Rogers Corporation (ROG) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation 2016 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Will Tryon, Director of Investor and Public Relations, you may begin your conference.

Thank you, Chris. Good morning, everyone, and welcome to the Rogers Corporation 2016 first quarter earnings. The slides for today’s call can be found on the Investor section of our website along with the news release that was issued yesterday. Turning to Slide 2. With me today is Bruce Hoechner, President and CEO; Janice Stipp, Vice President, Finance and CFO; and Bob Daigle, Senior Vice President and CTO. Please move to Slide 3. Before we begin, I would like to advice 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 statement. Also the discussion 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. I will now turn the call over to Bruce.

Thanks Will. Good morning, everyone, and thank you for joining us on today’s call. Please turn to Slide 4. In Q1 2016 Rogers achieved net sales of $160.6 million exceeding the high-end of our guidance which was $156 million. Year-over-year revenues were down slightly primarily due to challenges we faced in the PES business segment which I’ll speak to later in the call. Sequentially, revenues grew 5% over Q4 2015 which is attributable to the recovery we are seeing across a number of our key markets. Rogers’ ongoing commitment to driving operating efficiencies and practicing disciplined cost management; help contribute to a substantial adjusted operating margin performance of 16.9% during the quarter. Our year-over-year adjusted EBITDA percentage was consistently strong at 21.1%. Q1 adjusted earnings of $0.94 per share far exceeded the high-end of our guidance. During Q1, we were encouraged by strengthening demand in the areas of wireless infrastructure and general industrial. The longer-term growth prospects for these and other key markets remain positive and Rogers is in a favorable position to capitalize on the many opportunities that lie ahead. Turning to Slide 5, I would like to review our growth strategy. This roadmap has enabled us to deliver sound results and positions us for growth as market demands strengthen. Rogers is a market driven organization and we leverage our deep understanding of the link between our markets and technology to develop solutions that fill unmet needs in the marketplace. One example of this is the technology leadership position we have established in wireless telecommunications especially in 4G LTE applications. With the rapid evolution of this market, we are privileged to be working very closely with all of the major OEMs on 5G technology, the next phase of wireless connectivity. We believe our technological expertise, strong customer relationships, and differentiated products will enable us to continue to thrive in this marketplace. In the area of innovation leadership, we are very pleased with the advancements we are making in our U.S. and Asia innovation centers as well as in the operating units where our R&D teams are focused on next-generation solutions. These talented employees are cultivating a robust portfolio of new products to meet current and upcoming market needs. Growing organically and through synergistic M&A remains a key focus for the company, we continue to pursue opportunities that will add value for our shareholders. To increase the profitability of the company, we have several projects underway within our operational excellence initiatives. These efforts are driving advancements across our manufacturing operations in areas such as yield improvements and throughput as well as in our back office support organizations. In addition, we are improving efficiency by standardizing processes and upgrading our IT systems to enable uniformity across our global operations. This includes the recent successful completion of a companywide upgrade of our primary ERP system with no adverse operational or customer issues as a result of the transition. At the bottom of this slide, you will see our interim three-year financial goals which continue to serve as a checkpoint in our long-term plan. In Q1, we were pleased to have exceeded our operating margin target of 15%, while market conditions may impact near-term results; we remain confident in our strategy and longer-term ability to sustain our profitability performance and achieve 15% sales growth through a combination of organic and acquired revenue. On Slide 6, the outlook and corresponding growth expectations for our key markets remain positive. For example, mobile data traffic is growing at 45% annually, yet only about 40% of the world’s population is currently covered by 4G LTE. So there remains tremendous opportunity for applications in the wireless infrastructure that will help meet global data demand. Other areas of importance to Rogers are energy efficiency and safety which continue to be at the forefront of our technology advancements across many segments. In particular, we expect to see solid growth for EV/HEV and automotive safety system applications going forward. While there may be variability in certain markets around the world, we are not anticipating significant shifts in commodity pricing, foreign exchange rates, or inflation at this time. In the event this situation changes we are agile and well prepared to address any material shifts that may occur. The challenges noted at the bottom of Slide 6 are not unique to Rogers and we are proactively addressing areas that could help mitigate any downturns that might impact the overall business. We will continue to execute our proven strategy in order to create opportunities that deliver value to our shareholders. Turning to Slide 7, ACS delivered record quarterly net sales of $73.4 million during Q1 2016, which is an increase of 2.9% over Q1 2015. Adjusted operating margin decreased moderately as a result of unfavorable absorption. Janice will review this in greater detail during her comments. In Q1 2016, we were encouraged by our 15% quarterly sequential revenue growth which was driven by stronger demand for 4G LTE wireless telecom applications. Although sales of these applications were down year-over-year we believe we are seeing a return to a balanced supply chain between the board shops and the OEMs specifically in China. In addition, we are delighted with the consistently strong demand for automotive safety applications in advanced driver assistant systems or ADAS as these features continue to expand into mass market automobile models globally, we are executing on our strategy to deliver growth in ACS. In the near-term, we expect to maintain our leadership position in 4G LTE wireless infrastructure and automotive safety system applications. Going forward, we are well-positioned to benefit from the ongoing technology advancements in wireless telecommunications for 5G applications as well as the adoption of new technologies linked to the Internet of Things and E-Mobility. Turning to Slide 8, EMS achieved record first quarter net sales of $46.3 million, an increase of 4% over Q1 2015. Adjusted operating margin increased slightly compared to Q1 2015. Profits were impacted primarily by inventory build that occurred in the comparative quarter of Q1 2015. During the quarter, EMS results were driven by an increase in demand for general industrial and automotive applications which more than offset a slight decline in sales into the portable electronics market. Sequentially EMS net sales were up approximately 9%. Our strategy to drive growth in EMS through geographic expansion was evident during the quarter as sales in Europe increased 15% compared to Q1 2015. In addition through our R&D efforts we are expanding our portfolio of opportunities. For example, we continue to make good progress in the penetration of our materials into back pad applications for portable electronics. Turning to Slide 9, PES net sales were $35.3 million, an 8.5% decrease compared to Q1 2015 with much of the decline due to currency. PES adjusted operating margin of 6.8% was slightly down year-over-year and actions are currently underway to improve profitability in the PES business. Overall, we saw increased demand in certain renewable energy and vehicle electrification applications during the quarter. For the PES business, we maintain a positive outlook for the mid-to-long-term. We expect government mandates and climate change agreements to continue to drive demand for energy efficient motor drives and renewable energy applications. I will now turn the call over to Janice, who will report our Q1 results in greater detail as well as additional financial highlights. Janice?

Thank you, Bruce, and good morning everyone. As Bruce articulated earlier, although we had a very strong quarter with financial results excluding our redefined adjusted earnings per share guidance by 32% at the high-end of the range, record quarterly revenue in our ACS operating segments, record first quarter revenue in our EMS operating segments, and 16.9% adjusted operating margin, and 15% GAAP operating margin achieved in our three-year profitability target in this quarter. Now let’s review our first quarter results and second quarter guidance in more detail. Turning to Slide 11, you will see the summary results for Q1 2016. As you look at our year-over-year performance, adjusted operating margins was down 30 basis points from 17.2% in the first quarter of 2015 to 16.9% in the first quarter of 2016. This decline was primarily result of the inventory builds in Q1 2015 at our ACS operating segment which did not occur in Q1 2016, as well as unfavorable sales mix in our PES operating segment. These declines were partially offset by reduced SG&A cost and lower expenses related to our post-retirement benefits as a result of certain changes made to the plan in late 2015. Adjusted EBITDA of $33.9 million declined by $0.9 million compared to the first quarter of 2015, but remained strong as a percent of revenue at 21.1% despite lower revenue for the first quarter of 2016. Adjusted earnings per share of $0.94 in the first quarter of 2016 was down by $0.08 in the first quarter of 2015 primarily due to lower adjusted operating income. As you may recall, these are the new metrics that were introduced during the Q4 2015 earnings call with the exception that the company has revised its definition of adjusted EBITDA and adjusted earnings per share to no longer include adjustments for non-cash stock-based compensation which integrates with the equity from our Roger shareholders. This company defines adjusted EBITDA as net income excluding interest, income taxes, depreciation, amortization, and other discrete charges. While adjusted earnings per share is defined as net income excluding acquisition-related intangible amortization and other discrete charges. Please turn to page 12, for the review of our quarterly revenue. Although our revenue was down 2.7% on a year-over-year basis, we exceeded the upper-end of our guidance range by $4.6 million, volume and others was down 2.2% on a currency neutral basis primarily driven by the PES segment. However, as previously mentioned ACS achieved record quarterly revenues and EMS had record first quarter revenues. Fluctuation in currency exchange rates unfavorably impacted net revenue by 2.4% primarily due to fluctuations in Euro and Renminbi. Lastly, the total revenue was favorably impacted by 1.9% due to a full quarter of revenue related to the Arlon acquisition which occurred in January 2015 net of the divestiture of the non-core product lines which occurred in December 2015. Looking at our Q1 2016 adjusted operating income on Slide 13, first quarter results declined by 30 basis points or $1.2 million compared to the first quarter of 2015. This reduction was primarily due to unfavorable overhead absorption resulted from lower production across all of our operating segments, but principally at our ACS segment due to inventory build in Q1 2015 which did not reoccur in Q1 2016. Partially offsetting this unfavorable variance was overall commercial expense as result of lower benefit cost and disciplined spending control, partially offset by planned higher investments in higher R&D in line with our strategy. Now let’s look at our adjusted EBITDA on Slide 14. Adjusted EBITDA declined by $0.9 million to $33.9 million in Q1 2016 as compared to the first quarter of 2015 although remained strong as a percent of revenue at 21.1%. This decline was primarily driven by many of the same reasons just noted in our discussion of adjusted operating income such as unfavorable absorption at our ACS segment, higher R&D investment in line with our stated goals, and slightly higher miscellaneous expenses. These declines are partially offset by favorable SG&A expense. Turning to Slide 15, we exceeded the high-end of our Q1 2016 redefined guidance range for adjusted earnings per share by $0.23. However our adjusted earnings per share was down 7.8% from $1.02 in Q1 2015 to $0.94 in Q1 2016. Our original guidance of $0.72 to $0.82 included an adjustment of $0.11 for equity compensation. As I mentioned earlier, we have revised our definition to no longer include any adjustment for non-cash stock-based compensation. The variance between Q1 2015 adjusted earnings per share of $1.02 as compared to Q1 2016 adjusted earnings per share of $0.94 is primarily due to $0.12 of unfavorable overhead absorption across all of our operating segments but principally ACS as noted earlier, $0.04 increase in other miscellaneous expenses, $0.02 of higher R&D investment, and $0.01 volume mix and other. These unfavorable variances are partially offset by $0.11 of lower SG&A expense primarily due to lower benefit cost and lower discretionary spending. If you turn to Slide 16, you will see our Q1 2016 segment revenue. Since Bruce already reviewed this earlier, I will briefly touch upon some of the highlights. The adjusted gross rate from a currency neutral basis for ACS of 4% and EMS of 6% was primarily driven by the full quarter of revenue related to the 2015 Arlon acquisition. ACS segment was also favorably impacted by strong growth in sales of high percent of the 4Gs in the automotive safety application as well as growth in portable electronics, aerospace and defense. This growth was offset by lower demand year-over-year of 4G LTE applications resulting from particularly high demand levels in the first quarter 2015. However we did experience strong recovery in 4G LTE demand as compared to Q4 2015. In addition to the favorable acquisition impact, EMS segment results were favorably impacted by increases in certain general industrial and automotive applications which more than offset a slight decline in portable electronics. Finally, our PES segment experienced a currency neutral revenue decline of 4% due to lower volume in mass trends and hybrid electric vehicle application. These lower volumes were partially offset by increased demand in certain renewable energy and vehicle electrification application. Looking at Slide 17, you will see our adjusted operating income by operating segments. First ACS operating adjusted income of $17 million, down $0.2 million from Q1 2015 or 90 basis points as a percent of revenue. This decline was primarily due to unfavorable absorption for lower production in volumes as inventory build in Q1 2015 did not recur in 2016. This was partially offset by higher revenue and disciplined spending. Next, EMS adjusted operating income of $6.2 million, up $0.3 million from Q1 2015 of 20 basis points as a percent of revenue. This increase was primarily due to higher revenue which was partially offset by unfavorable absorption. Lastly, PES adjusted operating income was $2.4 million, down $0.4 million from Q1 2015 or 40 basis points as a percent of revenue. This decline was primarily due to lower revenues and mix differences as well as unfavorable absorption. As Bruce noted, we are currently reviewing actions to improve our profitability in our PES operating segment as the component is not at a satisfactory level. Turning to Slide 18, you can see we ended the quarter with a strong cash position of $229.2 million. Rogers had solid operational cash flow of $26.2 million during Q1 2016 represented a 77% conversion of adjusted EBITDA. During the quarter, we invested $4.8 million in capital expenditures which is approximately 3% of revenues. In addition, we executed $2 million in share repurchases and made debt repayments of approximately $0.8 million. Taking a look at our 2016 Q2 guidance on Slide 19, revenues are estimated to be in the range of $156 million to $164 million, with net earnings in the range of $0.72 to $0.82 per diluted share in the range of $0.81 to $0.91 per diluted share on an adjusted earnings per share basis. At the mid-point, our Q2 2016 revenue guidance represents a revenue decline of 1.9% over Q2 2015. This revenue guidance includes anticipated unfavorable currency fluctuation of 1%, another 3% unfavorable impact resulting from the Q4 2015 divestiture of our non-core product lines, partially offset by 2% increase in volume mix and other. Guidance for earnings per share has a mid-point of $0.77 per diluted share which reflects an increase of 6% per diluted share to the earnings per share in Q2 2015. Also for the full-year 2016 Rogers expected capital expenditures to be approximately $25 million and its effective tax rate to be approximately 30%. In summary, we had a strong first quarter despite weak global growth; we believe we are well-positioned to enhance shareholder value into 2016 and beyond. We will continue to aggressively optimize our cost structure while remaining strategically positioned to capitalize on our growth in our megatrends market pursuing creative acquisitions and continue to invest in technology and innovation that address our customer needs. I will now turn the call back over to Bruce.

Thanks, Janice. This concludes our prepared remarks and now we will open the line for Q&A.

[Operator Instructions]. The first question is from Daniel Moore with CJS Securities. Your line is open.

In terms of looking back to the quarter, the top-line the relative outperformance relative to your guidance, what were the key areas of strength that came in a little bit better than may be you had expected or embedded in the original guidance range?

Certainly in the ACS business we saw a return to what we’ve been saying over the past couple of quarters is the view that longer-term the telecommunications 4G LTE and even beyond that 5G will be very good growth tailwinds for us. So we saw a nice recovery there again getting that balance in the supply chain back in line that had gotten out of kilter in 2015 between the board shops and the OEMs. So that was a big one and of course we were continued to be encouraged by the ADAS the blind spot and Radar automotive radar business which grew substantially again close to 30% in the quarter. So those were the big I would say things that pushed us to the higher level of revenue.

Helpful. And then in terms of bottom-line obviously now a significantly bigger B versus expectations. Was it largely absorption or were there other cost reductions perhaps expenditures that were held back over the kind of the key drivers that will be outperformance there?

Well we continue to manage our SG&A quite well and I think that’s reflected in what happened in Q1 to help build out the bottom-line. Of course the top-line also dropped right through to the bottom as well but helped on the profitability side. So again its good cost discipline, we continue to focus on operational excellence and we’re driving forward on that. And as we look even into Q2, we will see, we believe, our margins -- our gross margins remaining solid as we go through that quarter again due to a lot of the efforts on the operational side as well.

Okay. And one more I will jump back in queue but you mentioned Bruce, the outlook for 4G picking up and supply chain normalizing. What is your outlook for transceiver growth both in China and also more broadly around the rest of the world for the rest of fiscal 2016 and the opportunity for Rogers to either keep pace or may be even take a little bit of -- grow a little bit ahead of that?

So it’s interesting right and it’s good that you bring up transceivers because that’s really what is driving the use of our high frequency materials in LTE. We see this and this is according to some external sources at a 12% growth rate in 2016 for transceivers which as a direct correlation as I mentioned earlier that to Rogers in terms of our circuit materials. Again there is a lot of noise that we see coming out of China on the number of base stations builds but what we’re really focused on is are the transceiver builds and it varies across the base stations depending again on the type of transceivers that are put in place whether it’s TDD LTE or FDD LTE, they still take more transceivers than some of the other technologies. So again this is good news for us moving forward that 12% global growth rate. The other point I will make is that we are starting to see strength in other areas, other geographies, other than just China, so we saw India while it’s still a very small part compared to what you would see in the market in China, India is starting to see growth now in 4G LTE which we saw in the first quarter.

Thanks. The next question is from Julie Li with Drexel Hamilton. Your line is open.

Good morning everybody. Congratulations on the good first quarter result. My question -- my first question is also about China 4G LTE side. You have mentioned the TDD and FDD tied to transceivers. Did you see a trend of increasing FDD in the market, can you share more color on that?

In China as we mentioned the two -- the two major technologies are the TDD and FDD, I’m going to ask Bob to describe a little bit more broadly the differences in the technology and why one has more than the other in transceivers course.

So, Julie, its Bob Daigle. Yes so basically that some of the numbers I’ve seen I think as something in the neighborhood of 28, I think transceivers per FDD base station and something like a dozen that’s in TDD. So the ratio is pretty high. Your specific question though about deployment, I haven’t seen any data published for first quarter in terms of what that mix was, it’s something we will keep our eyes open for but I don’t have any specifics around that.

Great, good and my second question is about PES business. The declining revenue of mass transit end market, do you see that part of revenue will be recovered in the next few quarters?

Well really breaking out the revenue decline that we see in Q1 in PES is really in the some specific areas; it’s in rail where specifically in China the combination of the two major rail companies has delayed a number of projects. So we saw that impact us in Q1. But the other thing that we’re seeing is in the mining sector where a lot of mining equipment is not being manufactured the way it had been may be a year or two ago because of global commodity prices coming down, the reduction in activity at the mine level at least in the ordering of capital equipment for mining. So that was the part of the impact in Q1 for PES. The other part of the impact was what we saw an inventory adjustment by a major EV electric vehicle manufacturer in the U.S. and that had an impact on our sales in Q1 as well.

Thank you very much. And I have one last question, it’s the ADAS business, can you share more color on that. Did you see active -- more active quotation activities and do you see your -- well further expand your market share in that?

Well, yes, this is -- I think this is such a great story for Rogers. We’ve been in this area since the beginning of the application in automotive and it really translated over from the military applications that we had for many years. We see this market growing at close to 30% annually and this is really a market penetration story not a shared story, our share is very high in the sensor market but what we’re seeing is the adoption rate in automotive is increasing going forward. So originally had been in the higher end automobiles, the luxury automobiles, we’re now seeing it down into the mid-market and into the more economy styles of automobiles. So as that penetration continues we will continue to see that level of growth and as I mentioned, 30% through 2022 is what ADI Research is telling us will be the growth rate in that area. And of course we continue to work with the suppliers in upgrading the systems and bringing new materials in to improve capabilities and so forth. So we’re in all the new wins and the new designs going forward. So again very impactful for the ACS business and really continues to be a great story for us.

The next question is from Joan Tong with Sidoti & Company. Your line is open.

Good morning, I have a couple of questions. First off, I just want to understand the second quarter guidance a little bit better. Revenue is relatively flat on a sequential basis and then you have EPS guidance at the mid-point lower than the current quarter, are there some expenses get pushed out from the first quarter to the second quarter?

Very good question, very good observation, what we see in Q2 is really coming into play the equity comp that gets put in every second -- every Q2 when we look back in history this is an impact that occurs to us in the SG&A component in Q2, it’s the executive equity comp as well as the board equity comp. So Janice may be you can expand a little bit.

Yes, just say and we could look at the last three years, Joan, because that’s a good observation that you made and every single second quarter you will see that earnings were down due to equity comp and things, so it’s not out of trends by any means and in addition, some of the R&D that was actually savings in Q1, when we looked at it, it was lower than we anticipated it wasn’t at the higher percent of sales, is also being pushed into Q2. So a little bit of that also. So it’s just the timing of some of the expenses.

I will also add that going from Q1 to Q2 in terms of our gross margin we believe that our gross margins will remain stable and of course the work that we’re doing on operational excellence will help continue on our path forward to continually improve that.

Okay, okay, good, good. Thanks for the clarification and in terms of like going into the second half, I know that you don’t give specific guidance beyond one quarter but if I just were to ask you like in general if you are seeing the global capital spending out there and some of the puts and takes of the different products that you sell different like sub-segment, how should we think about the second half may be some sort of a cyclical rebound and may be some secular trend or some new products going to help you, do you like to may be grow a little bit faster in the second half of this year?

Well the world is a difficult place and there is lots of variability and lots of impacts on the global economic scale that can come in. But generally what we’re seeing, we’re encouraged with what I could call the stability in the general industrial side of the business, it -- we came into the year with very frankly thinking that general and industrial side and capital investments in capital equipment would be lower than may be what we’ve seen in Q1. So our belief going forward is that we are cautiously optimistic as we move through certainly in Q2 with our guidance as you can see it. But for the rest of the year we think if we remain, if things remain as they are, it -- we should see the stability remain in many of our markets. The other point I will make is again back to ACS in the circuit materials side of the business in 4G LTE in China, that’s stabilizing and we are continuing to see that be a good position for us, the supply chain is in balance and so as we move through the year we think that will also reward us well.

Okay. Thank you for the color. And then you mentioned a 4G infrastructure is a longer-term strategy. Can you just give us like a sense of timing and do you also expect that you would be the key market shareholder once we move into 4G couple of years down the road and then how should we think about content growth?

Right, so it’s really moving from 4G LTE to 5G which I think is what you’re referring to, I would ask Bob to really describe how we see this laying out over the next couple of years for us.

Yes, so, Joan, one of the -- I think one of the key drivers in terms of what they are trying to achieve with 5G versus 4G it’s a top 10 times the bandwidth availability and underlying that it’s going to be, we believe, and what’s being discussed, it’s really a shift towards much higher frequencies in a lot of cases. So for us that generally bodes very well, we’re very actively engaged with all the players that are really just today defining what 5G is going to be, what the infrastructure look like, and we believe, actually our content opportunities go up and it’s hard to quantify how much right now but I will give you an example, so you still have a fair amount of 4G infrastructure that’s being, antennas that are being built with metal cable that gets even more challenging with 5G and especially with the higher frequency bands and the higher data rates. So the trend is definitely we think it’s a pretty nice tailwind. Again timing, what I’ve been reading is we’re probably looking about three years out before there is a major deployment although there is some articles about people trying to pull it in a little bit. But all in all we think it gives us some very nice opportunities to increase content.

Any color in terms of may be the competitors trying to get ahead or like how you see the market share is going to be like. I think it is too early to call that out but basically just want to get a sense of the competitive landscape?

Sure and again we’ve stayed very close to our customers that allowed us to capture very high shares as each regeneration is deployed. And again I think we’re going to do the right things, we’re going to continue to make sure we have the best products out there, help solve customer problems and our expectation would be that we can maintain a very high share in 5G as well.

Okay, perfect and then one final question regarding portable devices and it seems like after I would say six to eight quarters if we’re still looking for pretty weak results there, I know that you talked about some product innovation, can you just give us a sense like in terms of timing, when we are going to see like a lapping of some year-over-year growth in that particular division?

So and this is the EMS division and what we saw in Q1 in portable electronics, that segment was down about 1% for us which from our perspective is relative stability given what’s occurred over the last six to eight quarters. What I will reference back to is that this now portable electronics is now about 23% of the EMS business, and we do have some new products coming in, we’ve had some very good success with the back pads and this is a phone technology, a European phone technology that goes behind the screens to prevent the ripple effect when you touch your screen on your tablet, your phone, your smartphone. And so we’ve got some good penetration going on there. But I think what’s really encouraging us in the EMS business is the growth that we saw in general industrial. This section or this segment now is about 45% of the EMS business and the thing that we like about this market segment is that it’s very generally very stable for us and we continue to make very good inroads particularly in places like Europe where we geographically are taking positions and taking share, translating applications that we’ve developed in the U.S. into Europe and we grew 15% in Q1 2016 over Q1 2015, a lot of that in the general industrial area and we’re also seeing good inroads in Asia as well not to the level that we’re seeing in Europe. Europe more resembles right now the industrial side that we see in the U.S. So it’s easier to translate over to Europe. But we believe that the EMS business overall is in very good position now and rebounding the work that we’re doing on the industrial side is paying off. Also in automotive, we saw, we were up 11% year-over-year in automotive in Q1 and in both so if traditional automobiles as well as EV/HEV automobiles. So again we think we are on the rebound here in EMS.

The next question is from Daniel Moore with CJS Securities. Your line is open.

Thanks again. First I just wanted to touch based on kind of cost structure margins and cash flow a little bit as well. The 15% operating margin target just to clarify does that exclude amortization you already had almost 17% this quarter, is there anything structural that’s preventing you from getting towards staying in the more of the high-teens as we look out over the next couple of years.

I’m going to ask Janice to comment on this.

Yes, and we hit our target we are very happy about hitting that goal of 15% and that was not adjusted the 16.9% was obviously adjusted for amortization and things. So the 15% is our target, I mean obviously as we move forward and we do future acquisitions that might have large purchase accounting and amortization that could free it a little bit on hitting that target but we’re definitely looking at the target with no adjustments.

There are no adjustments to that okay that helps on an apples-to-apples basis. And then the -- from an R&D perspective you’ve been trending higher, you have that kind of longer-term 6% of revenue target, they trended back down towards 4% this quarter. Are you seeing better efficiency out of your spend given the innovation center with North Eastern and is that 6% still a target that you’re looking out over the next couple of years?

So Dan 6% is our longer-term target but you are exactly right, what we’re seeing is some very interesting efficiencies and we’re very proud of what we’ve done over the last couple of years with our innovation centers. And so I’m going to yield the floor to Bob because this has been such a big part of his contributions to Rogers over the last couple of years to describe what we’re seeing in that dynamic in our innovation.

Yes, and I think we’ve talked about this before Dan and that part of our vision which is for innovation centers is really being able to access top talent, top technology, IT globally. And this model has actually been exceeding our expectations in terms of our ability to work with some leading technologies not just in North America but in Asia as well and really very efficient way able to leverage our R&D investments. And so we got some very nice programs going on with building some very nice IP around the technology where we’re accessing. And I would say what we did last year was really take that model which we established with North Eastern which was playing well and expanded that into Asia. So that’s our model going forward. The investments would really be linked to I think the bigger spend comes in as we start to scale things. So we’re accessing some core technology as we start to move more towards full qualification, building the infrastructure around some of these opportunities, those discrete opportunities are going to drive additional investments. But for the time being I think we’re in a pretty good position with what we’re investing globally.

That’s helpful. And then lastly balance sheet continues over $50 million in net cash by our estimates, if with no acquisitions probably over $100 million by the end of the year or around there, talk about the M&A pipeline or we any closer than may be we were a couple of quarters ago, what’s the dialogue sound like any color you might have there would be helpful.

Sure, Dan. We continue as you well know to drive forward on acquisitions, it’s a question of timing. We’ve got some very interesting targets that we’re working on. So it’s just a question of timing right now and when these things come together. We’re hopeful certainly by the end of the year that we will have substantial acquisition under our belt. But as I’ll caution everyone it always takes two to tangle and it’s not sometimes straightforward as we would all like to think it would be. However I’m going to reinforce the strategy. The strategy is to grow both organically and inorganically through M&A and we’ve got a lot of dedicated resources right now working on the M&A side obviously in addition to the organic side.

The next question is from Juan Molta with B. Riley. Your line is open.

Yes hi good morning guys. Thanks for the questions. First one is on the earnings per share, when we continue reporting in the future quarters, will you continue reporting non-GAAP EPS and adjusted non-GAAP EPS or should we look at adjusted non-GAAP EPS and have that as official estimate and for publishing models?

No, we will publish both.

Okay. Because it seems like most people out there are using non-GAAP EPS and not the adjusted that you refer to more that’s why I asked the question. But we should look at adjusted?

Yes.

Okay. And then regarding China, do you have an update as to the number of base station builds that you have for 2016 based on your estimates or the sources you use, I think last quarter was at $1.17 million?

Yes, this is Bruce. The base station build numbers vary it seems from quarter-to-quarter and we’re still early in the year to have everybody’s numbers in. We did hear that China Mobile Unicom and Telecom have reportedly stated 870,000 base stations for 2016. But as I mentioned this number is flexible from what we’ve seen in the past, we would expect probably in June to hear another update on this. And I think what I would really say is let’s go back to the transceiver side of the story and not necessarily focus on base stations but it’s the transceivers that really drive the use of our materials. And I think Bob described earlier that the number of amps, amplifiers that are associated with each of the two technologies that are utilized in China and with the 12% growth number, which we think is a very good number for the transceiver growth rates globally. We are more or less deemphasizing the base station builds and focusing more on the transceiver.

Okay, very good. One of the earlier questions was about your internal expectations and what verticals performed better than you expected. Could you also address which verticals relative to your internal expectations performed worse?

So what I would say is the rail and mining sectors particularly associated with PES were ones that didn’t performed as well as we had anticipated particularly on the rail side. We also, as I mentioned earlier, on the EV side of the business, the rollings business was affected by what was -- what we see as an inventory adjustment of a major EV manufacturer. So we see that we believe returning certainly in the second quarter to our expectations. So going back -- the two sectors that really were probably more impactful and remain under our analysis are the rail and mining side due to a lot of the commodity situations, decrease in commodity pricing and so forth, that’s impacted those areas.

Okay, very good. And then the last question was already asked on M&A but when you look the M&A is there a particular geography that you would be looking into the domestic and international any color there?

We’re looking more broadly at what makes it strategic and synergistic sense for Rogers and whether it would in Europe, Asia, or North America, depends on the properties that are available and how we see us taking advantage of the acquisition to help Rogers grow in a productive and profitable way. So we’re not limiting just to one region or another.

[Operator Instructions]. The next question is from Dana Walker with Kalmar Investments. Your line is open.

Good morning all. Could you talk about the tone that you’re seeing in Europe you mentioned beginning to unfold was up 15% in the quarter, when would you say it began to inflect better and what types of initiatives are you using on the ground to make this happen?

Hi Dana, this is Bruce. This is really an EMS play where we’re seeing the growth in Europe and we’ve seen good growth over the last, I would say 18 months, and it’s really a penetration story for us, it’s not necessarily that the overall industries are growing at 10% or 15%. This is really a focus with more resources being put in place on the continent to drive our knowledge of applications particularly into the GI, the general industrial sector. Other, we are not seeing as you might imagine any robustness generally on a year-to-year basis in the segments of industrial, it is in the area of GDP type growth but again it’s more of a penetration that we’re getting with our businesses.

Of the two different types of transceivers that you described, is one of them outperforming the other in terms of its account growth?

Yes I’m going to ask Bob to comment on that.

Yes so again Dana as I mentioned earlier, I haven’t seen anything published right now in terms of the mix between FDD and TDD. So we will see what we can dig out. But again at least what’s built into projections for transceivers for 2016, piece of that together and the total is up around 12% in terms of the forecast for 16 transceivers. And as we’ve said before basically for every transceiver, you will have a power amp which is where you will find our products.

It’s not like you were going to be able to make this not be an issue but I think is it the ZTE, was that the vendor that has the quarantine issue related to its dealings with Iran, and if so, did you have any complications as a result in your dealings with them?

So Dana we generally don’t talk about specifically about customers, however ZTE is a telecom equipment OEM and as you probably know we work with all the OEMs, we are in over 90% of all the power amps and the base stations. So and our view and it’s pretty held out that way that our view is that if it’s not ZTE getting the sale one of that OEMs is getting the sales. So we’re getting sales regardless of which OEM is taking it to market.

Two last questions if you can accommodate me. I believe you had an action plan to improve the operating profile of the PES business for a while. You seem to suggest that you might have a new action plan or possibly thinking about an incremental action plan, now help us out if you could.

This is you’re well versed in it, Dana. We have had over the last couple of years activities in place and actions in place to drive efficiency in that business. Part of that has been the expansion into Hungary for final inspection that’s worked extremely well for us. But we continue in other parts of that business particularly in Germany to make investments in automation to drive down costs and some of that takes a little bit longer once the equipment expect and bought lead times can be six to nine months and then once we get it into the factory and start driving efficiency it can take up to a year to really see the results. So this is a continual effort on the part of our PES team to drive that operational efficiency. And it is across improving yields, improving throughput, and so on that we expect certainly during the course of this year to make progress and move ahead.

In Q1 though that operating margin was six unchanged if you were to frame external expectations for the type of progress you would hope to make, where would you start?

When we look at -- we want to get it back in the double-digits like our other margins that we have in our segments. So our goal is to get them back into the range that they operate in the past and be more acceptable for us. So that is our goal.

Very well. Final question relates to the mix of phone demand out there, if Apple seems to be seeing some softness against its strength and there seems to be more focus on some of these mid-market smartphones, do that play to your hands in one way or another?

Dana, we have content in almost every phone, smartphone or feature phone but it’s a very small amount, $0.01 to $0.02. So it really doesn’t affect us and as I mentioned earlier this segment the portable electronics segment is really becoming less important to us, it’s getting down close to 20% of sales of EMS in very stable areas like gasketing around microphones and cameras and so forth. So a big gasket is gone around the displays for the most part. So that -- whether Apple is up or down, or Samsung is up or down or any of the major phone guys, it’s really the number of units that are sold and our expectations are that’s going to be a relatively flat market overall going forward.

Showing no further questions at this time, we will turn the call back over to Mr. Hoechner for any closing remarks.

In Q1 2016, we experienced a recovery in demand in a number of our markets enabling us to exceed both revenue and earnings guidance. Moreover we are pleased that our efforts to control costs and improve operational efficiency are making a positive impact on our operating margin where our results were well above our 15% target in Q1. Looking ahead we remain confident in our growth strategy, which has delivered sustained solid results over the past three years in the phase of some challenging market dynamics. We continue to seek new acquisition opportunities, implement operational improvements to reduce costs, increase efficiency, and cultivate a robust pipeline of new products. The growth projections for the markets in our megatrend categories remain strong for the mid and long-term. Throughout 2016, we will maintain our focus on actively growing our business, controlling costs, and disciplined capital allocation. We are optimistic about the signs of recovery that we’re seeing and we expect to deliver solid returns to our shareholders. Thank you for joining us on today’s call. Have a good day.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.