Rogers Corporation (ROG) Q1 2019 Earnings Report, Transcript and Summary

Good day. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to your host, Mr. Steve Haymore, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Kelly. Good afternoon, everyone and welcome to the Rogers Corporation’s first quarter 2019 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 2. Before we begin, I would like to note that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in Rogers’ operations and environment. These uncertainties include economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements. 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 Investors 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, Steve. Good afternoon everyone and thank you for joining us for today’s call. Before we begin, I would like to welcome Steve Haymore to Rogers. Steve is our new Director of Investor Relations. So I am sure you will be getting to know him well. He has been here for just over a month and has already made a number of positive contributions to our quarterly earnings materials. Please turn to Slide 4. In the first quarter of 2019, Rogers achieved all-time record quarterly net sales of $240 million, an increase of 8% over Q4 2018. Rogers also delivered record quarterly adjusted earnings of $1.85 per share, an 11% increase over Q4 2018. Both net sales and adjusted EPS exceeded our previously announced guidance range. These strong results were driven by the emergence of meaningful demand for 5G wireless infrastructure applications in China as well as in Korea. The industry has been anticipating the advent of 5G for several quarters and it is now beginning to ramp. This is an exciting development for Rogers as we are extremely well-positioned to capitalize on this growth. In addition, the demand outlook for 4G wireless infrastructure applications continues to be solid adding to the overall strength of our advanced connectivity solutions business in Q1. Also contributing to the quarter were demand tailwinds in advanced mobility applications. This included a return to growth for Advanced Driver Assistance Systems or ADAS applications as well as strong demand for EV/HEV applications, specifically power semiconductor substrates and battery pad materials. Even with these great results, we have room for improvement. Gross margin was slightly above the midpoint of our guidance range at 35.6%, an increase of 40 basis points over Q4 2018. Gross margins were negatively impacted by the PES ceramic business. Over the past 18 months, the PES business has experienced a significant acceleration in demand for its semiconductor substrate solutions used in the EV/HEV automotive sector. As this business has developed, more stringent performance requirements have been demanded by our customers. These requirements impacted product yields and have increased overall costs, thus negatively affecting margins. We are aggressively tackling the root causes of our yield issues. In addition, price actions are underway to address our increased costs. Unfortunately, the execution of our recovery plans has been more time consuming and has presented greater complexity than our original estimates. Rogers is committed to being a leader in this market. The EV/HEV market provides us with a tremendous opportunity for growth and value creation over the next decade. Our technology has positioned us well to secure the leadership position in this area and we are making the necessary investments to assure our long-term success as we move forward. For the quarter, we were pleased with our record revenue and earnings performance and highly encouraged by the tailwinds in many of our key markets. Turning to Slide 5, we are optimistic about the increasing demand for 5G wireless infrastructure applications that is driving growth in advanced connectivity. Our newly developed products, specifically engineered to enhance 5G performance particularly in massive MIMO antenna systems have received an enthusiastic response from our customers. Market indicators support the previously mentioned mobile experts’ view that 5G base station shipments in 2019 are expected to be strong and could exceed 200,000 units. This outlook is supported by the announced CapEx plans of the top 3 Chinese telecom operators as well as the widely reported 5G deployments expected by a leading Chinese telecom equipment maker. Demand remains stable for 4Q equipment, following the Q4 2018 announcement that a leading China service provider was going out to bid for 416,000 4G base stations. We saw the positive impact of this development during Q1 and expect this trend to continue for the remainder of the year. Adding to the good news for Rogers regarding the strong demand growth in our advanced connectivity markets, the growth outlook remains robust for advanced mobility applications. We continue to work closely with a broad range of customers to support current demand and develop products that will enable the performance of emerging technologies. We are seeing substantial opportunities in areas that include the next generation of 77 gigahertz ADAS radar as well as advanced performance silicon nitride substrates for EV power modules. The industry outlook in EV/HEV indicates steady year-over-year growth at a 28% compounded annual growth through 2023 as automakers strive to meet their goals of introducing a significant number of these models in the next several years. As the auto industry moves towards EV/HEV and x-by-wire systems, the opportunity for Rogers expands through both increased market penetration and higher content per vehicle. Looking at the ADAS market, automakers have essentially worked through the new emissions protocol in Europe. Demand is being somewhat tempered by a weakening global automotive market. However, market penetration of ADAS systems is still progressing well. As the market moves towards higher levels of autonomy, transitioning from 24 gigahertz to 77 gigahertz radar sensors, Rogers is uniquely positioned to meet these higher performance requirements. Furthermore, safety features continued to proliferate across mass-market models. Given these conditions, we expect to maintain our market share and deliver ADAS growth in double-digits for the next year. Please turn to Slide 6. In Q1, 2019, ACS net sales were $81 million, an increase of 11% over Q4 2018. These results were driven primarily by demand for 5G and 4G wireless infrastructure and ADAS applications. As mentioned in the previous slides, we anticipate substantial growth in 5G revenues as China deployments ramped throughout 2019 and into 2020. In addition, we expect 4G to maintain its current pace through 2019. We also expect to see steady growth in demand for ADAS applications for the balance of the year. Over the last 2 years, we have significantly increased ACS capacity positioning us well to meet current demand. In addition, we have invested in multi-site qualifications and addressed several production bottlenecks to improve efficiency in the ACS operations. Given the optimistic outlook in ACS, we are adding substantially more capacity in 2019 and 2020 to meet this projected demand for advanced materials in our key market of 5G and ADAS. Turning to Slide 7, PES achieved net sales of $60 million in Q1 2019, an increase of 5% over Q4 2018. The sequential improvement in PES results was due to demand for applications for EV/HEV and renewable energy. As previously discussed, market tailwinds in EV/HEV are favorable. The PES business has experienced excellent market acceptance and tremendous growth for its new generation silicon nitride materials for wide-band gap semiconductor packaging. As I mentioned, we have comprehensive actions ongoing to address our commercial and operational issues and we are continuing to execute on our capacity expansion projects to position the PES business to take advantage of these great market opportunities. Please turn to Slide 8. In Q1 2019, EMS delivered net sales of $93 million, an increase of 5% over Q4 2018. Results were driven by double-digit growth in EV/HEV and mass transit applications. The business also benefited from solid sequential growth in the general industrial market. EMS continues to gain significant design wins in battery pad applications and is expanding its product portfolio. One example of this is the new PORON EV extend material, which enables enhanced lithium-ion battery life. For the balance of the year, we expect solid growth in general industrial and portable electronics with higher growth in EV/HEV applications as this market expands globally. Turning to Slide 9, the four pillars of our proven growth strategy continue to serve as the roadmap to our long-term goals. Our market-driven innovation focus on the high growth markets of advanced mobility and advanced connectivity have contributed to significant top line growth opportunities. Our innovation pipeline is robust and is supporting a significant growth in these markets. We are securing design wins and current applications and in our customers’ next-generation products. As we have discussed, we expect to see continued growth in these areas as we progress through 2019 and beyond. As we optimize our acquisitions in the EMS business, we will continue to look for synergistic M&A opportunities to augment our organic growth and expand our current capabilities. As detailed previously, we are addressing challenges in the PES business to drive operational excellence and margin improvement. Overall, we are pleased with our results in Q1 our focus on growth markets and our ability to innovate solutions in these areas is enabling Rogers to grow substantially. As we move ahead, we will continue to invest in capacity expansion and innovation in our key growth drivers of advanced mobility and advanced connectivity to take advantage of the significant opportunities that lie ahead. Now, I will turn it over to Mike to report on our Q1 results in greater detail. Mike?

Thank you, Bruce and good afternoon everyone. In the slides ahead, I will review our first quarter 2019 results followed by our second quarter guidance. Turning to Slide 11, we will preview the financial results for Q1 2019. First quarter revenues as previously noted were $239.8 million significantly above the high-end of our Q1 guidance range of $220 million to $230 million. Higher than expected 4G revenues along with the commencement of meaningful 5G revenues in the back half of the quarter and expected recovery of ADAS revenues and continued strength in EV/HEV revenues all contributed to an 8% sequential revenue increase compared to Q4 2018. Higher revenues at an improved portfolio mix contributed to our gross margin in the first quarter of 35.6% just above the midpoint of our guidance of 35% to 36%. I will add additional commentary on gross margin later in my presentation. Adjusted operating income for Q1 2019 was $41 million or 17.1% of revenues compared to $35.6 million or 16% of revenues for Q4 2018. Adjusted operating expenses increased $1.6 million in the quarter due to performance-based expenses consistent with improved results. GAAP EPS of $1.52 per fully diluted share and adjusted EPS of $1.85 per fully diluted share for Q1 2019 were both well above the upper end of our guidance for Q1 and measurably higher than the comparable fourth quarter fully diluted EPS metrics. The significant beat on the diluted EPS metrics both on a GAAP and an adjusted basis resulted primarily from significantly higher revenues, good expense control and a lower than forecasted effective tax rate for the first quarter due mainly to discrete tax benefits realized in the quarter. I will cover the first quarter 2019 effective tax rate in my subsequent commentary. Turning to Slide 12, our Q1 2019 revenues increased $16.9 million or 8% versus fourth quarter of 2018. The sequential increase was experienced across all business segments with our ACS revenues growing 11% and our PES and EMS revenues each growing 5%. The increase in ACS revenues resulted primarily from strong wireless infrastructure application revenues as 4G revenues grew slightly compared to Q4 reversing a multi-quarter negative trend and 5G’s revenues increased meaningfully in the back end of the first quarter both driven mainly by installations in China. Revenues from ADAS applications were also strong in the first quarter recovering as expected from a weak second half of 2018 as both inventory and emission standard challenges in Europe have been addressed. The sequential increase in PES revenues was primarily due to continued higher demand for power semiconductor substrates EV/HEV applications as well as increased demand for renewable energy applications despite continuing challenges to add capacity and ramp new products to keep pace with the market acceleration. We expect to bring added capacity online beginning in Q2 and throughout the reminder of 2019 to address the increased demand. Revenues in our EMS segment increased sequentially due to strong demand in automotive and mass transit applications and growth in general industrial applications. Currency exchange rates favorably impacted 2019 first quarter revenues by $0.2 million compared to Q4 2018. Turning to Slide 13, our gross margin for Q1 2019 was $85.4 million or 35.6% of revenues, 40 basis points higher than our fourth quarter gross margin of 35.2%. The increase in the gross margin percentage was due to better factory utilization from higher production levels and all businesses in a favorable portfolio mix, particularly with higher ACS revenues. Improvement in performance-driven cost reductions in ACS business were offset by continued challenges in both our EMS and PES businesses. We communicated in our Q4 earnings call that we would be working through the EMS consolidation and optimization opportunities through the first half of 2019. We made progress on the EMS opportunities in the later part of Q1 and expect to be essentially through these issues as we exit Q2. As Bruce mentioned, the progress in gross margin improvement in our PES ceramic business is taking longer than anticipated as we continued to address commercial and operational issues related mainly to our new silicon nitride wide-band gap semiconductor products. We saw margin decrement to the PES business in Q1 2019 compared to Q4 2018 and expect to further decrement in the second quarter as the demand for and volume production of our new product continues to grow. We will see progress in the PES gross margin through the second half of 2019 as we execute on the recovery plan. The headwinds on company gross margin from performance issues, mainly from EMS and PES business segments continue to be approximately 175 basis points showing slight improvement from the approximately 200 basis point performance drag initially discussed in our Q3 2018 earnings call. Even with these headwinds, we are able to improve our gross margin 40 basis points in the first quarter. We expect to generate gross margin sequential improvements of 50 basis points commencing in the third quarter as the majority of the EMS consolidation and optimization opportunities will be completed and we begin to see benefits from the PES recovery plan. The path to significantly higher gross margin after the EMS and PES performance improvements is through the leverage of increased volume in all businesses, especially the higher profitability advanced connectivity revenues, which commenced in Q1. We did not make any incremental strategic investments that wait on the gross margin in the first quarter and believe we are in good shape to execute on the anticipated 5G ramp in 2019 and 2020. Slide 14 details the changes in adjusted net income from Q1 2019 of $34.6 million compared to adjusted net income for Q4 2018 of $31.2 million. The adjusted operating income for Q1 2019 of $41 million or 17.1% of revenues with $5.4 million and a 110 basis points higher than Q4 2018 adjusted operating income. Adjusted operating expenses for Q1 of $44.4 million or 18.5% of revenues were $1.6 million higher than Q4 adjusted operating expenses of $42.8 million or 19.2% of revenues. The higher expenses resulted from increased SG&A performance-based expenses resulting from a strong first quarter. Other income expense for Q1 was favorable compared to Q4 2018 as a result of benefits from currency and commodity hedging activities. Lastly, our effective tax rate for Q1 2019 was 14.2% compared to our Q4 effective tax rate of 3.6%. The fourth quarter 2018 effective tax rate incorporate the annual impact of tax planning strategies implemented in foreign jurisdictions in the fourth quarter. The first quarter 2019 effective tax rate is measurably lower than the expected effective tax rate of 27% to 28% due to the forecasted change in the geographic mix of pre-tax income as well as favorable discrete tax items in the quarter. Going forward, we expect the effective tax rate to be between 25% and 26%, excluding the impact of discrete tax items. Turning to Slide 15, we ended the first quarter 2019 with a cash position of $162.1 million, a decrease of $5.6 million from December 31, 2018. In Q1, the company spent $12.6 million on capital expenditures. In addition, the company paid down $5 million of debt. The company generated $17.1 million from operating activities net of an increase in working capital of $25.1 million primarily from the increase in accounts receivable due to both strong revenues and the timing of revenues in the first quarter. Taking a look at our Q2 2019 guidance on Slide 16, revenues from advanced connectivity are expected to increase in Q2 resulting primarily from the ramp of 5G applications. Therefore, revenues for Q2 are estimated to be in the range of $240 million to $250 million. The expected gross margin benefit from the improved portfolio mix we expect to be offset by the continued gross margin challenges discussed earlier. As a result, we are guiding gross margin in the range of 35% to 36% for Q2 consistent with our Q1 gross margin. We guide GAAP EPS for Q2 in the range of $1.16 to $1.31 per diluted share. On an adjusted basis, we guide fully diluted earnings in the range of $1.47 to $1.62 per diluted share. We continue to guide capital spending for the year in the range of $50 million to $60 million as we continue to add capacity for increasing demand for products serving 5G and EV/HEV applications. I will now turn the call back over to Bruce.

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

[Operator Instructions] Your first question comes from the line of Daniel Moore from CJS Securities. Please go ahead. Your line is open.

Good morning, Bruce. Good morning, Mike. Good afternoon I should say my third call today. So I apologize. Congrats obviously on a really nice quarter, great to see the revenue coming through in the uplift, particularly on ACS. And I appreciate the color on gross margin I guess number one digging in a little or pulling on that string, are you seeing the incremental margins that you would expect specifically in ACS on the gross margin side? And number two, you gave good color, but if you could drill down a little bit more, I think you said in total EMS and PES as 75 basis point sort of headwind to margin right now, just maybe give us a little bit more color on that challenges that you are seeing in the roadmap to get back to where a more sort of normalized margin might be and a quick follow-up? I know that’s a lot.

Sure, Dan. So on the ACS yes, we are seeing the incremental margins that we expected to see from the ACS business, that’s strong. So I think from that perspective, we feel good about that and in fact that will be a significant part of margin expansion as we move forward once we address our EMS and PES headwinds as we talked about. So your question on EMS and PES, so as we talked about previously, in the EMS side, we have from the acquisitions that we have both consolidation as we move our production from Santa Fe Springs intro Carol Stream. That’s one area where we have had some challenges, but again getting through those and then optimization of the structure as we put the – and integrate the acquisitions into our EMS business. So as we talked about maybe larger challenges in Q3 and Q4, we have seen some – we have seen some progress late in Q1 and again expect to be through these issues primarily as we get through Q2. On the PES side, so you listened to Bruce’s commentary the main issue there, again tend to be around the ramp of our products, new products addressing the wideband gap semiconductor applications, silicon nitride materials. And again, we are struggling or have struggled with yield, labor issues associated with that and then also freight issues associated with some on-time delivery as a result of challenges on capacity and yield there. And again, I think that’s going to take us through the second half of the year to make some meaningful progress there. So if I look at the 175 basis points that we talked about with respect to the drag on margin, I would say, as we go into Q3 and the 50 basis points improvements that we believe will see with respect to that, I believe that the majority of that improvement will be from EMS again as we have worked through the majority of those issues in the second quarter. I think we will see slight improvement in PES, but then as we get into the fourth quarter in the first quarter, I think we will see much more significant improvements from PES in order to drive those 50 basis points improvements in both Q4 and then probably into Q1 as well. So, I think that’s how I would look at that.

Got it. And some of the pricing initiatives that Bruce alluded to, is that along those that – that sort of follow the same timeline as well?

Yes, hi, Dan. This is Bruce. The ongoing price work with customers and because of contracts and so forth, this will stretch out through the rest of the year. So, it’s not an immediate move, but as we move through contracts and as we move towards the tail end of the year, we should see a lot of this moving forward into those marketplace. So, it’s a combination of our work on pricing as well as our work on the operational side to move our gross margins up in the PES business.

Got it. Shifting gears on the tax strategies, again, it continued to drive down tax rates maybe just talk a little bit about the strategies employed, and this is nitpicking, but do you expect 25%, 26% for the next three quarters or do you expect 25%, 26% to report for the full year which would imply a higher tax rate for the remaining three quarters?

Yes. So again, I think we look at several tax strategies in terms of sort of ownership of different structures, which will give us some beneficial results with respect to kind of where we generate our pre-tax income. So, that’s all I want to say there, but certainly as it looks for the next three quarters, we expect that the next three quarters will be 25% to 26%. So, that would imply for the year something would be less than that, obviously, because the first quarter coming in at 14.2%.

Perfect. And then lastly and I’ll jump back and hand it over. But free cash flow conversion, just talk about, obviously, you’ve built inventories, had a very expected ramp. Do we continue to build capacity, do we expect that to be continued use of cash or do we – does it turn to – inventories turn to more of a source of cash in the coming quarters? Thanks again.

Yes, so on that, Dan, interestingly enough, when we look at the first quarter again, generated $17.1 million from operating activities, which included an increase in working capital of $25 million, the majority of that $25 million actually happened to be from accounts receivable and we didn’t have that much of a build-up in inventories. And in fact, if you look at what we did a year ago in 2018, we had a significant build in, in inventories and we expect to actually work that down in 2019 even with the expected increase in the 5G ramp.

Very helpful. Thank you, again, congrats on a nice quarter.

Thanks, Dan.

Your next question comes from the line of Craig Ellis from B. Riley FBR. Please go ahead. Your line is open.

Thanks for taking the question and guys congratulations on record financial performance in what’s a pretty difficult environment out there, albeit one that has some nice secular research in your business. I just wanted to start by clarifying further one of the lines of inquiry from a little earlier. On gross margin, Mike, you were very, very detailed on what you see happening with PES going forward and thanks for that. But what’s the underlying assumption on the ACS business, clearly, you’re seeing a significant 5G volume ramp starting to form and that should be good for volumes there and I would expect for gross margin, but you’re also ramping significant new capacity. So, can you just walk us through some of the puts and takes with gross margins for that segment as we look out over the next 3 to 5 quarters?

Yes, I think all of that’s going to be very, very positive for us, Craig, right. So, we’ve got two things going on. So, we’ve got, in general, that part of the business has higher margin products. So, I think we’ll see those tailwinds. But again, as you mentioned, we’re also going to see the tailwinds associated with better factory utilization and the capacity that we spend money to put in place in 2018 – and we’ll continue to do that in 2019, again, because we see the ramp as very, very significant for us both in 2019 and 2020. So, without getting into the specifics per se, I think it’s just mostly a tailwinds as it as it relates to the ACS business both from a profitability standpoint in terms of just general profitability, but also in terms of factory utilization, both should be again incremental, incremental benefits to the 50 basis points that we talked about with respect to performance improvement, so it’s on top of the EMS and PES.

That’s helpful. Thank you. The next question is for Bruce. Bruce, appreciate the comments on 5G and the ramp that’s starting and it’s underway. Can you help us with some further color on the indications you’re getting from your customers as to how 5G’s base station ramps will play out this year from a linearity standpoint, not looking for quarterly guidance, I know you guys wouldn’t give that, but can you give us some sense for the pacing of the builds that customers are talking about as they look at 5G?

Hi, Craig. Thanks. Thanks for the question. So, what we’re hearing from our customers and this is essentially in China, the 200 to 300 base stations, we’re seeing relatively strong demand or we saw relatively strong demand at the tail – towards the end of Q1 progression – progressing into Q2. And we believe that this will remain relatively stable through pretty much the rest of the year because what we’re hearing is, there’s a potential to go to about 300 base stations, 200 had been targeted and we think that, that should play out through the rest of the year. So, we think it should be relatively stable in terms of month-to-month demands.

And then looking a little bit longer term, I think you mentioned or referred to some of the forecasts that are out there from some of the larger equipment manufacturers. If we start to move into mass adoption or mass commercialization next year from trial city [ph] deployments this year, when would you start to get the indications for those builds and when would those orders start to come into Rogers?

We would think towards the end of the year, fourth quarter, we would start getting notifications and probably do some building there and then moving into the new year. Our sense is that things will ramp substantially moving into 2020 on the base stations.

Okay. And then…

That’s what, I’m sorry, that’s what the consultants that cover this space are basically indicating and that’s being referred to also by some of the equipment folks.

And I think some of the industry observers are conveying the same thing to back that up. More of a technical question, Bob, and this is just looking laterally across what we hear some of the other companies saying. So, a company reported this morning that said their view on base stations and they’re broadly exposed just said at least for ‘19 and ‘20, a majority of the 5G base stations would be 6-gigahertz moving to millimeter wave in ‘21 and ‘22. If that were to play out and to the extent that, that might be indicative of Rogers, are there any average content implications there? And as we get started on initial deployments, is it fair to think that content in these early innings is that up $3 to $5, and if we can be any more precise in that, that would be helpful?

Yes. So, I think, yes, I think that’s an important distinction, Craig. So, I think if you talk about sub 6-gigahertz and most of the activity that we’re seeing today, the large volumes out of China would be sub 6-gigahertz. And when they tell numbers of 200,000 to 300,000 base stations this year and 600,000, for some cases a little bit higher than that for next year, those are typically referring to sub 6-gigahertz. And your characterization that, that typically translates into 3 to 5 times the material opportunity for us that’s accurate. On top of that, you have what’s referred to the millimeter wave, which is gives you the much higher bandwidth, but in very small areas, those are complementary. I don’t – you basically are adding that on top of your basic 5G network or in the case of North America, frankly, most of the millimeter wave activity is really fixed wireless, it’s not the basic 5G mobile network. The content there tends to be – tends – it’s a smaller opportunity generally, but it is additive to what we’re talking about in the sub 6-gigahertz application.

That’s helpful. Thank you. And then the last one for me before I jump back in the queue. Quite a bit of discussion on the EV and HEV opportunities benefiting numerous segments, we’ve seen very strong recent numbers out of China, but I suspect the benefits could be more broadly, can you just touch geographically about where you’re seeing strength in those businesses and to the extent that there’s any color on either content or divergent growth rates geographically, that would be helpful too? Thanks, guys.

I’ll ask Bob to take that.

Yes. So, our activity on the two areas where we have the most exposure in EV/HEV are again in the power semiconductor, in PES, we’ve got power semiconductor packages. We also have power distribution with our Rolling Smith [ph] products. And in the case of EMS, it’s the battery pads. Probably the broadest exposure for us would be in both the battery pads, which are global applications and we’ve seen very solid double-digit growth in all three regions for the battery pad materials. In the case of our power semiconductor substrates, it’s a little bit harder to track, Craig, because we’re selling to all – basically all the major power semi guys who then sell their modules into the various regions. But the sense we have from the activity we’re seeing is it is in fact global that we’re – it’s not being driven specifically by one particular region.

Got it. Thank you, Bob.

And – oh, just to cover content, I think it’s also important to note and I – we’ve said this in previous calls that one of the tailwinds we’re seeing and one of the big growth drivers, you’ve got the penetration story on EV, but it’s also the degree of electrification has a significant impact on the magnitude of our opportunity. We have a much larger opportunity in a full battery electric vehicle than in a mild hybrid or and plugin that’s somewhere in between. So, the dynamic is such that as you see the numbers of vehicles that are being produced with electric powertrains increase, the numbers are in the neighborhood of 28% to 30%. We’re also seeing a shift to higher degrees of electrification in the mix, which also helps give us a nice tailwind in that area.

Got it. Thank you.

Thanks, Craig.

[Operator Instructions] Your next question comes from the line of Craig Ellis from B. Riley FBR. Please go ahead. Your line is open.

Thank you. As long as there’s an opportunity, I’ll jump in with one more. Mike, turning back to the income statement, clearly, there is a number of things going on that are – that are significant opportunities for Rogers. Beyond the calendar second quarter, can you just speak to the general direction of OpEx as we look at over 2019 and the degree to which you feel like current OpEx or further investment is needed to fund the opportunities that, that you all see? Thank you.

Sure.

Yes, so our adjusted operating expenses were 18.5% of – 18.5% of revenues in Q1. So that was better than they were in Q4, which was 19.2%. I think going forward I would expect them to be in the range – you have timing issues that go on in particular that may be specific to any quarter. Going forward though, I would expect them to be in the range of 18.5% to 19.5% of revenues for any particular quarter with R&D expenses being anywhere in the 3% to 4% range. And so at this point in time, we’ll continue to fund our R&D to the extent that we have – that we feel like we have good opportunities out there to exploit and at this point in time, as you’ve heard from Bruce, I think we do have some really nice opportunities. But I still believe that in the 3% to 4% range will be sufficient in order to bring those to fruition. So, again, I think 18.5% to 19.5% I think makes sense on a go-forward basis.

Thanks for that. Mike, I’ll ask one last question and it’s a topical question that’s come up in some other sectors related to 5G, there’s been some concern that some of the OEMs and different players are stocking inventory? To what extent, is that something that you have concerns about and what procedures do you have in place to really preclude excess inventory building any part of the supply chain with these types of things?

Well, this is Bruce. We obviously are working very closely with our customers and responding to their needs. And our understanding is there could be some build in the supply chain, but I think we also – the other side of it is that demand is there and so it’s getting depleted. I think there was an initial start that now we’ve built up a reasonable level in the supply chain of supply and I think as we move through the rest of the year, as I mentioned, our belief is that it should be relatively even demand given the start that we’ve seen here.

Thanks, Bruce.

And there are no further questions at this time. I will now turn the call back to Bruce Hoechner for closing comments.

Thank you. Thanks everyone for joining us on today’s call. Have a great afternoon.

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