Good day. My name is Chantal and I'll be your conference operator today. At this time, I would like to welcome everyone to the Rogers Fourth Quarter 2018 and Full Year 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 will now turn the call over to your host, Mr. Jay Knoll, Senior Vice President and General Counsel. Sir, you may begin your conference.

Thank you, Chantal. Good afternoon everyone and welcome to Roger -- Rogers Corporation's fourth quarter and full year 2018 earnings conference call. The slides for today's call can be found on the Investors section of our website along with the news release that was issued today. Please turn to slide two. 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 exists in Rogers' operations and environment. These uncertainties include economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements. Also, the discussions during the conference call may include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call which is posted on the Investors section of our website. Turning to slide three, 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 for today's call. In the fourth quarter, net sales were near the top of our previously announced guidance range at $223 million, a decrease of 2% from Q3 2018 and an increase of 7% over Q4 2017, a strong start in the quarter was tempered in December by global uncertainty linked to trade issues and interest rate concerns. Adjusted earnings per share for the quarter were $1.67, an 18% increase over Q3 2018. Net sales for the full year 2018 were $879 million, an increase of 7% over 2017. For the year, adjusted earnings per share were $5.77, up slightly compared to 2017. During the year, we saw a broad based growth across many of our key market segments with particular strength in advanced mobility applications for electric and hybrid electric vehicles, EV/HEV and Advanced Driver Assistance Systems, ADAS. We expect this growth to continue based upon the strength of a number of leading indicators, which I will discuss in more detail shortly. Our investments to position the business for further growth impacted our margins in 2018. We experienced greater than anticipated near-term costs related to initiatives to accelerate capacity expansion and reduce our cost structure. We have made progress on a number of these projects, including completing our multi-site product qualifications, concluding our Belgium plant consolidation, installing additional lamination presses in multiple locations, and acquiring circuit materials manufacturing assets in Chandler, Arizona. In summary, 2018 was a pivotal year for Rogers. We accelerated capacity expansion projects as market indicators provided greater clarity on the timing and the increasing size of opportunities in advanced mobility and advanced connectivity applications. Looking ahead to 2019 performance, given the strong demand outlook for our ACS and PES businesses, capacity expansion projects will…

Thank you, Bruce and good afternoon everyone. In the slides ahead, I'll review our fourth quarter and annual results for 2018 followed by our first quarter guidance. Turning to slide 13, we will preview the financial results for Q4 2018. Fourth quarter revenues as previously noted were $222.9 million above the midpoint of our Q4 guidance range, but some headwinds in December mentioned by Bruce and the unfavorable currency rates compared to Q3 resulted in revenues being 2% lower than our third quarter revenues. We improved our operating performance in the fourth quarter compared to Q3, resulting in a sequential improvement in our gross margin to 35.2% that below the midpoint of our guidance. I will add some additional commentary on gross margin later in my presentation. Adjusted operating income for Q4 2018 was $35.6 million or 16% of revenues compared to $38.6 million or 17% of revenues for Q3 2018. Operating expenses increased by $2 million in the quarter, consistent with our expectation of a Q4 increase. GAAP EPS of a $1.31 per fully diluted share and adjusted EPS of a $1.67 per fully diluted share for Q4 2018 were both well above the upper end of the guidance range for Q4 and measurably higher than the comparable third quarter fully diluted EPS metrics. The significant beat on the diluted EPS metrics, both on a GAAP and on an adjusted basis resulted primarily from a significantly lower effective tax rate for the fourth quarter due to actions taken in the quarter to reduce our tax rate in foreign jurisdictions and the impact of recently issued U.S. tax legislation. I will cover the fourth quarter 2018 effective tax rate and the expected 2019 effective tax rate in my subsequent commentary. Turning to slide 14, revenues for the calendar year of…

Thanks Mike. This concludes our prepared remarks. So, we'll now open the line for Q&A.

[Operator Instructions] Your first question comes from Craig Ellis with B. Riley FBR. Your line is open.

Thanks for taking the questions and congratulations on a strong finish to the year on the sales line. Gentlemen, you mentioned that there was some slowing in the month of December and that's understandable given some of the macro issues that we saw, but the clarification on that is, was that in any particular products segment or in any particular geography and you -- can you quantify how significant that was?

How are doing, Craig? The -- it was really more in the -- I would say in the general industrial sectors, where we saw the fall off and that really is pretty much in the month of December. I think as we moved into January, we saw things relatively stabilized. So, it was a bit of a few million miss in December versus what we had anticipated. But I think from what we've seen now in the first part of the year here things have sort of returned to what our expectations had been.

That's helpful. Thanks Bruce. And then the first real question is on 5G. So, it seems that from some of the details that you're providing, the content opportunity maybe a little bit bigger than I had earlier thought, I had thought that the content for 5G was going to be up 2x to 3x versus 4G, but it sounds like you may be seeing something that's a little bit larger than that 3x to 5x. Am I catching that right? And is the situation one where issue get closer to the real ramp you're seeing that the designs are including more of your content or how do I explain what seems to be an increase in content for Rogers as we approach the on-ramp to China 5G and that of other geographies?

Right. So, it is as the designs come in what we've seen is that, our materials are actually used in a greater amount. I'm actually going to ask Bob to comment on this, because--

I think, Craig the big -- I think the big difference we're seeing and what we're now talking about in terms of the multiplier is driven by the level of MIMO that's being what we're hearing from customers in terms of what they're going to be deploying is more toward the 64 transceiver -- receiver level versus the speculation was that there may be 16x16 and more 32x32 going out. So, it's really the higher level of MIMO and the complexity and the material requirements associated with that are driving up the multiplier a bit. And the other aspect, I think that's been positive for us, that really only became evident in December is the spectrum allocation for China Mobile which was -- we're typically looking at 3.5 gigahertz, now a fair amount of spectrum at 2.6 gigahertz and just the physics of that spectrum increased the board size as a bit as well.

That's really helpful. Thanks for that, Bob. And then just a follow-up to that before I move onto ADAS. With regard to the higher content, can you express your comfort with your existing capacity situation through 2020? Is it sufficient in communication infrastructure, do you think you'll need to be adding given the step up in content that you're seeing?

Well, as we've talked about, we've -- we purchased the Price Road, Chandler, Arizona facility just for this purpose. And we are now repurposing the machinery over there to ensure that we have even on some of the upside estimates capability certainly 2019, 2020 through 2021 and as we move through the next year or so, we will be assessing that the amount of the ramping of 5G and then we'll add as we see fit. But I think that acquisition really has put us in a very strong position out at least two years to three years in terms of demand.

Clear. Yes, clear message. Thanks Bruce. And then the next question on revenue is ADAS. You correctly identified that issue is stemming from European regulatory issues last quarter. I wasn't clear if your sense is that that is fully resolved now or it were in intermediate stages and if it's the latter, when would you expect the inventory to have fully cleared in and for consumption to be matching demand back to you?

So, as we got through the final stages of the year, we started seeing ordering into January and February for ADAS and we now think we are back in balance, certainly on the inventory and the supply chain. And we believe we will be returning to those higher double-digit in the teens kind of growth rates in ADAS as we move through 2019. So, things are back in balance. Demand coming out of the situation in Germany seems to have righted itself. And so again, part of this, we have to remember is a penetration play, not necessarily just numbers of units that are getting produced. So, even if there is a slight downturn what have you in automotive numbers, the penetration play still continues for us.

Got it. And I don't want to neglect you, Mike before I go back in the queue. On gross margin, it sounds like what you're saying is that in the near-term, our gross margin expansion maybe a little less than the 50 basis points we talked about last quarter. But as you get mix benefits and is it correct to think that you think you could get some from 5G in the back half of the year, but then gross margins would potentially be expanding by 50 basis points per quarter or would it be better than that and we can still look at 50 basis points on average through the year? Thank you.

Yes. So, I think -- so just a couple of things. So, first of all, on the 30 basis points. I think we're happy to see that, right get it moving in the right direction, but the pace of the improvement however, is probably little slower than what we had planned. But we are, I think, making headway and as we talked about. And I think Bruce mentioned in his comments that the DSP -- the consolidation of the DSP into our Carol Stream facility should be completed in late Q2. So, I think we'll see again some pick up there. And again, the challenges in the PES business, the acceleration of demand for the EV/HEV continues to challenge our scaling and yield of new products. All that said, again, I think we feel good about the 30 basis points. But actually -- and I think even as we move into Q -- get through Q2 and into Q3, I think we'll see an acceleration of that such that we could actually see -- I think well in the next first quarter maybe and second quarter, I think will be limited to 30 basis points to 50 basis points of incremental improvement. But I think as we get into the third quarter, I would think just from the improvements in performance, we could see something in the 50 basis points. And then on top of that, we should get incremental benefit from the 5G as a result of, one, just a stronger standard margin on that, but also the utilization of the capacity that we put in place. So, I think as we get into the third quarter and fourth quarter, we should see improvements in gross margin that should be better than the 50 basis points.

Got it. Thank you.

[Operator Instructions] Your next question comes from Dan Moore with CJS Securities. Your line is open.

Yes, hi it's Pete Lukas for Dan. Can you talk about -- a little bit about the pipeline for M&A opportunities, our valuations more or less reasonable than perhaps 12 months ago. And what's your confidence level in executing on the M&A portion of the long-term growth plan over the next say 12 months?

So, as we've discussed, we have a very robust team in place looking at acquisitions across a number of different fronts. And it's hard to comment on when the execution will happen on some of these opportunities. Our assessment of multiples are pretty much where they've been over the last 12 months to 18 months. So, we don't see any real change there. But our teams are working and we really at this point, don't have anything that we can report publicly.

Got you. And then just in terms of Huawei. Can you frame for us how big a customer they are? And are you seeing orders accelerated all for them or their board shops in terms of building inventories from key suppliers like Rogers? And also what type of impact in terms of revenue and growth would you expect if they were to be cut out of most major markets other than China?

In terms of the size of Huawei, certainly a very important customer for our ECS business. But where the Corporation certainly less than 10% of revenue. We don't report specifically what our sales are to each customer. But as I said, it's an important customer. To answer the question regarding orders and moving forward, we see a lot -- we had a lot of dialog ongoing with a number of our customers, particularly folks in China and so there's a lot of, let's say, activity ongoing right now around ramping up, making sure that raw materials are available and that when the time comes, we are ready to execute against their needs. And to answer your question regarding the effect on the company, if things were cut off. I mean, that would be an effect, without a doubt and it is certainly something that the all suppliers would feel across the electronics world. So, we believe that from the standpoint of our position, that our technology is relatively unique and that we are able to supply our folks and we have been able to really differentiate ourselves. If someone like Huawei was not able to produce, we are qualified by all the major OEMs. So, that business if it went to another OEM, we would be able to get that.

Very helpful. Thanks. I'll jump back in the queue.

There are no further questions at this time. I will now turn the call back over to Bruce.

All right. Well, that was a short Q&A session. Again, I think we are well-positioned as we look through and toward 2019, our capacities are coming on stream, the demands are there, and we believe Rogers is well-positioned to take full advantage of the strong market indicators that we've talked about today. So, again, thank you for your attention and have a good day.

This concludes today's conference call. You may now disconnect.