Rogers Corporation (ROG) Q2 2018 Earnings Report, Transcript and Summary

Good day. My name is Brandon, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2018 Second Quarter Conference Call. [Operator Instructions] I would now like to turn the call over to your host Mr. Jack Monti, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Brandon, and thanks so much everyone for joining Rogers' Second Quarter 2018 Earnings Call. To follow along with the slide presentation, please see the Investors section of our website. Turning to Slide 2. We have a disclosure on forward-looking statements. During the call, we will be making certain forward-looking statements subject to a number of risks and uncertainties, which may cause actual results to differ materially versus today's outlook. In addition, some of the financial metrics discussed will be on a non-GAAP basis, which management believes better reflects the underlying core operating performance of the business. Turning to Slide 3. It's my pleasure to introduce Rogers’ management team. Bruce Hoechner, President and CEO, is joined by Ram Mayampurath, Vice President, Financial Planning and Analysis; and Bob Daigle, SVP and CTO. I will now turn the call over to Bruce.

Thanks, Jack. Good afternoon, everyone, and thank you for joining us on today's call. In Q2, Rogers delivered revenues of $215 million an increase of 7% including currency effect over Q2 2017 and at the midpoint of our previously announced guidance. Revenue performance was due to strong demand in e-Mobility applications and antenna applications for 4.5G and 5G wireless infrastructure. These results were partially offset by weaker demand for 4G LTE power amplifier applications, which is being impacted by the market's transition from 4G to 5G. Also during the quarter, we completed our diligence for our acquisition of Griswold LLC, which closed in early July. Q2 gross margin was 35.7%, adjusted EPS was $1.19. While we have made progress during the quarter in a number of areas, we are acutely aware of our shortfalls in Q2. Actions are in place to improve our results moving forward, and as we progress through the second half of the year we are confident in our ability to improve both the top line and margins. Our core operations ran well during the quarter and continued to improve inline with the actions I detailed in last quarter's call. Pricing programs to recover increased raw material costs had a positive impact in Q2 with the full pricing benefits to be realized in Q3. However, margins were below our expectations due to greater than anticipated near-term costs associated with our continued investments to support our growth strategy including multi-site product qualifications, manufacturing site consolidations and higher costs associated with maintaining underutilized capacity in anticipation of significantly increased demand in core markets. Ram will cover the details of our performance shortly. As we go through today's call you will hear about the strong demand that is projected in our key growth drivers of advanced connectivity and advanced mobility. Opportunities for growth in markets such as 5G, EV/HEV, and ADAS are driving our capacity expansion plans. It is a key imperative for Rogers to maintain its market leadership position by ensuring capacity is ready when our customers need it. While these expansion plans are having a short-term negative impact on margins, we are positioning Rogers now to fully benefit from the projected substantial growth in these areas. Please turn to Slide 5. We remain focused on our growth strategy, which serves as a roadmap to our 2020 goals. Our commitment to market driven innovation is helping us advance our position in the markets we serve. Our power electronics, chip packages for the new generation of wide band gap semiconductors are gaining significant traction in electric vehicle applications. Also, ACS has recently introduced a new thermo set product family tailored to massive MIMO phase array antennas, which are highly engineered and high performance for 4.5G and 5G wireless network capabilities. We are also executing on our strategic imperative to identify and pursue synergistic M&A opportunities that enhance our existing capabilities and expand our product portfolio. Our recent acquisition of Griswold, demonstrates our ongoing commitment to augmenting organic growth through thoughtful, well-executed acquisitions. Shortly, I will speak in more detail about the strategic benefits Griswold brings to Rogers. Our operational strategy is focused on ensuring capacity availability to fulfill the projected demand in our core market. Flexibility, with regard to geographic location and efficiency and cost improvements. We have addressed the majority of operational challenges, we reported last quarter and are confident that we are getting back on track relative to our operational excellence goals. Rogers is targeting top quartile operating profit growth when compared to our peers as we execute our strategy to achieve our 2020 vision. On the revenue side, our goal is to deliver organic growth from our current businesses in the range of 7% to 10% per year. In addition, we expect the continued execution of our M&A strategy to add 5% to 8% in revenue growth per year, for overall top line growth of 15% per year. Some of the acquired revenue may not come in smooth increments but by the end of 2020, we expect Rogers to deliver roughly $1.2 billion in sales with adjusted operating profit margin of at least 20%. Turning to Slide 6, earlier this month we announced the acquisition of Griswold LLC, an industry leader in custom engineered cellular elastomers and high performance polyurethanes. This acquisition demonstrates our continued focus on adding top of the pyramid companies to Rogers. These are businesses that offer market and technology leadership as well as differentiated products for highly engineered applications. For the EMS business segment, Griswold's custom engineered cellular elastomers expand our current product portfolio, while it’s high performance polyurethane products increased our existing capabilities and provide immediate additional capacity to our manufacturing network. Similar to Rogers Griswold's products and solutions, serve a variety of applications in the general industrial, electronics automotive and consumer markets. As the integration proceeds, we will maintain a strong North American focus and also seek opportunities to grow Griswold's product lines, through geographic expansion and product innovation. Please turn to Slide 7, our two growth drivers advanced mobility and advanced connectivity represent more than 50% of our revenues. Rogers enjoys a leadership position in many of these markets, where the outlook is very favorable. In advanced mobility, we are very encouraged by the continued adoption of our silicon nitride materials, as auto makers continue their race to introduce more EV and HEV models. Earlier this month Jaguar Land Rover announced plans to invest $13.5 billion, over the next three years to develop electrified versions of all its models. And Toyota Lexus has committed to offering 10 pure battery powered models beginning in 2020. This shift in the industry bodes well for the PES business where our ceramic substrates offer high thermal connectivity and reliability. These features are essential for the smaller, more energy efficient wide band gap semiconductors found in EV and HEV applications. PES is a technology and market leader in this space, with customized products and strong design capabilities and engineer to engineer relationships, to meet complex customer market needs quickly. In addition, momentum is gaining for 48-volt battery applications in Europe as OEM's look to mild hybrid options. 48-volt batteries meet the ever increasing power requirements for mild hybrid technology and offer a compelling value proposition in the marketplace. Revenues for 48-volt battery applications played a substantial role in Rogers’ Q2 EV/HEV revenues and this momentum is expected to continue in line with the overall trends towards e-Mobility. Relative to ADAS, as we move to higher levels of driver assistance in autonomy we are seeing that automotive manufacturer’s roadmaps include a greater number of radar sensors. Rogers is in a strong position here as our portfolio is applicable across the full range of requirements for short, mid and long-range sensors. In the area, of advanced connectivity we continue to see signs that the transition to 5G is imminent with testing and early deployment on the rise in China. For Rogers, 5G represents a much larger opportunity than past generations of wireless infrastructure, due to the complexity of these advanced systems and the greater material content they require. ACS holds a solid leadership position in this market offering differentiated products that meet customer needs for very high frequencies, thermal management and high performance that minimizes crosstalk. We look forward to capitalizing on the large opportunities ahead. Please turn to Slide 8. ACS, achieved second quarter net sales of $76 million, a slight increase over Q2 2017 and a sequential growth of 4% over Q1 2018. Revenues, were largely driven by applications in aerospace and defense and antenna for 4.5 and 5G wireless infrastructure and ADAS partially offset by lower demand in portable electronics and wireless 4G LTE power amp applications. For the remainder of the year, we see increasing demand for antenna applications for 4.5G and 5G wireless infrastructure applications. A slight improvement in 4G base stations with NB IoT deployments and ZTE sanctions lifted, plus expected strength in ADAS. The longer-term outlook for ACS is promising. The latest independent market analysis indicates 2019 5G base station deployments at roughly 100,000 units with some experts indicating the number may be multiples of 100,000. ACS has achieved significant design wins in this space where base stations require two to four times the Rogers content than that of the 4G LTE base stations. In addition, we are seeing growing adoption of our next generation laminates for massive MIMO antennas for 4.5G and 5G applications. To meet the growth projections, and in support of our robust opportunity pipeline ACS has several capacity expansion projects in the U.S., China and Europe. Please turn to Slide 9. In Q2, EMS net sales of $79 million were relatively flat compared to Q2 2017. Higher demand in portable electronics, consumer automotive and mass transit applications was offset by lower demand in clean room automation equipment used in OLED display manufacturing, impacting the overall strength of our general industrial applications, which otherwise grew at roughly 8% in the quarter. In the second half of the year, we expect continued improvement in the general industrial segment. In addition, we are continuing to drive operational synergies across our acquired businesses including DeWAL, DSP and more recently Griswold. Turning to Slide 10, PES delivered another great quarter with net sales of $54 million, a 12% increase over Q2 2017 excluding the impact of currency. Net sales increased due to broad-based demand across markets including particular strength in electric and hybrid electric vehicles, renewable energy, mass transit and variable frequency drives. For PES, we expect the strength we've seen in the first half of the year to continue into the third and fourth quarters, driven by exceptionally strong demand for EV/HEV and x-by-wire applications. As an unprecedented number of automotive OEMs accelerate their plans to introduce this technology to new models, the supply chain is responding. Recently, a major power semiconductor manufacturer announced plans to invest €1.6 billion to prepare for the next decade of significantly higher demand for EV/HEV among other applications. PES offers a strong product portfolio to meet these evolving market needs. So our customers have asked us to accelerate our expansion plans. In response Rogers has several PES production expansion projects underway in Europe and China to meet existing and projected growth. As we complete our plant consolidations and production moves to more cost effective locations, we expect to see sequential margin improvement through the end of the year. Please turn to Slide 11, looking at the macroeconomic environment, we are clearly very encouraged by the positive growth forecast in many of our key markets, based on recent reports business confidence is gaining and global GDP is strong. We continue to monitor the potential effect of the ongoing tariff discussions and we will remain vigilant and agile in our response to any changes. I'll now turn the call over to Ram, who will report on our Q2 results in greater detail as well as additional financial highlights. Ram?

Thank you, Bruce. Good afternoon everyone. In the slides ahead, I will review our second quarter results in more detail, followed by a third quarter guidance. Turning to Slide 13, Q2 2018 revenue as previously noted was $214.7 million, increasing $13.3 million versus the second quarter of 2017. This increase was primarily due to favorable FX, higher volumes and pricing programs. Q2 2018 revenue was at the midpoint of our guidance range. Adjusted operating margin was 14.8%, which decreased from 18.8% in Q2 2017. Adjusted operating income of $31.7 million decreased by $6.2 million compared to $37.9 million last year. The decline in adjusted operating margin and adjusted operating income was primarily the result of certain actions we have taken to improve our long-term efficiency and prepare for strong demand expectations. Net income of $17.3 million in the second quarter 2018 was down $3.6 million versus prior year, less than the decline in operating profit, largely due to lower interest expenses from the pay down of debt, lower tax expenses and higher JV income. Second quarter 2018 adjusted earnings per share of $1.19 decreased by $0.14 versus Q2 2017. I will cover all these points in more detail in the slides that follows. Please turn now to Slide 14 for a review of our quarterly revenue. Our revenue was up $13.3 million or 6.6% on a year-over-year basis. The second quarter exchange rate favorably impacted revenue by 4.2% or $8.4 million, primarily due to depreciation of euro and renminbi. Q2 2018 volume and other was up 2.4% or $4.9 million versus prior year. Rogers was favorably impacted by strong broad-based demands across our Power Electronics Solutions business, with particular strength in EV/HEV applications. We also saw growth in massive MIMO antenna applications. As we mentioned in our Q1 call, we have put in place pricing programs to offset higher raw material cost. We have started seeing the positive impact of these programs in the second quarter. These positives were partially offset by declines in 4G LTE wireless base stations, as well as continued weakness in clean room automation for OLED display manufacturing. Looking at Slide 15, our Q2 2018 adjusted operating income was $31.7 million versus $37.9 million in Q2 of 2017. Q2 2018 adjusted operating margin was 14.8% decreased from the 18.8% adjusted operating margin, we reported in Q2 of 2017. The deterioration in operating income was mainly due to unfavorable performance of $9.3 million coming from ongoing footprint consolidation and multisite product qualification programs that resulted in duplication of some cost and higher freight in the quarter. In addition to that, cost associated with maintaining infrastructure to support strong demand expectations, also had an unfavorable impact on Q2 results. Also in the quarter, we saw higher raw material cost and a one-time provision for a commercial issue. Increase in both SG&A and R&D of $2.4 million also contributed to lower operating income. This was mainly driven by investments to support future growth initiatives, partially offsetting the volume and other improved operating income by $5.4 million with favorable impact primarily from foreign exchange of $2.2 million and $3.2 million of higher volume and price after the negative impact of unfavorable portfolio mix. We are confident that our ongoing initiatives to drive synergies and cost optimization at our manufacturing facility by focusing on process enhancements in automation will help drive gross margin improvements in the coming quarters. Turning to Slide 16, we reported adjusted EPS of $1.19 in the second quarter of 2018, which was down versus last year's $1.33. As the slide depicts $0.14 decrease was primarily due to $0.33 of unfavorable performance and commodity cost, $0.03 higher SG&A to support future growth initiatives, $0.06 of higher R&D including discrete engineering investments to support customer projects. These were partially offset by favorable items totaling to $0.28 due to $0.19 from volume and other including $0.08 of FX, $0.11 from higher volume mix and price, $0.04 improvement from lower effective tax rate, primarily due to the U.S. tax reform, $0.05 of other income from lower interest and higher JV performance. If you turn to Slide 17, you will see that our Q2 segment results. On the left side of the chart is the segment revenue for our strategic business unit. These have been covered by Bruce in the earlier section. Looking at the right side of the slide, you will see our segment adjusted operating income. First, ACS adjusted operating income was $12 million, down $2.3 million from Q2 2017. This was primarily due to higher commodity cost, higher freight cost and cost associated with maintaining infrastructure to support future strong market demand projections for 5G and ADAS. Next, EMS adjusted operating income was $12.8 million, down $4.4 million from Q2 2017. The decrease was largely due to lower throughput in certain product lines like OLED display manufacturing, resulting in under absorption of fixed cost, freight and other costs related to capacity optimization and site consolidation and higher raw material cost. Lastly, PES adjusted operating income was $5 million, up $300,000 from Q2 2017. This increase was mainly the result of favorable volume and price, partially offset by costs related to capacity optimization and site consolidation efforts and unfavorable impact of a one-time provision for a commercial issue of approximately $1 million. Turning to Slide 18, you can see we ended the second quarter with a cash position of $175 million, adjusted EBITDA of $80.9 million or 18.8% in the quarter, excluding the adoption of revenue recognition guidance of $1.2 million. Year-to-date, we had the use of working capital of $44.7 million, adjusted for revenue recognition methodology. The decrease was primarily due to $18 million cash paid for incentive compensation and inventory increase of $21 million, mostly driven by plant consolidation initiatives, multisite qualification and managing long lead time raw materials and an increase of accounts receivables of $9 million, increasing due to revenue timing including a strong month of sales in June. Partially offset by an increase of $4 million in accounts payable and other accrued liabilities. Capital spending for the first half of 2018 was $20.2 million or 4.7% of revenue. Cash taxes paid year-to-date of $14 million was approximately $3.5 million less than the first half of 2017. The year-to-date tax rate, effective tax rate is 23.2% versus 33% last year, lower due to U.S. tax reforms, net impact of FIN 48 releases and benefits from other programs we've been working on and the geographic mix of income generation. Taking a look at our Q3 2018 guidance on Slide 19, revenues are estimated to be in the range of $220 million to $230 million with earnings in the range of $0.97 to $1.12 per diluted share. The GAAP earnings per diluted share range does not include the estimate of purchase accounting for recent Griswold acquisition. On an adjusted basis, we guided earnings in the range of $1.25 to $1.40 per diluted share. At the midpoint of our adjusted EPS range of $1.33, we are $0.14 better than Q2 2018. We are guiding our gross margin at 37% for Q3 2018, an improvement of 130 basis points from Q2 2018. We expect the improvement to continue in the quarters ahead. We have taken actions and put actions in place to improve our profitability while continuing to invest in the capacity necessary to meet forecasted growth opportunities. Guidance for capital spending for the year is in the range of $50 million to $60 million. The effective tax rate for the full year is guided to 25% to 27% and for Q3 is guided to 30% to 31%. I will now turn the call back over to Bruce.

Okay, thanks Ram. This concludes our prepared remarks. We'll now open the line for Q&A.

[Operator Instructions] And your first question comes from Craig Ellis from B. Riley FBR.

Yes, thank you for taking my question. And congratulations on the growth that we're seeing in the business and the Griswold deal. I’ll start there, Bruce. First, as we take a step back and look at Griswold along with DSP and DeWAL, what did those three acquisitions do for the business in aggregate? And specifically what did Griswold add that you had been seeking for the portfolio?

Sure. Thanks Craig. First, those three acquisitions, the DSP acquisition really bolstered our position in silicones and silicone sponge. And so we continue to utilize their capabilities because they had DSP, now part of Rogers had different machinery, different capabilities, different product line to broaden our silicone area. I'll end with Griswold so let met go to DeWAL. DeWAL really provided us a totally different polymer system in which to take to our customer base, a similar customer base, a similar route to market. And so we've been able to utilize our existing field sales, some of our technical folks and also utilize our overseas capabilities to grow the DeWAL product line. So that's given us a whole new window, a whole new opportunity in terms of PTFE polymers. And then finally with Griswold, Griswold has two main product areas. The elastomer expect, the specialty elastomer expect to have a variety of different applications and different application areas than the current EMS, urethanes and silicone areas. But utilize a similar route to market, same customer base in terms of distribution and preferred converters. So that system or that approach allows us to grow that business. We believe pretty well certainly in North America and again they’re 97%, Griswold’s 97% North American based. So a big opportunity for us in Europe and Asia, the other part of their business which is about a third of their business, utilizes polyurethane foam technology, very similar to Rogers’ PORON. And so some similar applications, some alternative applications, different mix of customers so it broadens our footprint in polyurethanes. It also provides to us some immediate capacity on their lines, which are capable with some adjustments running a Rogers product line. So those three acquisitions really continue to move us forward in what we like to call top of the pyramid areas.

Thanks for that. And then Ram, is it fair to say that there's probably $6 or so million of revenue in your third quarter guidance for that and would it be worth a penny or two in adjusted earnings on the bottom line or how should we think about the contribution in the guidance?

A little higher than your estimate, the revenue is more $7 million – $7 million to $7.5 million range.

Okay, helpful. Got it. Let me move on, Bruce, just from the sounds of the color that you provided around 5G. I sense that you picked up incremental disability in the last three months. And I was wondering if you could talk about some of the milestones that you see with the 5G ramp. And specifically as it relates to the way customers may be slowing their investments on 4Gs, they get ready for 5G. What's the net effect in the portfolio likely to be both in the near-term and intermediate term as we get that great higher content with 5G but as we see 4Gs slowdown?

Right. So very good pick up, so a couple of issues, a couple of things that we've seen in the marketplace that we're very pleased with in the 5G side. First, I mentioned in my prepared remarks around the 4.5G and 5G, massive MIMO antenna systems, phased array antennas. Those – that's a very good leading indicator of infrastructure moving into the 5G realm. And the reason I say that is that the 4.5G antennas that are going in these massive MIMO antennas can be altered very relatively easily using software to make them 5G compatible. So what we're seeing is that infrastructure, the tower infrastructure starting to be built out and fortunately for us, Rogers has developed some very interesting products that our customers are very excited about. And so we're seeing real uptick on that side and we saw that in the results in Q2 on antennas. The second thing that we're seeing and it's very consistent, I'd say across the industry. We're hearing from industry experts, we're hearing from OEMs and also through some published reports in China regarding 5G build out. And there's a consensus around about 100,000 5G base stations coming in the first part of 2019 with some folks saying, it could be double that. Now from our perspective, we don’t have exact timing on that. And so in early first quarter, late first quarter, second quarter – we, at this point, don't see – don't have that visibility but what we do know, we're starting to hear from OEMs that we need to get ramped up to make sure that we're ready for that. And the reason maybe 100,000 doesn't sound very high but we're talking two to four times the content per base station of Rogers’ material versus what we saw in 4G. So a very, very positive, from our perspective which ties back to some of the work that's going on that went on in Q2 continues in Q3 to build out our capacity. Our key objective here is to make sure that we've got capacity on-hand when demand comes because we think it could ramp relatively quickly. And certainly we don't want to be in a position to disappoint our customers.

Got it. And that relates to my third question. I'll move it back to Ram. Ram, from the guidance of 37% gross margin to the target models, 40% we’ve got about 300 basis points. So as you look at the drivers, you certainly clearly articulated the five things that are negatively impacting gross margin on a year-on-year basis. We're moving higher from that in a third quarter but as we look at the milestones to close that final 300 basis point gap. How would you been those out for us are there three or four things that contribute most to that gap or how do we break down the difference that exists between where we are on the target model? Thank you.

We typically guide gross margin for the next quarter but I also say that we are committed to our 40% target for 2020. To give you a bit more detail, it’s about one-third of that performance variance that we talked about in Q2 is related to that it turn up the top line of a 5G sales coming back. The remaining RSUs that will come through the next quarters and you’ll start seeing our gross margin improvement as we’ll start working through our operational excellence programs.

Just to add a little bit of color to Ram’s comment on that one-third, essentially its capacity held in abeyance for the surge that we are forecasting for 5G build out and ADAS as well.

Got it. Thanks guys.

Thanks Craig.

And your next question comes from Daniel Moore from CJS Securities.

Good afternoon. Thanks for taking the questions and the color. And starting off, Bruce, the level of optimism, I think I'm hearing maybe that's a little – even a little bit greater than the last couple of quarter. So can you give us a little sense for maybe revenue growth for the months of June and now into July? And beyond more optimism in terms of 5G, just tangibly what's driving your level of optimism around the revenue inflection. And then a similar question on the cost side, just either Bruce or Ram level of conviction that we have turn the corner as far as some of these one-time operating expenses et cetera. And then I’ve got a quick follow-up. Thanks.

Thanks Dan. So in terms of optimism on let's say 4G, 4.5G, 5G moving forward. We saw some nice strength in June because of the quarter, we also in terms and a lot – and part of that had to do certainly with the antenna side of the 4G, 4.5G business. What we're looking forward towards is in the second half of the year here, a pick up in NB-IoT that we've been hearing about for the first half of the year, we're hearing very clearly from some large OEMs in China that that is coming and will come to fruition in the second half. Now will it be as great as we first anticipated in January, probably not. But certainly what we're hearing very clearly is a pick up moving into Q2 or Q3 and into Q4 on the NB-IoT side of the house. So between the antennas that's getting built out the NB-IoT that we're seeing. And then what we're anticipating to be continued growth on the ADAS side. Always bodes well for the ACS business.

Got it. And then I think you give a decent amount of color on the cost side. But if – maybe just I guess if you can put it all together in terms of quantify what sort of non-recurring in the quarter and that would dissipate into Q3. And then if possible, how much have been impacted the lag between price increases and rising raw material costs have in Q2?

No, that’s a good question. So just to give you a bit more color there, if you think about what’s impacted our Q2 numbers, it’s clearly some of the assumptions we had on timing of some of these larger programs coming through. And impact a slower implementation on the result. That together with the one-time commercial issue that we had was the key variances to the forecast. Looking forward to our guidance, clearly that one-time issue is not going to repeat. Your question on pricing, we put in place pricing programs throughout the beginning of this quarter in many place – in many of our businesses and we expect a full quarter benefit to kick in in Q3. So that is going to improve between Q2 and Q3. And in addition to that, we have the impact of Griswold. That will also help our margins in Q3. So we're very confident of our 37% margin guidance we've given.

Got it. And I’ll shift gears to what has been certainly a bright spot on the top line, PES seeing strength across the board there. EBIT margins kind of still in the high single-digit range. Bruce, I think you alluded to a nice pick up. What type of ramp should we be looking for and longer term what type of EBIT margins are embedded in your 2020 guide of 20% plus overall. Thanks again for the color.

You're asking specifically EBIT margin for PES?

Correct, where would that shake out or level off once we get to the 20% overall in 2020 and beyond.

Yes, well, we don’t break it out by individual unit, but as I mentioned in my prepared remarks we're doing a lot of work in the PES business in terms of site consolidation moving to lower cost manufacturing environment. So sequentially, we see certainly the gross margin side of the business moving forward quite well. And, we're also putting in place, even in existing facilities automation to take out some of the labor costs that we've experienced particularly in places like Germany, where there's high labor cost. But overall, we've got a roadmap in place for the PES business, volume certainly helps but there's real actions and significant movement in place to drive down our overall costs and drive up our margin in that business. Will we get to the level of the corporate average? We're working towards that in terms of gross margins and so forth, but that's probably a couple years out, certainly a few years out.

[Operator Instructions] And your next question comes from Sean Hannan from Needham.

Yes, good evening. So, sorry to beat a dead horse here, want to see if I can drill into some of the factors around costs a little bit. I'm not sure, if I'm hearing all the answers that I might be seeking. So, let me try some questions from a little bit of a different angle. When I look at Slide 16 here, and you folks provide this bridge for your earnings, now at least versus where the street was right, we had an earning miss for the quarter as well as for the guide. But I think that there are some pretty understandable factors and we probably were too low in our estimation for what perhaps the inefficiency would be from that added capacity. Ram I think you'd spoken that a little bit earlier being and Bruce being maybe about a third of where we have this performance impact. So, presumably that would be $0.11 that would have been in this quarter. So, as I step back and I try to think about all of these puts and takes. When does this $0.33 part of the equation, when does that resolve. You know because it sounds like the 5G factors are probably more, slow increments and perhaps that goes way beginning of 2019. I think we presumably had the – or we previously had the assumption that some of the freight and other multi-site qual costs were something to be resolved this quarter. So, can we just get some better clarity around these pieces here.

Sure, Sean. So if you talk about the $9.3 million that translates to about $0.33 in the EPS and about $0.11 of that is related to fixed overheard commitment, about $3 million. That's the part that is directed directly towards the 5G and the top line changes that we are expecting and we're preparing for. The other $0.22 is $6 million that is related to some temporary ramp-up in freight and some cost duplication coming from site consolidation efforts and also qualification of multi-sites. That together with some of the raw material versus pricing timing, which we hope to get a better off in Q3 will start coming back into our resource as we go through these implementations of some of these bigger projects.

So the resolution of those basically, because I had the prior impression that would be concluded as a drag sometime during the course of this September quarter. Am I correct to interpret it that is now pushed out an additional quarter that's now lagging into the fourth quarter or is it even something longer than that. That's part of what I'm trying to get my arms around.

So just to maybe put a little bit finer point on it. Certainly the price increases that we've talked about are coming through in Q3 right? They were instituted towards the end of Q2, we had some benefit, they’re moving into Q3 and fully implemented by the end of Q3. The multi-site qualifications that we spoke about in the last call would – as I said would extend into Q3, they've extended a little bit into Q3 further than we had thought. We thought maybe July would be the end, it's probably August before we see our way clear. So, the assumption there would be it's going to be with us a little bit for Q3 by Q4 we'll be clear of that. The real point that I think Ram was making here was…

It parallels with that, correct Bruce? With the multi-site quals, Right? Freight parallels with that so that also would go away by 4Q.

Yes. The other point is the plant consolidations and so Europe, Belgium is consolidating two plants into one. And, so that will be completed by end of Q3. So, we should see some benefits moving forward in Q4. The move of DSP from California to Carol Stream, Illinois is taken a little bit longer and taking a little bit more cost than we first anticipated. And so, we still are targeting Q1, 2019 to complete that transition and we're working very hard to meet that timeline with that probably a little bit additional cost than first anticipated. So the other point, I was going to make had to do with fixed overhead and that one third or $0.11 that Ram referred to that doesn't really go away until we start seeing the ramp in 5G coming. And as we mentioned, we're looking at that in Q1 into Q2 of 2019.

Okay, but by the time we get to 4Q at least half of say this $0.33 headwind we have seen in the June quarter should be gone. And we should see and then the remainder of it some improvement. So it should arguably be a little bit better than half of what ought to have comes back into the model kind of on a run rate – from in concept kind of a run rate perspective.

I think that's a fair point. Yes that's, that's where we are in our estimation as well.

Okay, Alright, sorry I had to go through all of that so painfully. Yeah, I just think it's really crucial to call out that there is – while why we again we had a miss in quarter as well as the guide, but there's a big chunk here that's explainable and a lot of it gets resolved. Or is in a good path for getting resolved in a little bit more granularly. So, that addresses my concern.

Sean, I and I think you can sense from my position on this, in my optimism that we have this well in hand. We understand it, we've got plans in place, we're driving through it. And I think your conclusion is very similar to where we are in terms of when it goes away and the amount that goes away.

Great. All right, thanks so much that's the main topic I wanted to hit on.

Thanks Sean.

[Operator Instructions] Your next question comes from Christopher Hillary from Roubaix.

Hi, good afternoon.

Hello, how are you doing Chris.

Great thanks. I wanted to ask you about the ASP lift you're going to get from 5G. Are there other growth areas, where you have a similar dynamic that's going to come into play. And, I guess in both those cases how is that going to impact your growth in operating margins.

So, in terms of 5G, we think it's really around content, not average selling price that goes up. Right? So the content in a single base station is two to four times Rogers material than what was in a 4G. So, that's an uplift that's in terms of growth that would be revenue growth in line with the implementation of 5G. And more broadly in terms of growth opportunities for the Company, certainly ADAS the blind spot and adaptive cruise control sensors that continues to be a very strong area for us. As we look forward, we have both the 24-gig and 77-gig materials that are used there. 77 probably being the longer-term choice of the industry. And, so we're well versed there and again the industry numbers that we're hearing are 20% to 40% growth rates per year. And some of that will vary as time goes by and penetration happens, greater penetration into the market. But that's a big growth area for us, but the big story and the one that continues to be very consistent quarter after quarter is the PES EV/HEV X-by-Wire direct bonded copper chip mounting and silicon nitride materials that are used for the semiconductors under the hood for electric vehicles, for hybrid electric. And we've seen every quarter growth rates in the double digits for the last year or so. And we see no change in projections as a matter of fact, I referenced in my opening remarks that people are putting in capacity and coming to us and telling us we need to expand our capacity because this wave of EVs and HEVs is really getting off and really going to be there moving forward. So, we've got a number of really high nice growth areas for the Company between what we like to call advanced mobility, the HEV and advanced connectivity in the areas of 5G.

And do the newer products that you're looking for to selling more up are continuing to sell do they come in at higher structural margins or is it more just volume versus your existing production plant.

I would say it's similar. There are some depending on the specific product might be a little bit higher but, generally we're modeling similar profit margins moving forward.

Okay, thank you.

And, I will now turn the call over to Bruce for closing remarks.

All right, thank you Brandon. That concludes our call today. I want to thank everyone for joining us and have a very good evening. Thank you