Good day. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Second Quarter 2019 Earnings Call. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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, Jason. Good afternoon, everyone and welcome to the Rogers Corporation’s second 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 on today’s call. Please turn to Slide 4. Rogers delivered strong Q2 results achieving record quarterly net sales of $243 million and adjusted earnings of $1.64 per share which exceeded the top of our guidance range. The results for the quarter were driven primarily by demand for 5G wireless infrastructure applications. As we indicated on our last earnings call, meaningful 5G emerged in Q1 and orders accelerated into Q2. Solid demand for 4G wireless infrastructure and growth in portable electronics also contributed to the strong quarter for advanced connectivity applications. Advanced mobility applications specifically Advanced Driver Assistance Systems or ADAS and EV/HEV battery pads also helped to drive our Q2 performance. Following a return to growth in Q1, ADAS market demand remained strong in Q2 and grew for a second consecutive quarter. The uncertainty that follow the restrictions on sales to faraway had some impact on the quarter. We had a short interruption to ensure compliance with the U.S. rules before resuming shipments to our direct fabricator customers. However, as I’ll discuss later, the collateral affects of these restrictions and the ongoing trade tensions are creating uncertainty in our outlook for the second half of the year. In addition, our Q2 results were tempered by weakness in general industrial and conventional automotive markets, which correlates with a number of recent reports pointing to declines in these sectors in Europe, China and other regions. High tariff costs which as Mike will discuss later affected gross margins and operational challenges in our PES business which I’ll discuss in more detail shortly. Despite these near term challenges, we remain very confident and the opportunities for Rogers in the advanced mobility and advanced connectivity markets. We’ve aggressively cultivated a leading position in these…

Thank you, Bruce and good afternoon everyone. In the slides ahead, I'll review our second quarter 2019 results followed by our third quarter guidance. Turning to Slide 11, we will review the financial results for Q2, 2019. Second quarter revenues as previously noted were $242.9 million within our Q2 guidance range of $240 million to $250 million. Q2 revenues increased slightly on a sequential basis, but increased 13% over the second quarter 2018. The wireless infrastructure market for both 4G and 5G applications along with ADAS, portable electronics and mass transit markets were strong contributors to the sequential revenue increase. The company experienced weaker demand and lower revenues primarily from power semiconductor substrates for general industrial applications as well as conventional vehicle electrification applications. While we were able to achieve a gross margin of 35.3% within our guidance range of 35% to 36%, our continued execution challenges and PES exacerbated by lower volumes in the PES business offset significant improvement in ACS gross margin and improved gross margin performance in our EMS segment. The company's gross margin was also measurably impacted in the quarter by the increased tariffs resulting from an escalation of the trade tensions between the U.S. and China. Adjusted operating income for Q2, 2019 was $41.7 million or 17.2% of revenues compared to $41 million or 17.1% of revenues for Q1, 2019. Adjusted operating expenses decreased by $0.3 million in the second quarter compared to the first quarter. GAAP EPS of $1.30 per fully diluted share and adjusted EPS of $1.64 per fully diluted share for Q2, 2019 were at and above respectively the upper end of our guidance range for Q2, but below Q1 levels. The strong earnings performance both on a GAAP and an adjusted basis resulted primarily from good expense control and a slightly…

Thanks Mike. In summary, we achieved strong results in the second quarter despite trade related uncertainties, market headwinds and operational challenges which we are focused on improving. The outlook for advanced connectivity and advanced mobility market, opportunity is strong and we are well-positioned to take advantage of these growth areas. 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 Patrick Ho from Stifel. Your line is open.

Thank you very much. Maybe first off, in terms of your ACS business and the comment you made about both the 5G and the 4G deployment that we are seeing today. You’re still seeing good strength in the 4G side of thing. Two-part question there, is how sustainable do you believe that is? And secondly, given some of the issues with the Huawei ban in the U.S. does that have any impact related to the 4G business?

So, hi Patrick, it's Bruce. With regard to 4G, what we are seeing is, we had a good first half with 4G. We believe that as the focus turns towards 5G that will be perhaps less sales into the 4G area, less build-out as the operators and as the OEMs move towards the 5G side. And I would say, with regard to the situation that I outlined with Huawei, I think the reason as we look forward, we have some unknowns. The ability of Huawei to get all the components that they need to build-out the 5G base station is still up in the air. Now there is obviously talk that they build inventory over time, but we will see how that plays out as we move through the second part of the year. As I mentioned in my prepared remarks, we also saw, certainly in the beginning year of Q3, continued strength in 5G demand for our material. So again, it's just the cloudiness as we move through the quarter and into Q4 that with regard to ability of Huawei to continue that's a question for us.

Great that's really helpful. And maybe as my follow-up question on the PES business, you talked about the vehicle electrification still being somewhat soft on the demand side of things. I guess from a big picture perspective, can you give a little color on what you believe the catalyst or the inflection that's needed to I guess, spark that market segment and then obviously in turn drive your PES business?

So yes, thanks for the question. On the x-by-wire or vehicle electrification, again this is internal combustion engine automobiles going to stop/start and so forth, as well as the other systems, air conditioning and so forth going to electrical motors. The situation is really related to the numbers of vehicles being produced and particularly the higher end models. And so, there has been, when you look at the data from China, when you look at the production data of automotive output in Europe, there is a decline there and that's what we believe this is related to that it's really the number of units being produced of the internal combustion engines with the x-by-wire capability generally higher end models and that's what we are seeing stuffer on the volume side. So when we see a return there in terms of sales growth of internal combustion engines at the higher end, we should see this pick back up.

And maybe final question from me in terms of, kind of the management of your different facilities and the different businesses to help the gross margin profile that's been key initiative for you. Can you just, I guess, give a little color on how you adjust both the manufacturing changes within the businesses themselves where it's strong in one area, weaker in another, how you can adjust some of the manufacturing capacity, but also on the supply chain to help boost up gross margins over the long term?

So there is a number of initiatives underway. First of all, we are really pleased with the performance of ACS. If you recall, if you go back probably six quarters or so, we had some operating issues there. We focused on them. We’ve improved substantially in that business and we’ve carried that model forward into the EMS business where we also saw some very good performance in the quarter, in Q2 on the operating side as we continue to integrate into the EMS business where we also saw some very good performance in the quarter in Q2 on the operating side as we continue to integrate the acquisitions that we made over the last couple of years. So, the two businesses, ACS, EMS, we're seeing our plans have been executed well and we're seeing those results. The PES business which is I would say more complex from a processing perspective has had some struggles as we've outlined over the last couple of quarters. We decided to make a change in operations leadership there and with some bringing some experienced people from the outside and we think we'll see some good results as Mike pointed out, it'll take us through the end of the year to see some of that come to provision but we have there's plans in place and we believe the execution should go good should go well.

On the supply side, Patrick, I think there are a couple of thing that we continue to focus on. So, reformulation of materials that we use within our products. We are continuing to look for reformulations that lower our cost and I think we've made some good progress here early in the year. I think we'll have better progress as we move throughout the year. So, that's certainly one. And then, in terms of trying to address, not trying but in terms of addressing tariffs, again we're looking at supply chain and supply chains on in different geographies that we can utilize that will again mitigate impacts of tariffs should those continue to be significant and ethical and the trade tensions let's say not resolve themselves favorably.

Great, thanks a lot guys.

Thanks, Patrick.

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

Yes, thanks for taking the questions and guys congratulations on the strong revenue performance in ACS in the quarter. The first question is really a clarification. What I wanted to do was understand some of the comments Bruce that you had when you talked about guidance; I think at least once maybe twice. You talked about the third quarter outlook being cautious and Mike you yourself noted that you were factoring in the potential for an impact from macro issues. The question is are because the guidance said based on trends you're seeing in the order book or have you taken the order book and based on concerns you have based on whatever's going on with trade or at the macro level, have you made an extra allowance for some of the things that would cause you to be conservative. Just trying to get a better sense of how you're looking at the outlook this particular quarter.

Yes. I think there's little bit of one in the same, right. I think some of the things that we're seeing in the macro certainly have our impact in the order book and as a result of that I think we're again being somewhat cautious in terms of and believe that some of those trends will continue at least for some short period of time. Certainly through the third quarter, we'll see how they shape out end of the third quarter and end of the fourth quarter. So, I think Craig, it's what we're seeing it and in the order book and I think it again reflective of what we're hearing and what we're seeing in the general map or picture.

Yes. Craig, I would say a lot of it is related to the macro situation, right. We talked about general industrial being down particularly capital equipment as it's related to our variable frequency drive substrates. But also even hands there, so right if you look at portable electronics, it's relatively flat to down. We've had some very good wins in that area. Q2 we had some introduction in new models that helped EMS boost their sales in that area. So, we're just looking really at the macro side of it, macroeconomic side and saying there is some headwinds here for us. I'll flip it over though and make another comment. Where we're seeing strength continuing is EV/HEV as I mentioned the orders for 5G early in the quarter looked good. So, in our focus markets we're seeing a strength that we had hoped for.

Great, that's helpful. So, moving on to the first question. Bruce, you noted that there was a consultancy that identified that potentially in China there is demand for 800,000 base stations in 2019 and 2020. My question is, do you speak with your customers and OEMs that are out there. What's your sense for 5G base station demand in 2019 and 2020 and how is the team approaching capacity planning for the back half of this year and next year as you're working with your various customer consistencies on their build plans?

So, the consultants and contact obviously with OEMs, we're looking at approximately 200,000 base stations in 2019, 600 going forward in 2020. From a capacity perspective, we think we're in good shape as this ramps. For the last couple of years, we've added about 30% additional capacity into the ACS business between primarily between the presses and debottlenecking of the treaters. We're bringing on another treater coming out in at the end of the year early next year in 2020 as part of the acquisition of our price real deal. I saw the factory as that gets converted. So, we think we're in very good shape, very good position on the capacity side of things and it certainly matches up with the data that we're getting from the marketplace on base stations.

I think to add to that, Craig, is even though again as we've talked about some of these uncertainties in terms of how they impact the back half of the year. We are still planning for again the 800,000 between the two years a 600,000+ next year. And so we have not slowed down despite the uncertainly we have not slowed down our capacity adds particularly let's say relates to the solar plant that we had acquired in the back half of 2018.

And is there any visibility that you have on that 600,000 per next year. Mike, when do you expect to hit the inflection because on quarterly basis there is clearly a very steep ramp coming at some point, do you have visibility into that yet?

No, I don’t think we have that visibility, Craig.

Okay. Next question both you and Bruce, address some of the issues that are occurring in PES that relate to gross margins. My question is this, so we've been executing on operational and the yield improvements in PES and it's proven elusive thus far although there have been some exhausting challenges but can you just recap what gives you confidence that those will be resolved in the next quarter too. And as you think about that path to the 39% gross margin 20% operating margin that you mentioned, Mike. Is that a fairly linear path from here or is it backend loaded and what are some of the bigger dependencies between here now.

Yes. So, I would say again you're right, Craig, on your initial observation, right, the improvements have been elusive so far. We believe though in the last quarter too we develop the right recovery plan as Bruce had mentioned we are frustrated in some respects by the pace of which that is moving and so we have made organizational changes that we think will again increase the probability of success and increase the speed of success around that plan. So, I think from that perspective that gives us significantly more confidence than maybe as we started the quarter and prior to making those changes. So, I don’t want to underestimate the impact of the changes that we made there. I think they're fairly significant. And then, as I laid out what needs to happen to get to the 39%, I think again we talked about 50 basis points improvement, in the last call we talked about 50 basis point improvements from the performance improvement at both the ES and EMS that we are seeing that in EMS and I think they're on plan. PES is going to have a couple of things. So, PES will have to get back on track, we just talked about that. The volumes' going to have to pick back up and PES is well because I think volume will play an important part. And then, I think it depends on again the acceleration of the 5G and as we said we really don’t have necessarily great visibility into how that 600,000 units is going to play out. So, I don’t believe that it's linear from here, let me say that. I still think it probably becomes accelerated in the first half of 2020 and again continues to pick up in the back half of 2020.

That's helpful. And then lastly, Bruce, just summarizing the situation is I think I'm hearing it from you with your automotive exposure across the three segments. It sounds like or you got internal combustion engine exposure. It's just the unit headwinds that we're seeing globally in the different markets and some of that reporting there and sort have been I think very well recognized by most investors. But it sounds like underneath that where you've got your EV/HEV exposure, those trends seem to be solved be on track. Is that a fair breakdown of what's going on out there?

Yes, that's absolutely the way we're seeing it both in the PES business as well as the EMS business and the EV/HEV really have some very nice share on the battery side in EMS. So yes, we're very pleased with the uptake that we're seeing on the EV/HEV side.

Great, thank you guys.

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

Good afternoon, gentlemen. Thanks for taking the questions. A lot ground covered obviously, I just wanted to talk about the cadence, if we look at kind of the three buckets of 1) Wireless, 2) Auto and 3) Industrial, maybe the cadence of orders and demand as we exit it May and into June and then to July and the early part of Q3 between those three where you're seeing the most meaning inflexions.

So, I think when as we talked about the automotive let's say the conventional automotive is where we're seeing probably the bigger impact along with industrial. Both of those are areas that we've seen weakness I would say or headwinds. On the wireless side, certainly through the early part of the quarter here we've seen strength. So, we're pleased with that aspect of it.

Helpful. And Mike, I think you alluded to this in the commentary but as it relates to the 2020 goals that you mentioned H2, I think that was the first time. So, should we think of the 19% 20% or the 20% operating margin, 39% gross margin is kind of a run rate exiting back half of 2020, is that the right way to think about it at this point.

Yes.

Just a shot up, understand that a bit.

Yes, it is.

Okay.

We got. Right, we'd look at it.

And lastly, it's one of those things that comes when it comes but Bruce maybe just talk about the M&A pipeline balance sheet continues to get stronger every single quarter given the cash generation. I know you've had a lot of internal stuff that you're focused on but what are you seeing in what's the likelihood for M&A as we look at the back half of the year and into 2020?

Well, certainly as we've been very public about this, we have teams working on this and looking at opportunities. I would say we're probably going into this a bit more cautiously than we had maybe a year ago. Given that we're seeing some weakness in some of the sectors, we want to make sure we understand fully the valuations of what we're looking at and how that might project forward on given some of the weakness in the sectors that we just discussed. So, we're still hammering away at it and looking hard but I would say a bit more cautious as we enter the second half here.

Understood, fair enough. Thanks for the color.

Okay, thanks Dan.

There are no further questions at this time. I turn the call back over to Bruce Hoechner for closing remarks.

I want to thank everyone for joining us today on the call. Have a good day and evening. Thanks a lot.

That concludes today's conference call, you may now disconnect.