Rogers Corp
NYSE:ROG
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Rogers Corp
Earnings Call Analysis
Q4-2023 Analysis
Rogers Corp
The past year for the company was marked by a tough manufacturing environment, with a noticeable reduction in industrial sales. This was reflected in a 6.5% decrease in full year sales to $908 million compared to the previous year. The contraction was particularly strong in the US, EU, and China, signaling broad-based challenges. However, there was a positive undertone as the company succeeded in landing significant design wins in AES and EMS businesses, hinting at the potential for future growth.
Despite the fall in sales volume, the company admirably enhanced its gross margins to 33.8%, up by 75 basis points. This careful financial management showcased the benefits of prior structural cost reductions and vigilant containment of operating expenses. Nevertheless, the adjusted EBITDA margins held steady at 16.3%, although the adjusted EPS lowered to $3.78 from $4.91, a figure that warrants investor attention.
The fourth quarter saw net sales decline by 11% to $205 million, affected by reduced volume and negative currency fluctuations. Additionally, AES and EMS segments experienced decreases, except for a rise in EV/HEV sales. Despite a 2.2% drop in gross margin compared to Q3, the company leveraged procurement savings and manufacturing efficiencies to partly counter the downturn and reported a GAAP EPS of $1.24, benefiting from a significant insurance recovery.
The year concluded with a strong operating cash flow of $72 million in Q4 and $131 million in total, enabling strategic capital investment and voluntary repayments on credit facilities. This robust cash management demonstrated the company's commitment to both growth and financial prudence.
The company forecasts a slight increase in net sales for Q1 2024, with expectations ranging between $205 million to $215 million. Despite a slight decline in anticipated gross margin to a midpoint of 32.5% and forecasted start-up costs, there are clear signals of preparation for a top-line recovery mid-year. The projected EPS range is set at $0.30 to $0.50 for GAAP and $0.45 to $0.65 for adjusted EPS.
Acknowledging a slower-than-expected global manufacturing recovery and uncertain EV market growth, the company has deferred its financial targets to beyond 2025. Yet, officials reaffirmed their commitment to the company's long-term growth and strategy. They anticipate strong contributions from the EV/HEV market in the future and aim to achieve sales targets of $1.2 billion to $1.3 billion.
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Good afternoon. My name is Kevin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Rogers Corporation Fourth Quarter 2023 Earnings Conference Call. I'll now turn the call over to your host, Mr. Steve Haymore, Director of Investor Relations. Mr. Haymore, you may begin.
Good afternoon, everyone, and welcome to the Rogers Corporation Fourth Quarter 2023 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 earlier 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 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 made today.
Please turn to Slide 3. The discussions during this conference call will also reference certain financial measures that were not prepared in accordance with U.S. Generally Accepted Accounting Principles. A 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.
Turning to Slide 4. With me today is Colin Gouveia, President and CEO; Ram Mayampurath, Senior Vice President and CFO; and Larry Schmid, Senior Vice President of Global Operations and Supply Chain. I will now turn the call over to Colin.
Thanks, Steve. Good afternoon to everyone, and thank you for joining us today. I'll begin with the headlines of our quarter, year and outlook on Slide 5. Overall, the macroeconomic headwinds we faced throughout the fiscal year persisted through the fourth quarter, prompting more pronounced destocking at our customers and contributing to broad market softness across our end markets. In particular, our sales in the general industrial and portable electronics segments significantly declined compared to the third quarter.
Lower sales volumes more than offset the procurement cost savings we achieved in Q4. And as a result, gross margins and adjusted earnings fell below our expectations. The ongoing contraction in global manufacturing activity, which has persisted for more than a year in many countries, continues to have a meaningful impact on the general industrial market, which comprises much of our core business. We are not yet seeing sustainable signs of improvement in this market, but we believe we are near the bottom of this cycle and may begin to see some recovery midyear.
While we anticipate the macro environment will remain challenging, Rogers continues to focus on variables within our control to position us to respond once demand improves. Our commitment to aggressively manage costs while simultaneously advancing our growth strategy is reflected in our full year 2023 results, which include gross margin improvement and solid free cash flow generation. We also secured significant design wins and brought on new team members to help execute our strategy. I'll speak more about our 2023 accomplishments and near-term priorities later in the call.
We also announced today that due to persistent challenges in the global manufacturing economy and the lack of near-term visibility in the EV market, the time line to reach our March 2023 Investor Day targets is being extended beyond 2025. We have not changed our view about what we can achieve, just the timing of when we achieve it. The longer time frame for recovery does not change our strategic objectives or confidence in the future.
Rogers is grounded in leading industry positions and relationships with our customers. As we manage this business for growth, profitability and success over the long and short term, we continue to invest, so we are positioned to capture opportunities when the market recovers. We believe the strength of our team, significant opportunities in our end markets and our differentiated technology will position us to achieve our goals.
Before providing more detail on our quarterly performance, I'd like to touch on some of our Restore accomplishments in 2023. Please turn to Slide 6. Our recent actions have helped fortify our business against the weaker macroeconomic environment, while at the same time, positioning us for long-term success. The first key objective we outlined was cost improvement. We took a series of actions in 2023 to adjust our cost structure to meet demand, strengthen our product portfolio and optimize our capacity footprint. We also executed on operational excellence initiatives, which lowered costs and helped us better serve customers. Larry Schmid, our SVP of Operations and Supply Chain, will speak more about our progress in these areas shortly.
Executing on our cost improvement objectives and carefully managing adjusted operating expenses helped us make progress in our margin improvement journey in 2023. Our objective was to achieve 35% gross margins in the second half of 2023, which we hit in Q3, demonstrating what Rogers can achieve despite a tough environment. Lower sales volumes did lead to a decline in our gross margin in Q4. However, we saw a meaningful full year 2023 gross margin improvement. These actions to improve our cost structure are sustainable and will help drive an increase in gross margin as sales return to more normalized levels.
Next, we bolstered the organization with new leadership in R&D, operations, supply chain, legal, human resources and business development. We now have the right skill sets in place to execute on our short- and long-term goals as we move forward.
Lastly, we secured important design wins in our key end markets. We selectively invested in new capacity and we paid down $185 million on our revolving debt facility. With an even stronger balance sheet entering 2024, we will be able to continue to fund both organic and inorganic growth.
I'll now turn it over to Larry to discuss our progress on operations.
Thanks, Colin. Turning to Slide 7, I'll discuss how we delivered on the 2023 operations objectives that we outlined at last year's Investor Day. And more importantly, the many ongoing operational and supply chain excellence initiatives that we continue to pursue. I'll begin with our most important resource, our dedicated and talented employees. I'm very pleased with the great progress we made over the course of the year, bringing on highly experienced talent from top-tier multinational organizations. Through a targeted hiring process, we filled key global leadership positions in safety, procurement, supply chain and technical operations. Simultaneously, we fortified our safety management processes and systems. The safety culture at Rogers has always been a strength, and we remain focused on driving our performance towards best in class.
Second, as Colin touched on, we made substantial progress with our operational excellence initiatives in 2023. For example, we delivered significant manufacturing and procurement cost savings by implementing new sourcing strategies focused on optimizing both direct and indirect spending. Additionally, we continue to drive year-over-year manufacturing efficiencies and productivity improvements to lower structural costs. We also improved on on-time delivery performance to customers and drove improvements in our integrated business planning process. Looking ahead, we are still working aggressively to drive further supplier diversification and deliver additional savings in manufacturing spend. Likewise, we will continue to pursue improvements in yields, asset utilization, maintenance and reliability costs and energy usage.
Lastly, the operations team achieved a nearly 10% capacity utilization improvement in our curamik operation, our fastest-growing business last year. With strong demand in our curamik business, we also began deploying new capacity in China. This work is continuing at full speed in 2024, and we look to begin commissioning an internal qualification activities later this year with mass production expected to begin no later than mid-2025, of course, subject to overall market conditions and customer approvals. As always, we will also continue to implement other yield capacity and quality improvements this year to help support customers and the growth of our businesses.
With that, I'll now pass it back to Colin.
Thanks, Larry. Turning to Slide 8, I'll next touch on our fourth quarter results. Sales of $205 million declined approximately 11% from the prior quarter and were below the low end of our guidance, due to lower-than-anticipated industrial and portable electronics sales. In reviewing the end market sales results, I will start with the EV/HEV segment, our significant growth category.
Q4 EV/HEV sales improved at a double-digit rate versus the prior quarter, led by our power substrate products. Demand for EMS EV/HEV battery products also improved. For the full year, EV/HEV sales declined mid-single digits. We had very strong growth in our power substrate technology where the growing demand for silicon carbide power modules and EVs and HEVs continues to drive demand for our products. This sales increase was more than offset by much lower power interconnect sales, which declined in 2023 as certain customers work through higher inventory levels ordered in 2022.
In our high-growth markets, portable electronics sales declined meaningfully versus the prior quarter due to normal seasonality and weaker demand from certain key OEMs. This ended the year where the global smartphone market declined sharply. We anticipate some improvement in 2024 depending on consumer traction with new models that will be introduced later this year. Sales in the aerospace and defense market declined versus the prior quarter. Commercial aerospace demand was lower following a very strong Q3 and defense demand declined, primarily related to program timing.
Full year sales also declined, but we expect this will be a key growth market going forward. We saw good full year growth in both the ADAS and renewable energy markets. The growth in renewable energy was led by demand for our advanced power substrates. In our core markets, we saw a sequential double-digit decline in industrial sales. Full year industrial sales were also significantly lower versus 2022. As we've highlighted, the ongoing contraction in manufacturing activity in the U.S. and EU, combined with a weak post-COVID recovery in China, created a strong headwind in this market last year.
Lastly, we secured sizable design wins in our AES and EMS business this past quarter. Our curamik advanced substrate technology was designed in by a major power module supplier and will be utilized in this customer's high-performance 800-volt silicon carbide power module platform. In our ROLINX business, we secured a design win for our power interconnects in a major renewable energy project. We also secured an important design win in our EMS business with a leading medical device manufacturer. Rogers was selected based on the performance of our advanced materials and our highly customized solution design.
Now I'll turn it over to Ram to discuss our Q4 financial performance and Q1 outlook.
Thanks, Colin. I will begin on Slide 9 by reviewing our full year results before discussing Q4 in more detail. As Colin and Larry highlighted, we have made good progress in many areas in 2023, including improving our cost structure and driving free cash flow even as macro conditions were challenging. Full year sales were $908 million, a decrease of 6.5% from the prior year.
Gross margins increased by approximately 75 basis points to 33.8%. The improvement in gross margin on meaningfully lower sales volume highlights the structural cost reductions made last year. We also contained 2023 operating expenses and lowered our overall SG&A spend dollars versus 2022. With the improvement in gross margin and by flexing OpEx lower, we partially offset the impact from drop in sales volumes.
Adjusted EBITDA margins was 16.3% in 2023 and roughly in line with the prior year. For the full year, adjusted EPS was $3.78 compared to $4.91 in 2022.
On Slide 10, I'll discuss our Q4 sales results in more detail. Net sales of $205 million declined 11% versus the prior quarter, due to lower volume of approximately $23 million and unfavorable foreign currency fluctuations of close to $2 million. On a reportable segment basis, AES revenue decreased from the prior quarter by 7.2% or $117 million. Sales decreased in aerospace and defense, industrial and renewable energy markets. This was partially offset by higher EV/HEV sales and a slight increase in ADAS. EMS revenue decreased by 14.9% to $83 million, resulting from lower portable electronics and general industrial sales. These declines offset improvement in EV/HEV sales.
Turning to Slide 11, our gross margin for the fourth quarter was $67 million or 32.9%, which declined from 35.1% in Q3. The decrease in gross margin was mainly a result of lower sales volumes and under-absorbed production costs. These demand-related headwinds reduced gross margin by approximately 350 basis points from the prior quarter. This reduction was partially offset by approximately 150 basis points of procurement savings and other manufacturing efficiencies in Q4. Although we are seeing some impact to gross margin from our current factory staffing levels, we intend to carry these costs through Q1 in anticipation of improved demand by midyear.
Q4 adjusted income decreased $11 million versus $23 million in Q3. Q4 adjusted earnings per share was $0.60 compared to $1.24 in the prior quarter. The sequential decrease in Q4 adjusted net income resulted mainly from lower gross margin and higher adjusted operating expenses, which was partially offset by lower tax expenses. Adjusted operating expenses were higher in the quarter, mainly due to increase in R&D costs and G&A professional services to support key strategic initiatives. Adjusted operating income does not include an insurance recovery of approximately $24 million received in the fourth quarter in connection with the fire that occurred at our UTIS factory in 2021. This recovery is reflected in our GAAP net income of $23 million and GAAP EPS of $1.24.
Continuing to Slide 12. Ending cash at December 31 was approximately $132 million, a decrease of $104 million from the end of 2022, and a $5 million increase from the end of Q3 2023. We generated strong operating cash flow of $72 million in Q4 and $131 million for the full year. This enabled us to invest in capital to support our organic growth initiatives and make discretionary repayment of $185 million on our revolving credit facility. Capital expenditures were $23 million in the quarter and $57 million for the year.
We dedicated considerable effort in 2023 to improve gross margin and manage working capital, which further strengthened our balance sheet. We are well positioned to execute on our capital allocation priorities, primarily driving organic growth as well as managing debt, strategically investing in synergistic M&A and returning capital to shareholders.
Next, on Slide 13, I will discuss our guidance for the first quarter of 2024. Net sales are expected to range between $205 million and $215 million. The midpoint of this range is slightly higher than Q4 as RF solutions demand is forecasted to be stronger in Q1. We are guiding gross margin to be in the range of 32% to 33% for Q1. The 32.5% midpoint of our guidance is lower than our Q4 results due primarily to changes in product mix. As mentioned, our guidance also reflects costs that we are carrying in anticipation of a top line recovery.
In addition to the capacity expansion investments, we will incur additional operating expenses this year to capitalize on our growth opportunities. Start-up costs are projected to be between $1 million and $2 million in Q1 and will continue for the remainder of the year. Depending on how demand levels evolve, these start-up costs may be adjusted.
Earnings per share is expected to range from $0.30 to $0.50 and adjusted EPS from $0.45 to $0.65. We project our full year tax rate to be around 25%. Finally, based on our current view, we anticipate Q1 guidance to be the low point of sales in 2024. We also anticipate that the second half of the year will be stronger than the first half.
I will now pass the call back to Colin to discuss our multiyear financial targets.
Thanks, Ram. Turning to Slide 14, following some significant changes in the external environment for 2023. We are extending the time line to achieve our Investor Day financial targets to beyond 2025. This decision is a result of several compounding factors across various markets that have affected our business over the last year. The first and most impactful factor is the slower-than-expected recovery in the global manufacturing industry. As reflected in our Q4 '23 results and our Q1 '24 outlook, the continuing contraction of the manufacturing economy meaningfully reduce sales in our general industrial and other core markets. These challenges have been broad-based, including in the U.S., Europe and China. We believe we may begin to see some recovery in industrial markets in the second half of 2024, but there is much uncertainty around the timing of a recovery.
The next factor leading to this change is the lack of near-term visibility on electric vehicle growth. Since the middle of 2023, there have been a number of automakers that have announced changes to their EV production plans in response to the demand environment. Subsidies have also been reduced or removed for EVs, for example, in Germany. As a result, there is increased variability in the timing of when certain design wins and projects in our opportunity funnel will happen. To be clear, these recent events do not change our view of the long-term growth potential in the EV market, but it does create a lack of visibility at the present time.
Third, we are revising our growth rate in certain markets that are facing different challenges. In the portable electronics market, we are projecting some recovery in 2024, following the significant market declines in 2023. However, the medium-term outlook remains muted as the premium segment of the market, where we primarily participate, is forecasted to grow at a lower rate as consumers keep existing phones longer. In the wireless infrastructure market, we expect sales to decline going forward, given the weaker-than-anticipated 5G base station rollout in many regions.
Before moving on to more specifics regarding our growth targets, I'd like to reiterate that we will be firmly committed to our strategy that will position Rogers for sustainable growth and long-term shareholder value. The EV/HEV opportunity remains a significant long-term growth driver for our business and the global automotive industry in general. As leading OEMs work through the near-term challenges associated with this transition, Rogers is a value partner providing mission-critical material solutions for our customers. Overall, our technology and strong positions in our key markets remain differentiators for the company that will propel us forward, despite the present headwinds.
On Slide 15, we have provided the key assumptions and strategic initiatives that will help us reach our multiyear sales target of $1.2 billion to $1.3 billion. We are also providing growth rate expectations for our core high and significant markets, although these are directional in nature given the current level of uncertainty.
Starting with our significant growth markets, we continue to believe that our significant growth market comprised of EV/HEV will be the strongest contributor to reaching our sales target. We project this market will increase at a CAGR in the high teens or possibly stronger depending on EV demand levels. This growth is expected to be led by our curamik power substrate business, which grew rapidly in 2023 and where we have the greatest visibility to customer demand. The first phase of our new curamik facility is anticipated to be a major contributor to this growth.
We are planning for commercial production to begin in 2025 with a full production run rate in 2026. The growth outlook for silicon carbide in EVs and HEVs remains very strong, and our power substrate solutions are integral to enabling that growth. We also anticipate that some of our significant EMS EV battery design wins will begin to ramp in the 2025 to 2026 time frame. The timing is later than expected at this time last year and has changed due to specific OEM manufacturing challenges and softer demand leading to production delays. We are on the print in these important programs, and we expect this will be a strong growth opportunity for us as production increases over the coming years.
In our ROLINX business, we are opening a new facility in Mexico, that will manufacture our advanced busbar technology, primarily for the EV/HEV and renewable energy markets. This targeted investment continues our regional footprint strategy and will enable us to better serve our customers in North America. Importantly, this projected growth in EV will not be linear, given the timing of our new capacity additions and likely fluctuations in market demand.
Turning to our high-growth markets. We are planning for these markets to grow at a mid-single-digit range over the next few years. This is lower than our previous assumption due to the challenges discussed in the portable electronics markets, a more measured view of global economic growth in the coming years and the likelihood that these markets will not grow as quickly. We expect aerospace and defense and renewable energy to provide the strongest growth.
The outlook for A&D is based on both specific defense programs utilizing advanced radar technologies and the substantial backlogs in commercial aerospace production. The outlook for new solar and wind deployments remains strong, and we expect growth with both our power substrate and power interconnect solutions. And in our core markets, we anticipate growth in the low single-digit range. This reflects both the weaker near-term demand in general industrial and consumer markets and our expectation for a gradual recovery. The outlook for a decline in the wireless infrastructure market is also contributing to the lower growth rate.
Finally, while our targets are based on organic growth assumptions, synergistic M&A will remain a key part of our strategy. As always, it will be subject to timing as we follow our disciplined process to identify the right opportunities to be transacted within targeted financial parameters.
In summary, we have a very clear strategy to achieve these financial targets. Based on the visibility of design win ramps and supporting capacity investments, we expect growth over the next few years. However, the current market uncertainty makes it challenging to predict timing and the exact rate of growth. For this reason, we are not currently able to specify at one point in the next few years, we are likely to reach these targets.
As we wrap up our prepared remarks, let me reiterate today's key messages. First, we made great progress in 2023, making structural changes to our cost structure, improving cash flow and shoring up the organization. We are also making the necessary investments in capacity and organizational capabilities to grow as these significant market headwinds ease. We have great confidence in our technology, our innovation capabilities and the talented employees at Rogers as we work to deliver on our financial targets.
With that, I will now turn the call back over to the operator for questions.
[Operator Instructions] Our first question is coming from Craig Ellis from B. Riley Securities.
In a tough environment, congratulations on the company controllable progress. So I wanted to start with a question around a comment that I think you made, Ram, when you were talking about the first quarter. I think you said you expect the first quarter to be the low point for the year. Can you identify some of the things that give you conviction that it would be a low point and touch on what, from a demand standpoint, leaves you with that confidence and how you are seeing and thinking about downstream inventories and their levels as you think about the ability to grow up 1Q?
Sure. Craig, talking about the cost improvements and the margin traction we have had in the first 3 quarters, those improvements are permanent. And this cost reductions we have made are here to stay. So as we have said before, we're focused a lot on correcting the cost structure of the company, both in COGS and in OpEx. And as we see the top line recover, we hope to see much more improvement in the bottom line.
Now talking about the top line, in particular, that's where that drives most of our results, as you know, and I'll start and I'll pass it on to Colin. If you look at our second half from what we are hearing from our customers and specifically with regard to the burning of the inventories in the channel and timing of when some of the new orders and recovery of the ordering patterns would start, that signals that the second half is likely to be better than the first half.
In general, seasonality, as you know, picks up better in the second half of the year as we start seeing the [indiscernible] ramp-up and the PE activity before the holiday build.
And then finally, the design-in wins converting to orders also signals that the second half will be better than our first half. So those are the 3 main indicators that signal that Q1 will be the low point -- Q1 guidance will be the low point of the year, and we think the second half will be better than the first half. Colin?
Yes, Craig, I'll add some more color to that. I think I wanted to talk about the inventory piece first. So we have been talking about that for quite a while. And I think the story really starts back in 2021. So back then, we were in the COVID snapback, and it was a real struggle for a lot of companies to get raw materials and people could not produce what they wanted to produce or needed to produce for their customers. So we certainly had a large backlog as the snapback came in full force. And we -- our backlog decreased a lot -- or increased a lot.
As we got into 2022, our backlogs decreased. We were able to supply and we saw companies really order a lot of inventory. They really mostly maxed and fill things out based on the fact for the past 2 years they hadn't been able to get inventory. And then as we have come into 2023, we found that there was a significant inventory hangover. We saw in several different key customers where they ordered quite a lot of inventory in '22, anticipating to build a certain amount of vehicles in '22 and '23, and they built half the vehicles they thought and their inventory lasted for 24 months or longer. And there's still some carryover into 2024. When we've hit this particular topic, particularly hard with our end customers and our customers' customers, the consensus we're hearing is that the inventory hangover from the COVID snapback and then the actions taken when companies could supply again will run out and come to normal levels around the middle of the year. There could be some puts and takes in terms of what month it happens, but that has been a general consensus. So that just builds on a little bit with what Ram said.
The other thing is China has not... okay, I can stop.
Go ahead. No, go ahead and finish the point, yes.
Finally, the China issue. China really has not come back from when they changed their Zero COVID policy and released everybody back into the workforce. There was an attempt at a bit of a stimulus in China in the second half of last year. And talking to folks in China and having just traveled there, they feel like it will still be a few more months for that to hit. And so we also see that as a factor to help improve things from an economic perspective in the second half of the year.
There's no doubt that China has been a downside surprise every single quarter over the last 4 and materially so. I wanted to follow up on the inventory comment, Colin, and just stitch it together with a point that was made in the prepared remarks around some of the subsegment behavior. So we did see a rise in EV and HEV product sales in the fourth quarter. So are you sensing that inventory is much better positioned there than in some other areas, maybe more legacy ICE-based automotive applications or general industrial? Help me understand the rise in sales there versus some of the things you're seeing with just broadly excess of inventory?
I think we did -- I mean, EV/HEV did have a good year in general. I think they were up 31% year-over-year -- for curamik and some other of our product lines. But -- and that was the whole market as a matter of fact. But what I would say is its OEM dependent. So we have some programs with OEMs where we know their inventory is in good shape. We have others where things are still a bit backed up, and it will be a case-by-case basis. And then I think the inventories also exist a bit in our general industrial space where we had a lot of different end markets in that core business order more than they have turned out to need in 2023, but it does feel like with, as I mentioned, a lot of conversations and a lot of work in our [ IBP ] process that, that inventory will be normalizing somewhat in the middle of the year.
If I could, just one more and sense, Larry is on the call, I'll direct it to him. So Larry, nice to have you on board. You made a point about structural cost declines that were achieved last year, and it certainly seemed like that was visible in how gross margin played out through the year. The question is this, are you able to quantify how significant those were in 2023? And what should investors expect would be possible for all the initiatives that you have in place for 2024?
Yes. Thanks, Craig. Good to talk to you. I think that when you think about the year-over-year productivity improvements, you can look at 2024 being fairly similar with what we did in 2023. And just to drill a little bit more there, there's more work to do into 3 major buckets. So in the procurement space for direct and indirect, we've still got some more opportunities there that we continue to pursue. In the manufacturing space, there are about 4 or 5 different areas, not to get too lengthy into that, but we continue to also drive improvements. And then, of course, logistics will continue to play in that space as well. So similarly, the areas that we focused on in '23, we're going to continue to focus on. We're getting a little bit further into the heavy lifting now, but we see similar opportunities for '24.
And would they flow into the model gradually to the year, Larry? Or is there anything that would be more of a step function change in the 3 areas that you're really targeting? And if so, at what point in the year should we expect to see that?
So I can take that, Craig. The 3 areas of focus continue to remain the operational improvements, productivity in the plants, footprint consolidation, plant excellence, manufacturing excellence, procurement savings being #2 and improvements from design being #3. You've seen a lot of improvement from the first 2 activities so far. And in a full year run rate we saw close to 200 basis points of improvements in our margins, maybe in the turning to second half, third quarter, in particular. We expect some of that activities to Larry's point to continue in the future. So we will be making additional cost improvements. But the big step change will come from the top line coming back.
So like we have said before, our path back to a 38% to 40% remains -- that remains our target. 70% of that from where we finished in Q3, for example, which is what we expect would have been in Q4 if we had similar top line will come from volume improvements and 30% from additional cost and productivity efficiency.
Our next question is coming from [ William Gildea ] from CJS Securities.
This is Will Gildea for Dan Moore. Industrial tends to add less attention but still represents 30% of your total revenue. Could you talk about the pipeline of opportunities for new products or new business wins in that segment? And what is your confidence that we will return to GDP plus type growth over the next 12 to 24 months?
So I can take that. So the general industrial segment does have many end market segments where we've had good growth, and we just highlighted a key program win in this past call that came out of this segment in the medical area. When you think about general industrial for our business, it's medical, it's oil and gas, semiconductor, HVAC, construction, food production. And we continually feel very good about several of the design wins we've had with our existing technology and even with our newly acquired technology from Silicone Engineering. But overall, some of these markets still remain sluggish, such as wireless communication to keep that market from growing and having it maintain a flattish trajectory.
In terms of the comeback, we look very closely at a certain index that really, I think, is a good proxy for this piece of our business. It's the purchasing manufacturers index. In the U.S., it spent 15 months below 50, which indicates a contracting economy. The Eurozone is 19 months below 50, again, indicating a contracting economy. We know that Germany is, in fact, in a recession. It's the largest customer -- excuse me, largest country for us in terms of sales and typically, what happens in Germany drives Europe. And this seems to be the case in terms of Europe's muted growth or, in fact, contraction in many areas. And then for China, there really has been no real recovery. They've been going sideways since the lifting of the COVID -- the COVID restrictions.
So in terms of when do we feel like these markets will come back? Well, even though these indices are below 50, we've seen steady improvement in both Europe and in the U.S. And so they seem to be working towards a place where they can be back on track at some point, which we anticipate sometime this year. And same for China. I think the big piece of China's turnaround will result from some of the stimulus work they've done prior to the end of last year, which takes around 6 to 8 months to, I think, really get some traction. And perhaps they might do something else also.
The other thing is we spend a lot of time talking with our customers and they feel the same thing. So as they feel like -- it's been quite a tough year last year and a tough start to this year, they're seeing the same thing. So we've done a lot of calibrations. So we're looking for improvement in the second half of the year. As Ram mentioned in his prepared remarks, we feel like Q1 will be the low point -- or the low point of our results in 2024, and we're preparing for improvement in the second half of the year.
Super helpful. And another question. If demand does not improve over the next quarter or 2, are there additional cost reduction actions that you're prepared to take to improve margins and profitability relative to your Q1 guidance?
I mean I can start and take that. So last year, we did take some aggressive action on cost reductions to marry up our operations and organization versus the demand economy. And so that is always an option we can pursue. But in our opinion at this point, we really feel like there will be some recovery, and we want to be prepared to capture it. If that doesn't happen, then we'll look at several different options that we could take, which might include something like you just mentioned. But we're optimistic that things will get better in the middle of the year and go forward.
We also have a lot of CapEx in flight. Growth CapEx, along with operations and maintenance CapEx. And I might ask Larry just to make a comment where we've put in a lot of scenarios where if things are slowing more than we thought or not ramping, we can pull the trigger and push out some things. Larry, would you like to continue with this?
Yes. So Will, I think that to build on what Colin said, I think he hit the right things. I think we'll continue to, of course, drive some of the productivity improvements we talked about. That's paramount, and we want to maintain that as a priority. And that's in the procurement and manufacturing space. We will obviously take action to maintain very, very close control of discretionary spending. And that could include some headcount. But we want to be careful about how we manage that with respect to potential snapback. And as Colin also alluded, we've actually developed some scenario planning where we will start to take a look now at -- if we need to reduce capital, where will that be and in what order. So we've prioritized that and we're talking with the businesses now there.
[Operator Instructions] We've reached end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.
Thank you, everyone, for joining today, and we look forward to catching up with some folks here over the next several days in callbacks. And in the meantime, have a good evening. Thanks for joining.
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