Good day. My name is Catherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Third Quarter 2018 Earnings 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] I would now like to turn the call over to your host Mr. Jay Knoll, General Counsel. Sir you may begin your conference.

Thank you and good afternoon everyone and welcome to the Rogers Corporation third quarter 2018 earnings conference call. The slide for today's call can be found on the Investor section of our website along with the news release that was issued today. Please turn to slide 2. Before we begin I would like to note that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to 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 discussions during this conference call may include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call which is posted on the Investor section of our website. Turning to slide 3 with me today is Bruce Hoechner, President and CEO. Mike Ludwig, Senior Vice President and CFO, and Bob Daigle, Senior Vice President and CTO. I will now turn the call over to Bruce.

Thanks Jay. Good afternoon everyone and thank you for joining us on today's call. Please turn to Slide 4. In Q3 Rogers achieved record revenues of $227 million, an increase of 10% compared to Q3, 2017 and a sequential increase of 6% over Q2 including a $4 million negative currency impact. Sales were at the midpoint of our previously announced guidance. Strong organic sales growth in our elastomeric material solutions business and power electronic solutions business were driven by demand in certain advanced mobility applications primarily in EV/HEV. Sales in our advanced connectivity solutions business were below expectations essentially flat for the quarter due to weaker demand for applications in wireless 4G LTE as the market prepares for the approaching 5G rollout. In addition ACS saw lower demand for advanced driver assistance systems applications as European automakers work through new emission standards. I will speak to our individual business segment results in more detail shortly. While we did not meet our gross margin guidance for the quarter disciplined SG&A controlled to strong adjusted EPS at $1.42. Our strategic investments to focus on the high-growth markets of advanced mobility and advanced connectivity in addition to our synergistic M&A strategy has resulted in significant top-line growth opportunities for the corporation. This high demand as well as increasing raw material costs has impacted our margin performance. As outlined in last quarter's call, we are addressing these challenges and have made progress during the quarter. Our multi-site qualification activities are essentially complete. The site consolidation in Belgium has been concluded on time and within budget and our pricing actions have mitigated raw material price increases. However, we continue to carry costs associated with maintaining underutilized capacity in anticipation of significantly increased demand in our core markets. In addition, the strategic costs to support our…

Thank you Bruce and good afternoon everyone. I'm excited to take on the CFO position for Rogers in such an exciting time for the company. In my short tenure I am impressed by both the quality of the people in the Rogers organization and the opportunities to both grow revenues and expand margin. My experience with form-factor aligns well with the opportunities at Rogers. In the slides ahead I'll review our third quarter results followed by our fourth quarter guidance. Turning to slide 12, we will preview the financial results for Q3, 2018. Third quarter revenues as previously noted were $226.9 million, slightly higher than the midpoint of our Q3 guidance range and 10% and 6% higher respectively compared to Q3 2017 and Q2 2018. Gross margin at 34.9% was below our guidance of 37% meaningfully below Q3 last year is slightly below our Q2 2018 gross margin. Bruce covered the gross margin challenges of each business in his prepared remarks and I will add some additional commentary later in my presentation. Good cost control of our SG&A expenses in the third quarter enabled us to deliver adjusted operating income in Q3 of $38.6 million, 17% of revenues slightly lower than the $40 million of Q3 2017 but measurably above the $31.7 million of Q2. EPS of $1.06 for fully diluted share for Q3 was within our guidance and adjusted EPS of $1.42 for fully diluted share for Q3 was above the upper end of our guidance, $0.01 higher than Q3 2017 and $0.23 higher than our second quarter. Please turn to Slide 13 for a review of our third quarter revenue compared to Q3 2017 revenue. Our third quarter 2018 revenues increased $20.1 million or 10% versus the third quarter of 2017. The increase was primarily due to higher…

Thanks Mike. This concludes our prepared remarks. We will now open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Craig Ellis with FBR.

Thanks for taking the question and Mike welcome aboard. It's nice to be back in touch again. Bruce, hello, I thought I would start off with a couple for you just on some of the larger trends so clearly within EMS we have some very strong automotive growth but in advanced connectivity there's some inventory and just regulatory and other issues. So regarding the particular strength in EMS is that reflective of new customer programs or what drives such significant growth here in the third quarter?

So EMS certainly the electronics handheld electronics and so forth which is a high quarter Q3 is a high quarter for the build in anticipation of the holidays. So we've been very successful in getting some new programs there earlier in the year and now that's paying off. The other thing though that that we saw was in the EV/HEV side battery pads and containment materials for the battery packs themselves we've made very high inroads there in terms of new programs as well and with the penetration of EVs which we've seen growth in September up 61% year-over-year in EVs and HEVs. So that's driving some of the growth that we're seeing in EMS.

And on that latter point Bruce is there particular geography or is that multi geography in nature?

It's multi. We've seen it in Europe, North America, and in Asia.

Okay. I think the follow-up is regarding the ADAS comments that there are some inventory buildup that's out there one. How significant you sense that is when does it get worked off and may be shifting over to a question for Bob related to that Bob what are the trends that you're seeing with respect to radar adoption and radar intensity in advanced vehicles as we move ahead.

So let me take the first part of the question and as I mentioned in my prepared remarks what we're seeing is that with the European testing and the delay there that European sales are down primarily in the higher-end automobiles where we have higher content right so that the automobiles that are more premium luxury would have a higher number of radar sensors. So we're getting impacted there and then correspondingly what we're seeing is that the inventories that are being held by their suppliers into the automotive OEMs are being pulled down in anticipation of those lower sales. Now our understanding is that the European car manufacturers will work through these new standards and return to normal sales. Our view is that this will happen most likely as we move into 2019 and so we would anticipate returning the double-digit growth in our ADAS business.

Yes. so Craig I think and in terms of the market dynamics we're continuing to see increased penetration and it's not just the number of vehicle platforms that are adopting these advanced driver assistance systems but also the number of sensors the average number of sensors continues to increase. That's getting – we think that that's going to get reinforced a bit also by the new European endcap requirements where you need to pick up a motorcycle from a 100 meters back. So the requirements for the technical requirements to meet the those distances is also we think very favorable in terms of driving average number of sensors. I think if you look at the roadmaps most of the tier ones have in place there's more effort going into what's referred to as high definition radar which again generally means more content opportunity for us as people go towards what effectively would be higher definition radar in future systems. So all in all very positive continues to be a penetration story and as Bruce mentioned the [indiscernible] seems we haven't seen anything beyond the fact that automotive production specifically with a couple of the German automakers was down fairly substantially during part of the quarter because they are scrambling to get all the vehicles certified with a new emission standards.

Okay that's helpful. The last question before I get back in the queue I'll focus on with Mike. Mike appreciating that you've been on the job less than a full quarter. I wanted to get your conviction that the gross margin in the third quarter really is a bottom. We had expected gross margin to move up there are some things going on obviously it moved down but what gives you conviction that the fourth quarter can actually rise sequentially and then from where we are now how would you been out the different drivers that we need to get back to that 40% target level.

Yes, so let me address my thoughts on that and then if Bruce wants to jump on top of it to amplify or expand on it you certainly can do that but I think the real question is as well as so hey we guided the 37%, we came in at 35% what drove that and then how do we recover from there going forward. So let me address that so I think the majority of the [mist] in Q3 versus our guidance is still due to the revenue mix with ACS revenues being down and GES revenues being up. ACS as you know is the highest margin business. So I think that was fairly significant contributor to the [mist] in Q3. But secondly we anticipated making more progress on the $5 million performance and other cost in Q3 that were outlined in slide 15. So first of all in EMS which we said accounted for 50% of that $5 million performance bucket there have been three acquisitions that we are in the process of one consolidating sites and two optimizing their operational infrastructure. The consolidation operational processes, consolidation optimization processes they're proceeding in a more deliberate fashion maybe than what we had anticipated to accommodate the increased customer demand and to ensure that we maintain the value that we acquired in the business and in PES we have introduced new product that has been well received in the market and we were having some difficulties with the product ramp and I think some of those are fairly predictable but mainly yield is costing us some money to address to ensure that that we are really meeting the customer expectations. So I think those were the big challenges with respect to Q3. Going forward our commentary related to incremental improvement…

Thanks Mike. I think the other thing just to point out we said that we were going to make progress in our last call on pricing, on multi-site qualification and completing that concluding the site consolidation in Belgium. So all of that was completed and we feel very good about that. So the other thing is online equipment performance is good. So the maintenance issues that we had earlier in the year have improved as well as quality. So we on the operational front where we've said that we were driving operational improvements we've made them and some of the impacts that happened in the quarter in Q3 were related to the items that Mike pointed out and as Mike also said we've got plans in place and we're working through it. So we remain very optimistic as we move through the next couple of quarters on writing that and moving towards that 40% goal.

Thanks guys.

I think the point there Craig is that we're not looking – we don't believe we're going to make 200 basis points or 300 basis points changes in a particular quarter. These things are going to take time. We want to be methodical about it. We don't want to destroy value. So I think looking at some smaller increments like 50 basis points I think is much more realistic.

Got it. Thank you.

Thanks Craig.

Your next question comes from the line of Daniel Moore with CJS Securities.

Good afternoon Bruce, Mike. Thanks for taking the questions. I wanted to switch gears to within ACS to 5G obviously not seeing pickup yet. We had expected it to be 19 you reference the second half of 19 a couple of times in the prepared remarks. Either be it by customer, by carrier or by geography or all three what kind of data points can you point to talk about your confidence and in seeing that ramp sometime in the back half of 2019?

So one when we look at indicators that are important to us certainly the design activity that we see with these major OEMs is fast and furious and of course we've been designed in so we see what's going on across that spectrum. We also have seen the chipset makers for handsets accelerating their output and introduction and I think as I said in the remarks the handheld folks are looking to provide the market in the first half of 2019 with 5G capable smartphones. The other thing we're waiting to see is the Chinese frequency assignments that have been targeted to be assigned towards the end of this year and then the licensing in the first half of 2019. So that'll be a big indicator so when we will really see this thing start rolling but the indications particularly from the OEMs that we talk with particularly almost every day are that this is coming and most likely second half of the year. Bob any further comments?

The only thing I might add Bruce is again I think part of it is the if you look at the trend of announcements and basically triangulating around what you're hearing from both the equipment providers and the service providers we continue to see signs of pull in versus push out. So people are talking about things sooner rather than later and that's giving us a lot more conviction about frankly about the volume coming and making sure that even though we're absorbing a little bit more expense in the near term that we are ready to support that.

Helpful. Appreciate it. And then switching gears to capacity, let me just update us on the [indiscernible] acquisition how much incremental capacity that brings how much kind of runway that will provide you and when we think about 5G starting to ramp an ACS starting to ramp what does the incremental margin profile look like into the back half of next year and 2020? Thank you.

So with regard to capacity so we've got two approaches here that we've been having ongoing investments in the ACS infrastructure to make sure that we continue to build our capabilities at the existing facilities and that's been on our roadmap. What we've done with the ISOLA asset acquisition is to provide ourselves with capabilities both in lamination presses as well as treaters that take us out probably two to three years with the roadmap that's already in place for some of our other capacity additions in the existing ACS facility. So we feel very good about that and let me comment though that we've learned quite a bit Rogers over the last eight to ten years has been a leader in the high frequency circuit materials used in cellular systems. So 2G, 3G, 4G and one of the things that we've identified is that when this inflection point comes, when this transition comes, it's coming within a certain period whether it's six, nine months something like that but not exactly when and not exactly how steep the curve is on the uptake and so our strategic decision on the acquisition of the ISOLA Assets was to ensure that we have the capacity in place, so we don't disappoint our customers as we move forward over the next one to two to three years. So I think the roadmap is very clear. We feel very good about that acquisition. Over the next six to nine months we will be converting that equipment in that facility to run to be able to produce our materials. It's not a very difficult conversion because this is similar equipment to what we have in our facilities but we will have trials and so forth and make sure that those equipments can produce our products for us. So there was a question on how we see the margins as we move into 5G. I will let Mike take that one.

Yes. So I think when we look at margins as it relates for the 5G again I think we're still looking through and understanding what the impact is of the ISOLA plant on all margins and what not but certainly we think that the what I would call the incremental margin, the contribution margin not necessarily gross margin of that business is going to be well north of 50%. I don't think I want to get pinned down right now to an exact number but I think it's going to be pretty significant. Again taking us towards our 40% gross margin target and I think that's going to be a big piece of it. So I think north of 50% is probably what I'd be willing to say now. We may have more to say on later.

Fair enough. Appreciate the color. I'll jump back in queue if they have any follow-up. Thanks.

Thanks Dan.

[Operator Instructions] Your next question comes from the line of Sean Hannan with Needham.

Yes. Good evening folks. Thanks for taking the question here. One thing I want to see if I can make sure that I have an appropriate understanding of this, when I look at the guidance and I think that you folks have talked about the state of business very well tonight with a lot of detail, as I mapped the gap for where your earnings are looking to be versus where the street previously was, trying to get a better understanding around how impactful is automotive as headwinds in there versus what you would have otherwise seen and then to what degree would you say the softness in 4G demands during this kind of middle transition time has actually deteriorated further than you would previously thought or is it just holding steady in its softness and somewhat consistent with where you've been thinking? So clearly it seems the focal point of my question is around ACS primarily automotive. Any other color around 4G and then if I'm missing the boat on something else, if you could lay that out that would be helpful. Thanks.

Yes Sean this is Mike. So at least on the first, I'll address a piece of this and then let Bruce again add some additional color to it. So certainly when you look at from a gross margin standpoint the fact that whether it's ADAS or whether 4G LTE those are obviously businesses within the markets within the ACS business. That's very profitable business. So to the extent that those create headwinds they certainly are going to create headwinds from a gross margin perspective and I will have to believe that that represents a pretty significant part of the challenge with respect to getting back to maybe what a street consensus might look like for the fourth quarter. So that's sort of the gross margin side of it. Bruce I don't know if you want to give any other –

Yes, I think on the market side I think that the 4G LTE is less than we expected certainly in Q3 and we're carrying that through into Q4. So that's an impact and the ADAS situation I think we've covered that should turn around as these testing gets completed and qualification gets completed by the car manufacturer. So again we're not expecting that to be through in Q4, most likely Q1 where we'll see that recover. So we've looked at this for Q4 going from Q3 to Q4 in the ACS business as pretty much going sideways at this point until we see ADAS recovering and certainly as 5G starts tuning up.

Okay. That's helpful. So basically our disconnect here it sounds like it's all tied to ACS, incremental softening within 4G but that's transitory. The magnitude it doesn't sound like it's all that material but it is incremental and the surprise out-of-left-field as a topic really was automotive and that seems to be arguably the bigger contributor because we hadn't previously been thinking about that too much even though we knew the standards were coming. How that actually played through in getting cars appropriate for the showroom, I think was more – a little bit more of an industry surprised than we expected. Fair?

I think that's probably a good summarization. I do think though that there's that's probably – that's probably the biggest piece. Let's put it that way. My sense is there still we talked about some of this performer challenges with respect to how that impacted the Q3 actual gross margin versus the guidance and my guess is that there's probably some of that in that discrepancy between maybe what the streets thinking versus maybe some of the guidance that we've provided again because I think we're being a little more deliberant in terms of how we work through those problems to move to ensure that we keep the value of the acquisition but again I think we're very-very committed to working those over the next couple of quarters.

Very helpful. That provides I think some important color around that and let me see if I can switch over to EMS for a moment and I realize that you've addressed some around this topic already but the strengths that we had in the quarter just trying to get a little bit of a better understanding in terms of the sustainability around some of these revenues and what risks could emerge that would otherwise undermine that because it's such a sharp performance there maybe some assumptions on our part in terms of how to extrapolate out from here. You just want to make sure that we have the right perspective on that. Thanks so much.

Sure. So Sean the view on EMS automotive particularly the EV/HEV side what we predict will continue to have strengths. So year-on-year we were up in that sector up 30% and that's consistent with what we're seeing in terms of the actual purchase of EV and HEV automobiles and it also mimics a bit of what we've seen over in the PES business in terms of EV/HEV applications there. So we think that's real and that's sustainable. As I mentioned in the quarter Q3 is a higher quarter generally for the portable electronics in anticipation of the holidays, that build for the holidays. I think the other area that we are cautious in looking at is the general industrial side. There's we've seen continued pretty good strength there. We had about 4% or 5% growth year-on-year on that and it was flat quarter-to-quarter from Q2 to Q3 but we're keeping a strong eye on that in terms of where the economies are heading. So overall though we see ACS being relatively steady here across their different sectors with the HEV/EV side showing that growth.

Bruce that makes sense. Just to follow up on the general industrial is that as you monitor that carefully the catalyst and monitoring that carefully is that anything that is [indiscernible] that you've seen or observes or heard within your own business or is it just effectively monitoring headlines that are going to hit whatever news wire or service that you may take a look at.

Yes. So good question good point Sean. When I step back when I look at the corporation and what we've done over the last five years or so in terms of diversification of the portfolio we've really focused on these higher growth markets of advanced mobility advanced connectivity. It's like over 50% of our sales. So I feel very good we've made a very clear strategic decision to invest in those areas and those areas are paying off in terms of growth. Now we'll see 5G towards the end of next year but the other ones in EV/HEV and ADAS they're there for us with just that issue in the European side on ADAS but this the typical cyclical nature of economies the general industrial is where we'll see it first and so that's the one that we're watching very carefully. A little bit reflecting what you're seeing in the headlines and so forth. So that's the area of I would say concern it's about 25% to 30% of the corporation, so that's just the one area that with what people say around being top of the cycle at this point. That's what we're watching.

Okay. So that's fair. So a matter of diligence from the executive team over there Rogers versus we've got some squishy points and we need to keep our eyes on it.

Now it actually has maintained itself over the last couple of quarters but like we said we're watching it.

Got you. All right. Perfect. Thank you so much for the feedback. Very-very helpful.

Thanks Sean.

And there are no further questions at this time.

Great. Thank you everyone for joining us on today's call and have a great afternoon and evening.