Good day. My name is Erica and I will be your conference operator today. At 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 a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] I will now turn the call over to your host, Mr. Steve Haymore, 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. 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 2.

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 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 statement.

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 Investors section of our website.

Turning to Slide 3, 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..

first, the ongoing trade tensions that continued to push Chinese OEMs to diversify their supply chains, thereby putting pressure on the market share of U.S. suppliers. Second, a substantial capital required for 5G infrastructure is reducing 4G 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 5G content will be around three times that of 4G or approximately $175 to $225 per base station. Third, uncertainty around the impact of the coronavirus is adding timing risk to 2020 deployments in China.

In summary with forecasts for strong multi-year 5G 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 5G rollout given the challenges and uncertainties discussed, we expect to retain a substantial share of this growing market.

The advanced connectivity sector also includes portable electronics and we saw a 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 sealing and protection technologies, which continues to be a leading choice in this market for major smartphone manufacturers. Turning to advanced mobility. The growth outlook for sales of EVs and HEVs continues to be robust.

Industry experts project that through 2024 sales of EVs and HEVs will continue at a compounded annual growth rate of approximately 30%. In response to this trend, automakers worldwide continue to make multi-billion 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 PES business, we have a leading market position based on the strength of our new generation wide band gap semiconductor silicon nitride substrates for the EV/HEV market. We are encouraged by our progress here based on multiple active programs and recent design wins.

In our EMS business, battery pads and battery pack sealing solutions for electric vehicles is another exciting opportunity where we saw a solid growth in 2019 and which also provides significant growth potential for 2020 and beyond.

The superior performance of our products developed for this market has firmly established Rogers as a leading provider to a large number of EV battery manufacturers and automakers.

Additionally, the outlook for ADAS continues to be very positive based on trends and 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 7.

In 2019, ACS 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 ADAS. Wireless Infrastructure as highlighted on Slide 5, 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 coronavirus may impact timing of the next wave of 5Q deployments. With that said, the multi-year growth outlook for 5G deployments remain very strong.

With four million base station deployment expected over the next four years at three times the content of 4G. Aerospace and Defence grew at double digit rates in 2019 and has delivered consistent growth over the past three years, with a compounded annual growth rate of about 10%. The outlook for Aerospace and Defence remains positive as the U.S.

government increases its defence budget and as we continue to secure design wins. ADAS 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 level of autonomy.

In addition to the significant ACS 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 advance antenna material and components. Turning to Slide 8.

EMS net sales were $362 million, an increase of 6% versus 2018 or 8% on a constant currency basis. The higher EMS sales resulted from strong growth in applications for portable electronics, mass transit and EV/HEV 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 is a substantial growth opportunity for the company in battery pads and battery pack sealing solutions for the EV/HEV 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 and a significant design progress in a number of battery suppliers. Please turn to Slide 9.

2019 PES net sales were $199 million, a decrease of 11% as compared to 2018 or 7% on a constant currency basis, double-digit growth in mass transit, power interconnects and power semiconductor substrates for EV/HEV were 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 PES operations in the fourth quarter.

As we indicated in the middle of last year, PES operational improvements were a top priority for company and we established a detailed recovery plan.

In Q4, we continued 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 in non-EV/HEV 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 EV/HEV 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 attain these targets as a run rate in 2020 due to the challenging market conditions and effects of the trade tensions.

With the business environment remaining challenging and near term uncertainty related to the impact of the coronavirus, 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 a greater than 20% adjusted operating margin as we drive top line growth and continue to execute on operational improvements. We believe that our investments in innovation and growth markets in our broad portfolio are 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.

A slowdown in demand for products serving the Wireless Infrastructure market for both 4G and 5G applications and seasonal weakness in the portable electronics market were 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. Gross margin for the fourth quarter was 33.1%.

The gross margin was within our guidance range of 33% to 34% despite the lower revenues, as we took steps to reduce our manufacturing spending in 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 million or $1.55 per share, that included a $43.9 million or $2.35 per share non-cash 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-risk the balance sheet.

On an adjusted basis, the company delivered EPS of $1.14 per fully diluted share within our guidance range of $1 to $1.15. 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 million of free cash flow in the fourth quarter and $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% and currency had a negative impact of just over 2%. Organic growth resulted primarily from advanced connectivity related applications, both in Wireless Infrastructure and ACS, primarily in the first half of 2019 as well as portable electronics and EMS.

Growth in advanced mobility and advanced connectivity was tempered by weak 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 PES business throughout the year and incremental costs for integration of EMS acquisitions in the first half of 2019.

In addition, trade tensions between U.S. and China resulted in tariffs that decreased gross margin by 66 basis points in 2019. Despite the challenges outlined above, both ACS and EMS increased our gross margins compared to 2018. 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 charge to terminate a pension plan. Adjusted EPS per fully diluted share of 2019 of $6.14 was $0.37 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 million decreased 13% compared to the third quarter of 2019.

The sequential decrease was experienced in our ACS business segment down 18% and our EMS business segment down 16% while the PES business segment saw its revenues increase 2% over the third quarter. Currency exchange rates negatively impacted fourth quarter revenues by $1.1 million compared to Q3.

The decrease in ACS revenues resulted primarily from a further slowdown in 4G demand and a continued delay in the 5G rollout in China. As a result, our Wireless Infrastructure revenues declined 34% sequentially. 4G revenues ended the year 23% below 2018 revenues.

The 5G revenues for the year 2019 resulted in Wireless Infrastructure revenues growing 10% over 2018 levels. Fourth quarter revenues from Aerospace and Defense programs grew 4% sequentially over a strong third quarter and increased 16% for the year.

ADAS revenues were down 8% sequentially but are up 7% annually compared to 2018 in the face of a weak auto market. Revenues in our EMS 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 comprised 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 in new handset and tablet designs.

General industrial application revenues, which comprise approximately 40% of the business segment’s revenues were down 9% compared to the third quarter and down 5% annually compared to 2018 reflecting ongoing weakness in certain industrial markets.

PES revenues increased in the fourth quarter due to a strong increase in our power semiconductor substrates for EV/HEV applications. 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 the 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 were down 16% as demand for factory 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 and 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 was $64.2 million or 33.1% of revenues, significantly lower than our third quarter gross margin.

The decrease in the gross margin percentage was due to lower volumes resulting in less factory absorption and manufacturing expenses, particularly fixed costs. We were able to reduce manufacturing spending at all business segments, thereby mitigating a portion of the negative impact from the reduced volumes.

Tariffs were $1.6 million lower in the quarter due primarily to reduced Wireless Infrastructure production. Gross margins declined significantly for both ACS and EMS in the fourth quarter due primarily to the meaningful volume declines experienced in the quarter.

In addition, EMS had a negative impact from product mix as the higher profit portable electronics revenues experienced a seasonal decline compared to Q3. In the fourth quarter, we continued to execute on the PES recovery plan as Bruce mentioned and we are encouraged by signs of progress made in the quarter for manufacturing yield and cost structure.

The improvements led to a significant progress on the business segment profitability, increasing PES 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 and incremental 600 basis points improvement at PES driven primarily from increased yields and continue to believe it will take us through the first half of 2020 to realize the majority of the remaining improvements.

These efforts are critical to maintaining our ability to support the increasing demand in the wide band gap 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 $0.8 million or 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 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 PES mitigating the impacts of tariffs and increased volumes in all businesses. Slide 16 details the changes to adjusted net income for Q4 2019 of $21.3 million compared to adjusted net income for Q3 of $28.2 million.

As discussed earlier, the adjusted operating income for Q4 2019 was lower than Q3 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 debt in the third quarter. Rogers effective tax rate for 2019 was 14.2% compared to 20.7% in 2018.

The 2019 rate decreased primarily due to the increased utilization of research and development credits and excess tax deductions on stock based compensation, partially 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 a cash position of $166.8 million, an increase of $26.1 million from September 30 and a decrease of $0.9 million from December 31, 2018. In Q4 the company spent $12.8 million on capital expenditures, we spent $51.6 million in 2019 with significant expenditures to increase capacity at both ACS and PES.

The company paid down $7.5 million if debt in the quarter and paid down $105.5 million of debt in 2019 and ended the year in 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 compares favorably to the cash generation in 2018 of $66.8 million from operating activities, net of the $46.2 million used for increases in working capital and $25 million to fund a 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 activities Taking a look at our Q1 2020 guidance on Slide 18, several of the headwinds Bruce described in his Q4 comments will continue into the first quarter and are expected to be exacerbated by the near term impacts and uncertainties from the coronavirus.

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 in 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 ACS business segment, specifically the continued push out of 5G deployments. As a result, we believe the coronavirus will reduce our revenues in the first quarter by approximately 7% to 10%.

We are however projecting to see a continued uptick in advanced mobility business both in EV/HEV and ADAS applications. Therefore, revenues for Q1 are estimated to be in the range of $185 million to $200 million. The range is wider than historically provided due to the increased level of uncertainty from the potential impact of the coronavirus.

We will continue to flex our spending for manufacturing infrastructure, SG&A and capital expenditures to address the anticipated lower demand levels. We will also continue our progress improving yields at PES 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 costs in our ACS business to address our customer needs when 5G 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 $0.50 to $0.70 per fully diluted share. On an adjusted basis we guide fully diluted earnings in the range of $0.75 to $0.95 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 will now turn the call back over to the operator for questions..

[Operator Instructions] 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 coronavirus 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 wireless telecom build out and any other end markets that you might want to discuss..

Sure. Thanks, Dan. Our view is that production is returning to China, right? Our plant is up, we're running somewhere between 50% to 70% of capacity. We've heard similar situations, for areas outside of Wuhan, the industrial areas outside of Wuhan, not in the majorly effected area.

And so our sense is that things are starting to return to normal to let's say an equilibrium. And I think if the infection rate continues to decline we would anticipate as we move to Q2 to see a return to normalcy, let's say. From our perspective we're ready to go, we've had inventory within our system. We're in very good shape.

We've made arrangements and have put in place the appropriate amounts of materials. So, overall, I think we're in good shape, ready to go when this resolves itself..

And to the extent that it lingers a little bit, do you see any risk or incremental risk or potential impact on your market share with Chinese telecom OEMs? Obviously, Huawei is specifically looking to displace as many American providers as possible, U.S.

providers, but I guess any impact that you would see over the next one to two years assuming that it resolves itself normally on market share..

Yes. So the way we look at it, I think a couple of things here. First, the role – the 880,000 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 5G opportunity as a substantial growth driver for Rogers. Again, from our perspective, it's a multi year deployment. We think it's begun.

We saw some of it certainly last year, obviously with the coronavirus it’s held back a bit, but it has begun and we think we'll have a very significant share of the market moving forward.

Specifically, our view is for the next round of the 5G tender, we expect to be near our historic share with non Huawei OEMs and the Huawei situation is dynamic and less certain, but we feel pretty good about this as we move forward.

Our customers look at us and depend on our products in terms of performance reliability and we still do command 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 5G 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 4G, any change over the last, say, one to two quarters. It's hard to tell given all the moving parts in corona, but any changes in sort of the rate of decline or some setting of 4G. I'll jump back in queue if any follow-ups. Thanks..

Dan, I think there was – we had looked at 4G in 2019 and anticipated a decline. I don't think we anticipated the decline to be at the level that it was in 2019 and what's anticipated in 2020. But really what's happened here is that the CapEx pressure that the carriers are putting on the OEMs has really driven 4G down.

That in conjunction with the adoption of the dynamic spectrum sharing technology to allow 5G systems to function as 4G as well also as cut in to the need for additional rollout or substantial rollout of 4G..

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 with a clarification.

So it looks like we're looking at a first calendar quarter where revenues are pretty flattish sequentially, but can you just help us to understand where there might be some material gives or takes within the different segments as you look at the performance of the business sequentially into the March quarter?.

Yes, I would say that on the PES side, we're encouraged by the EV/HEV. So we certainly believe we'll have – we'll see some slight increases there. There will be some gives and takes on the EMS side, but in general I think it's going to be relatively flat quarter on quarter. And I think again, the wildcard becomes ACS in around the 5G.

And as you can see from – if you look at, let's say, the mid point of the guidance, it would suggest that the ACS business is pretty close to what – where they were in Q4 as well..

That's helpful. And then Bruce I’d wanted to just follow up, but in a different way, some of the earlier questions regarding communication infrastructure. So by no surprise given all the news that's been out there that the 4G opportunity is less than what all of us thought it would be six months ago and with the timing of China's 5G launch.

But the question is this, as you look at the business 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 2020 could be really the mirror image of 2019 in two ways.

One, starting very low and ending high, but also with a business that that ends the year with just a much lower 4G component given what carriers are deciding to do around their 5G and 4G dollars or do you see 4G coming back more strongly in the back half of the year even as we get more of that 880,000 5G base station units?.

Yes, I think the 4G decline and what's being projected for 2020 is about a 25% decline. And we don't really believe that will change as we go through the year. But what I think is really encouraging is the public pronouncements that have been out there in the 880,000 base stations that some of 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 nice growth tailwind for us overall for our wireless business..

Makes sense.

And putting a finer point on that, is it your view given what you can see now that with that growth towards 880,000 and I am when exactly we get there, but can we get back to near record revenue levels in the back half of this year? Or really is that something that's a much more realistic next year as we get even more of the 5G help and maybe some return of 4G and some of the continued growth in businesses like PES and an ADAS?.

Well, a very interesting question. I think if we take it by segment and we look at 5G and look at wireless in general for ACS, I think it could be a good year if things get going again and we see this 880,000 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 in one or two quarters, things could roll 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, a number of 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 for Mike and then I'll hop back in the queue. Mike, I thought I heard you say that the PES gross margin improvement sequentially was 600 basis points in the quarter one.

Did I hear you correctly? And two, if so, what comprised that 600 basis points? And can you help us to see the shape of the things that are driving the improvement as we look ahead through calendar 2020? Thank you..

Sure. Yes, Craig, you did hear that correctly. So we did see a 600 basis point improvement in the gross margin, which also helps 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 cost out of that structure and become much more efficient over the last two quarters. So we certainly saw – a good chunk of that was cost reduction, but we also had saw some benefits from the yield programs that that we put in place.

And the new – I'd call the new operations management both at the corporate level as well as at the PES level have certainly, I think, helped to put a better approach to some of the challenges that we have there. So, we certainly have seen some benefits from the yield as well.

I would say probably – on that I'd probably say it was probably more towards the cost structure benefits than yield, but certainly we are seeing improvements in yield. And so when we look out into 2020, as we said, we're still looking for an incremental 600 basis points improvement in the gross margin for PES as we moved 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 and again improving yield. So I think that's going to – it's going to come slower than the first 600 basis points, but I think we're on a path to get that in.

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..

Well, so on all of our businesses and PES is part of this. We have some fairly aggressive cost reduction programs that we have in place that center around those supply chain as well as yields. So while the yield challenges are probably more pronounced in PES, we believe we have yield opportunities both in ACS and the EMS business as well.

And again, I think from a supply chain standpoint and procurement standpoint, we believe those are big opportunities for us. So when we think about – as we progress into 2020, right, we're expecting to see some nice fall through on incremental revenues, right.

I would expect that going forward we should be seeing fall throughs in the 60% above adjusted gross margin. So I think we're pretty encouraged by the programs that we have in 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 just first off in terms of the 5G rollout and your thoughts there in terms of the delays in the push out, do you believe this is more just capacity digestion? Or are there other variables that you believe are at work in that marketplace?.

I really – I mean, our view is that the push out is really on two fronts. One, certainly the coronavirus is causing a lot of disruption there. And as we had talked about, I think in the last call around rep free and the redesign that's going on at Huawei. That has also pushed out the implementation as they went through that redesign.

And our understanding, they're still engineering through – their way through that. So, our view is as the things settle in here with coronavirus, Q2, we should start seeing the rollouts begin in earnest..

Great. 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 coronavirus.

One, what are some of the things you can do in the supply chain? And maybe the kind of question I'm looking at is, 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 these supply issues?.

I would actually say that the one thing that we're trying to do, Patrick, is to leverage our global footprint with respect to where we would be producing some of these materials.

So, again, if we struggle or the challenges in terms of getting product or getting product into or out of our China factories means that 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 reduced volumes.

But that's – that I think is how we're more or less managing through that is through our global footprint..

Okay, great. And final question from me, you mentioned that, it could take another quarter or two for markets like industrial and automotive to filing turnaround.

On the industrial segment side, where do you believe you'll see the initial turn in kind of what marketplaces? And I guess how fast could you ramp up to meet demand because when you talk to some of the semiconductor company, it looks like a lot of those markets are at a bottom, some are beginning to turn, how do you look at it from your business perspective?.

So from the industrial side, we would see – we think the turnaround coming in more on the industrial equipment, which would be in our PES business, specifically in the variable frequency drives. And as business starts picking up capital spending those equipment spending increases. And so, we think that's where we would see it.

And certainly that's an area in the past where we've seen it recovered very, very quickly. It goes down quickly, comes back quickly. We know that the inventory in the system – in the supply chain system is now down to reasonable level. So if there's any uptake in industrial activity, we'll see it come through quickly..

Great. Thank you very much..

Your next question is from Daniel Moore with CJS Securities..

Thank you again. Just since you mentioned it, Bruce, want to tease the long-term goals a little bit. Obviously, 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 – are those – most of those numbers still achievable in the 2021 timeframe? Again, crystal ball, but just given the leverage in the business, is that a one-year push out or potentially longer?.

So, I think, Dan, this is - so this is Mike.

So if you think about the drop throughs that we talked about and you think about kind of – I – 1.2 billion that was out there, 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 you think about drop throughs and whatnot, it probably will take a 1% or 100 basis point improvement in gross margin is going to take somewhere in the $10 million to $12 million of incremental revenue.

Of course that depends on the mix. So, if you think about it, for us to get to about a 20% operating profit, which would require about a 39% gross margin thereabouts. We need to be somewhere in the 250 to 260 a quarter I think with 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 at least at this stage kind of how – particularly how the 5G market develops and again, and the improvements in the PES business, which I think we're on a good track to achieve those..

That's helpful, Mike. And then the second part of the growth is that that obviously the M&A piece.

Are you seeing any additional dialogues, pickup finding opportunities, given some of the disruption and challenges?.

As we've said in the past, this remains a high priority for us. We've got teams working on it and we're sifting through. We have our lists of targets and so forth. So, things could start shaking –could shake loose. We're anticipating trying to do something this year. There's a lot of work focused on that..

Got it. And I'll ask – I know I've asked in the past, Bruce, but this given the perfect storm that we're kind of living through, just a capital allocation question, would the board consider adding to the mix looking at your own stock given some of the near-term challenges in the marketplace maybe create a pretty interesting opportunity..

Certainly, our priorities are funding growth, whether it's organic or inorganic growth and stock buyback is always something that's looked at periodically with the board. And at the appropriate levels here, we're always looking and thinking about it. So it's, again, not a priority, but maybe opportunistically..

Got it. And then lastly just a housekeeping.

What the tax rate for – related to the Q1 guide? Is that consistent with the full year 20%, 21%, Mike?.

Yes, it is..

All right. Thank you..

And there are no further questions at this time. Bruce, I'll turn the call back over to you 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. You may now disconnect..