeat in the second quarter.
In the second half of 2019, we expect the effective tax rate to be between 24% and 25%.
Excluding the impact of discrete tax items.
Turning to slide 15, we ended the second quarter 2019, with a cash position of $173.1 million, an increase of $11 million from March 31, 2019, and an increase of $5.4 million from December 31 2018.
In Q2, the company spent $11.4 million on capital expenditures.
We have spent $24 million year to date.
We continue to guide capital spending for the year in the range of $50 million to $60 million as we continue to add capacity for increasing demand for products, serving fiveg and easy HCV applications.
The company paid down $28 million of debt in the quarter and is paid down $33 million of debt in 2019 through June thirtyth.
As of June Thirtyth, we are in a net debt position of $22.4 million.
The company generated $50.4 million from operating activities in Q2, including a decrease in working capital of $11.2 million.
Through June the company generated $67.5 million from operating activities net of an increase in working capital of $13.9 million, primarily from the increase in accounts receivable.
Due to both strong revenues and the timing of revenues in the second quarter.
Taking a look at our Q3 2019 guidance on slide 16, as we have discussed we are seeing a decline in the demand for our power semiconductor materials for general industrial and vehicle electrification applications that will extend into the second half of 2019.
And there continues to be uncertainty regarding the collateral effects of the U.S sanctions against wall way and how those will impact our wireless infrastructure application revenues in the second half of 2019.
Therefore revenues for Q3 are estimated to be in the range of $225 million to $235 million.
We expect performance improvements made in our Dms, and Pts segments and slightly lower tariffs from reduced HCS volumes to be offset by lower factory utilization from the reduced volumes. As a result, we are guiding gross margin in the range of 35% to 36% for Q3.
We guide GAAP EPS for Q3, and the range of a one dollar and five cents to $1.20 cents per diluted share on an adjusted basis. We guide fully diluted earnings in the range of $1.30 cents to $1.45 cents per diluted share.
I will now turn the call back over to Bruce.
Thanks, Mike in summary, we achieved strong results in the second quarter, despite trade related uncertainties market headwinds and operational challenges, which we are focused on improving the outlook for advanced connectivity and advanced mobility market opportunities is strong and we are well positioned to take advantage of these growth areas.
This concludes our prepared remarks, and we'll now open the line for Q and a.
At this time I would like to remind participants in order to ask your question. Please press Star then the number one on your telephone keypad, well pause for just a moment to compile documenting roster.
Your first question comes from the line of Patrick Ho from Stifel. Your line is open.
Thank you very much maybe first off in terms of the SCS business and the the comments you made about both the fiveg in the Fourg deployment that were seeing today are you still seeing good strength in the fourg side of things.
Two part question there is how sustainable do you believe that is and secondly, given some of the issues with the law way ban in the U.S. does that have any impact.
Related to the Fourg business.
So hi, Patrick as Bruce.
With regard to Fourg, what we're seeing is we've had a good first half with Fourg, we believe that as the focus turns towards fiveg that there will be perhaps less.
Less sales into the Fourg area less build out.
As as the operators and as the Oems move towards the Fiveg side with and I would say with regard to the situation that I outlined with wild way.
I think the reason as we look forward, we're we have some unknowns.
The ability of long way to get all the components that they need to build out the fiveg base stations is still up in the air now Theres, obviously talk that they built inventory over time, but.
We will see how that plays out as we move through the second part of the year as I mentioned in my.
Prepared remarks, we also saw certainly in the beginning here of Q3 continued strength in Fiveg demand for our materials. So again, it's just the cloudiness as you as we move through the quarter and into Q4 that.
With regard to ability of law weighted continue that's that's a question for us.
Great that's really helpful and maybe as my follow up question on that the PS business can you talk about the vehicle electrification.
Still being somewhat.
Soft on the demand side of things.
I guess from a big picture perspective can you give a little color on what you believe.
The catalyst for the inflection thats needed to I guess.
Spark that market segment, and then obviously in turn drive your PSS business.
So yes. Thanks, thanks for the question.
On the X by wire or vehicle electrification again. This is the this is internal combustion engine automobiles.
Going to stop start and so forth as well as the other systems air conditioning, and so forth going to electrical motors the.
The situation is really related to the numbers of vehicles being produced in particularly the higher end models and so theres been when you look at the data from China. When you look at the the the production data of automotive output in Europe , There's a decline there and thats. What we believe this is related to that it's really the the number of units being produced of the internal combustion engines with the X by wire capability generally higher end models and Thats. What we are seeing suffer on on the volume side. So when that when we see a return on it there in terms of sales growth of internal combustion engines at the higher end.
We should see this pick back up.
And your.
Great and maybe a final question for me in terms of the kind of the management of your different facilities and the different businesses to help the gross margin profile, Mike that's been a key initiative for you can you describe I guess give a little color on how you adjust both adjust both the manufacturing changes.
Within the businesses themselves, where it's stronger in one area. We can add another how you can adjust some of the manufacturing capacity, but also on the supply chain.
Helped boost up gross margins over the long term.
So so theres a number of initiatives underway first of all.
We're really pleased with the performance of Hfcs.
If you recall if you go back probably six quarters or so we had some operating issues. There we focused on them with improved substantially in that business and and we've carried that model forward.
Into the Fms business, where we also saw some very good performance in the quarter in Q2 on the operating side as we continue to integrate the acquisitions that we've made over the last couple of years. So the two businesses AC as MMS.
We're seeing our plans have been executed well and we're seeing those results the Pts business, which.
It is.
I would say more complex from a processing perspective has has had some struggles as as we've outlined over the last couple of quarters.
We decided to make a change in operations leadership there.
And with some bringing in some experienced people from the outside and we think we'll see some some good results as Mike pointed out it will it will take us through the end of the year to see some of that come to fruition, but but we have those plans in place and we believe the execution should go.
Good should go well.
On the on the supply side.
Patrick.
I think there are a couple of things that we continue to focus on so re formulation of materials that we use within within our products. We are continuing to look for re formulations out that lower our costs and I think we've made some good progress here early in the year.
I think we'll have better progress as we move throughout the year. So thats certainly one and then and then.
In terms of trying to address not trying but in terms of addressing tariffs.
Again, we're looking at supply chain and supply chains on in different geographies that we can utilize that will again mitigate impacts of.
Of tariffs should those continue to be.
A significant and ESCO and the and the trade tensions, let's say not resolve themselves favourably.
Thank you.
Great. Thanks, a lot guys.
Thanks, Patrick.
Thanks.
Your next question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.
Yes, thanks for taking the questions and guys. Congratulations on the strong revenue performance in SCS in that corner.
The first question is really a clarification, what I wanted to do as I understand.
Some of the comments Bruce that you had when you talked about guidance I think at least once maybe twice you talked about the third quarter outlook being cautious and Mike you yourself noted that you were factoring in that.
The potential for.
And impact from macro issues. The question is are you is the guidance said based on trends you're seeing in the order book or.
Have you taken the order book and based on concerns you have based on whatever's going on with trade or at the macro level have you made an extra allowance for some of the things that would cause you to be conservative just trying to get a better sense of how youre, how youre looking at the outlook This particular quarter.
Hi, I think I think there is little bit of one in the same right I think some of the things that we're seeing in the macro certainly have are impacting the order book is and as a result of that.
I think were again being somewhat cautious in terms of.
And beliefs that some of those trends will continue at least for some some short period of time certainly through the third quarter, we'll see how they.
How they probably shape out into the third quarter and into the fourth quarter. So I think Craig it's a.
What were seeing yet we're seeing it in and in the order book and I think it's again reflective of what we are hearing what we're seeing in the in the general macro picture.
Craig I would say a lot of it is related to the macro situation right that we talked about general industrial being down, particularly capital equipment as it's related to our variable frequency drive substrates.
But also even handsets right if you look at.
Portable electronics.
It's relatively flat to down we've had some very good wins in that.
That area Q2, we had some introduction in new models that that helped MMS boost their sales in that area.
So we're just looking really at the macro side of it macroeconomic side and saying you know there is there are some headwinds here for us I'll flip it over though and make another comment where we're seeing strength continuing is he the TV as I mentioned the orders for Fiveg early in the quarter look look good so.
In our focus markets, we're seeing the strength that we had hoped for.
Great Thats helpful. So moving on to the first question Bruce you noted that.
There was a consultancy that identified the potentially in China. There is demand for 800000 base stations and.
2019, and 2020, but my question is as you speak with your customers and and the Oems that are out there what's your sense for.
Fiveg base station demand in 2019, and 2020 and how is the team approaching capacity planning for the back half of this year and next year as you're working with your various customer constituencies on.
On on their build plans.
So so.
The consultants and contact obviously with Oems, we're looking at an approximately 200000 base stations in 2019 600.
Going forward in 2020 from a capacity perspective, we think we're in.
In good shape as this ramps.
Over the last couple of years, we've we've added about 30% additional capacity into the us business between primarily between the presses and de bottlenecking of the treaters, we're bringing on a another treat or coming out.
At the end of the year early next year in 2020 as part of the the acquisition of our price road. The old are I Sola factories that gets converted so we think we're in very good shape very good position on the capacity side of things and certainly matches up with the data that we're getting from the marketplace on base stations I think to add to that Craig is.
Even though again as if we as we've talked about some of these uncertainties in terms of how they impact the back half of the year, we are still planning for.
Again, the 800000 between the two years 600000, plus next year and so.
We're not we have not slowed down despite the uncertainty we have not slowed down our capacity adds particularly as they relate to the solar plant that we acquired in the back half of 2018.
And is there any visibility that you have on that 600000 for next year, Mike When do you expect to hit the inflection because on a quarterly basis Theres clearly a very steep ramp coming at some point do you have visibility into that yet.
No I don't think we have that visibility Craig.
Okay. Next question, both you and Bruce address some of the issues that are that are occurring in NPS that relates to gross margins. My question is this.
So we've been executing on operational and yield improvements in PS and and it's proven illusive, thus far although there have been some exhaustion as challenges but.
Can you just recap what gives you confidence that those will be resolved.
In the next quarter or two and in issue think about that path to that that 39% gross margin, 20% operating margin that you mentioned, Mike is that a fairly linear path from here or is it back end loaded and what are some of the bigger dependencies between here and there.
Yes, so I would say again.
Youre right Greg on your initial observation right the.
The improvements have been elusive so far we believe though in the last quarter or two we've developed the right recovery plan as as Bruce had mentioned we are.
Frustrated it's at some in some respects by the pace of which that is moving and so we have made.
Organizational changes that we think will again.
Increase the probability of success and increase the speed of success around that plan. So I think from that perspective that gives us significantly more confidence than.
Then maybe as we as we started the quarter and prior to making those changes so.
I don't want to underestimate the impact of the changes that we've made there I think they are fairly significant.
And then.
As I laid out the what needs to happen to get to that 39%.
I think again, we had talked about 50 basis points improvement.
Last in the last call, we talked about 50 basis point improvement from.
You know from the performance improvement at both the CMS that we are seeing that in Dms and I think they are on plan PS is going to have to a couple of things. So yes, we'll have to get back on track. We just talked about that the volumes are going to have to pick back up at CES as well because I think volume will play an important part.
And then I think it depends on again, the acceleration of the Fiveg and as we said, we really don't have necessarily great visibility into how that 600000 units is going to play out so.
I don't believe that its linear from here, let me say that I still think it's probably becomes accelerated in the first half of 2020 and again continues to pick up in the back half of 2020.
That's helpful. And then lastly, Bruce just summarizing the situation is I think I'm hearing it from you.
With your automotive exposure across the three segments it sounds like where you've got.
Internal combustion engine exposure, it's just the unit headwinds that we're seeing globally in the different markets and in some of the reporting there on sorry, Ben I think very well recognized by most investors, but it sounds like underneath that where you've got your any GB exposure those trends seem to be solidly on track is that a fair breakdown of whats going on out there.
Yes, that's absolutely the way we're seeing it both in the <unk>.
PS business as well as the EMS business on the TV, where we have some very nice.
Share on the battery side in Dms. So yes, we're very pleased with the uptake that we're seeing on the aviation side.
Great. Thank you guys.
Your next question comes from the line of Daniel Moore from CJS Securities. Your line is open.
Good afternoon, gentlemen, thanks for taking the questions.
A lot of ground covered obviously and I just wanted to talk about the cadence if I. If we look at the kind of the three buckets of.
One wireless to auto and three industrial.
Maybe the cadence of.
Orders and demand as we exited may into June and into July and the early part of Q3.
Between those three where are you seeing the most meaningful inflections.
So I I think when.
As we talked about the automotive.
Let's say that the conventional automotive is where we've seen probably the bigger impact along with industrial both of those are areas that we've seen.
The weakness I would say are headwinds on the.
On the wireless side.
Certainly through the early part of the quarter here, we've seen strength. So so we're pleased with that aspect of it.
Helpful and Mike I think you alluded to this in your commentary, but as it relates to the 2020 goals.
You mentioned H. too.
I think the first time, so how should we think of the the 19, 20% or 20% operating margin, 39% gross margin is kind of a.
Run rate exiting back half of 2020 is that the right way to think about it at this point.
Just just trying to understand that update.
Yes. It is.
Okay Thats right, we look at it.
And lastly.
You know, it's one of those things that comes when it comes but Bruce maybe just talk about the.
The M&A pipeline balance sheet continues to get stronger every single quarter, given the cash generation.
I know you put out a lot of internal stuff that you're focused on but.
What are you seeing and what's the likelihood for M&A as we look at the back half of the year and into 2020.
Well certainly.
As as we've been very public about this we have teams working on this and looking at opportunities I would say were probably going into this a bit more cautiously than than we had maybe a year ago.
Given that we are seeing some weakness in some of the sectors. We want to make sure that we understand fully the valuations of what we're looking at and how that might project forward given some of the weaknesses in the sectors that we just discussed so we're still.
Hammering away at it and looking hard, but I would say a bit more cautious as we enter the second half year.
Understood fair enough thanks for the color.
Okay. Thanks, Dan.
There are no further questions at this time I'll turn the call back over to Bruce Hoechner for closing remarks.
I want to thank everyone for joining us today on the call have a good day and evening. Thanks a lot.
That concludes today's conference call you may now disconnect.