Good day. My name is Kathryn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Third Quarter 2019 Earnings Call. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to your host Mr. Steve Haymore, Director of Investor Relations. Sir, you may begin your conference.

Good afternoon everyone, and welcome to the Rogers Corporation Third 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 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 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 today. Please turn to slide 4. Before discussing Rogers' third quarter results, I would like provide some context around the business environment in which we are operating and its effect on both our Q3 results and the outlook for the remainder of the year. Similar to what many other companies have reported in recent weeks, macroeconomic conditions are creating softness in the global economy. In addition, ongoing trade tensions are generating headwinds and in some cases limiting near-term demand visibility. From a market perspective, industrial and conventional automotive demand which had begun to slow in late Q2, weakened further in the third quarter. These challenges are continuing into Q4 with recent economic data pointing to declining factory activity, lower industrial output and falling auto sales. In addition, the geopolitical tensions between China and the U.S. which have resulted in trade restrictions on sales to Huawei are impacting 5G demand. While Rogers is able to continue sales to our direct fabricator customers, there is uncertainty regarding Huawei's ability to maintain 5G deployments without certain U.S. components and whether the performance of its alternative base station design will be acceptable. It is also not clear what impact these factors will have on Huawei's share of the market. A byproduct of these trade restrictions has led Huawei to consider local sources of supply for high-frequency circuit materials, even though these alternative materials have performance limitations as compared to Rogers' products. Although these challenges are impacting our near-term results, we continue to see very compelling market opportunities ahead and we remain focused on the key pillars of our strategy to enable our success. With this context in mind, I'll now turn to our results for the quarter. Rogers achieved Q3 net sales of…

Thank you, Bruce and good afternoon, everyone. In the slides ahead I'll review our third quarter 2019 results followed by our fourth quarter guidance. Turning to slide 11, we will review the financial results for Q3 2019. Third quarter revenues as previously noted were $221.8 million below our Q3 guidance range of $225 million to $235 million. Q3 revenues decreased 9% on a sequential basis and 2% compared to the third quarter 2018. As Bruce noted in his comments, weak demand for products serving the wireless infrastructure market for both 4G and 5G applications, as well as soft demand for power semiconductor substrate used in industrial power and conventional automotive applications are responsible for the lower sequential revenues. We achieved a gross margin of 35.6% for the third quarter, 30 basis points higher than Q2 and within our guidance range of 35% to 36%, due primarily to a favorable product mix and reduced spending in all of our business segments to react to the softer market demand in Q3 and expected to continue through Q4. Our gross margin was negatively impacted by lower production volumes and the ongoing pressure from tariffs resulting from the continued trade tensions between the U.S. and China. Adjusted operating income for Q3 2019 was $36.2 million, or 16.3% of revenues, compared to $41.7 million or 17.2% of revenues for Q2. Adjusted operating expenses decreased by $1.4 million in the third quarter, compared to the second quarter. GAAP EPS of $1.25 per fully diluted share and adjusted EPS of $1.51 per fully diluted share for Q3 2019 were above the upper end of our guidance range for Q3, but below Q2 levels. The good earnings performance both on a GAAP and an adjusted basis resulted primarily from spending control and a lower than forecasted effective tax…

[Operator Instructions] And your first question comes from the line of Craig Ellis with B. Riley.

Thanks for taking the question and Bruce thanks for all the help on the different issues that are impacting the business. I wanted to start just by following up on the prepared remarks around the communication infrastructure business and Huawei. One, can you help us understand the degree to which you got interaction with them and what they're saying about their desire to continue to use Rogers? And if they were in a position where they found a solution that was domestic that they could switch to, what would Rogers do with the capacity that would have otherwise gone to Huawei? How do we think about your capacity flexibility where it goes and the implications for gross margins in that situation?

Okay. Well, that's quite a question. So let me take us through that. First, with regard to Huawei and their seeking alternative local supply our view in talking with them is that, while they're evaluating, an alternative our material performance certainly is better, and I think really from their perspective, they're forced to look for that local supply. Now, that being said, we have a high level of confidence that we will retain significant share at Huawei. The other thing that's happening in the marketplace in China with the OEMs is the share shift among telecom OEMs in China. So, we would anticipate some share movement between Huawei and some others in China, particularly if the system that Huawei is putting together with local sourced materials has some performance deficiency. So that's under testing as we understand it. So, we don't have very good visibility on that front how that's progressing. So, overall, I think we're confident as we move forward in retaining significant share across all the OEMs in telecom. In terms of capacity, I'm going to ask Mike to comment a bit more on the capacity plans that we have.

Yeah. So, Craig I think as a result of what Bruce was describing and where we are with respect to bringing – preparing the additional capacity at Price Road or at the Isola Plant that we acquired last year. We are going to continue – we continue our plans to bring that up to speed in anticipation of the need for that capacity in 2020 at some point in time. And we'll continue to monitor the situation with respect to when we actually bring the capacity online. But we are going to continue our efforts to be ready for that.

That's helpful. The next question is more of a near-term question. Mike, I think the variance between the third quarter's revenue and the midpoint of the fourth quarter guidance is about $17 million. It was helpful to get a lot of color on the sub-segment performance of the business. But can you just clarify as we look at reconciling that $17 million GAAP quarter-on-quarter, what are the biggest contributors to the sequential decrease on a sub-segment basis for 4Q?

Well, I would say the biggest contributors first of all are volume, right? And so when you think about the volume and it's particularly around the wireless infrastructure. That is going to be a big challenge as well as another contributing piece of that is in the EMS business with the portable electronics being down quarter-on-quarter. That's probably, the second piece that's pretty significant. But again, so the volume's impacting it and the mix is impacting it. Those are the two primary areas that are impacting the gross margin decline quarter-on-quarter.

Thanks. And then if I could just sneak in one more, it was helpful to get the reconciliation between I think where we are and the target model with respect to closing gaps with gross margins. It looks like one of the three factors the volume factor is really out of the company's control. The macro will do it. The macro will do and it's been tough for everybody as you recognized. But two items seemed more in your control PES and EMS performance at 250 basis points and tariffs about 150. Can you just give us some insight how much progress can you make in those two areas over the next two to four quarters and where do you have greater visibility and greater confidence in making said progress?

Yeah, I actually think we have – I would say, higher confidence today than we did in the last two quarters with respect to the progress that we make on both EMS and PES. And in fact I believe we've made the majority of the progress that we anticipated making on EMS. PES still has a ways to go. And as we talked about that's a multi-quarter execution plan. But we've seen some very good signs of progress in the third quarter. So I think we'll start seeing some contribution towards gross margin in the fourth quarter and again as I said accelerating in the first two quarters of 2020. So I feel very good about, our ability to capture that, call it 200 to 250 basis points. The other one that you had talked about that we had talked about was the impact of tariffs being somewhere around 106 basis points in the third quarter. And as we've talked about we're working hard to leverage our global footprint as well as looking at changes in our supply chain in order to address that. And I think what we've said, I think in the last quarter and we'll say this quarter I think we can address at least half of that through our actions. To get the full hundred points, I think we would have to have some benefit with respect to trade tension discussions or trade discussions between U.S. and China over the next several quarters. So that one's a little bit like the market. It's a little bit out of our control. But I think we can at least get half of that.

Thanks guys. I’ll jump back in the queue.

Okay.

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

Good afternoon. Thanks for taking the questions. I wanted to stick with wireless infrastructure. What was the mix of 4G and 5G revenue in Q3 and year-to-date? And clearly, you feel good about the prospect for a recovery in 5G. What are your growth expectations for 4G as we think about 2020?

So, the 4G, you're absolutely right. We have first of all in 5G looking into the first half of 2020, we're confident that we'll see the rebound there if things go according to what we've heard from customers from industry experts and so forth. Looking at 4G, we think on that front, certainly, this year we're down probably about 15%. We think the industry will be down about 15%, and moving into next year probably high single-digits decline. So, again, as we talked about in the prepared remarks, this is a bit of a reallocation of the CapEx by the carriers towards the 5G side of things. And Mike?

Yeah, so on the breakdown so, year-to-date 5G is in the ballpark of 25 -- a little less than 25%. So 4G is still 75% of the business year-to-date.

Very helpful. And then auto and industrial, maybe you can talk about the cadence of the decline that's kind of late in Q3 and into the first month so far of Q4. Have things stabilized? Is the guidance predicated on essentially the current run rate of what we saw in October? Any color there would be helpful.

So on the industrial side we think it's kind of -- it will be flat moving from Q3 to Q4. A similar situation with automotive, we think it's relatively stable as it stands today. And so we're viewing Q4 to be similar to Q3 in terms of both of those market segments.

Very helpful. And then lastly from me, just even in the soft environment obviously cash continues to build back to a net cash position. I know M&A is your first priority. But given you've got plenty of liquidity, are you looking at perhaps alternative opportunities to deploy capital as well?

No. I think our thoughts on capital deployment are not different than what they've been. We are really using cash for growth. So we'll continue to build a stronger balance sheet and continue to look for opportunities that make sense for us in the M&A space where we can buy things that are strategically important at reasonable prices.

Understood. Okay. I look forward to -- appreciate the color and look forward to catching up next week.

Sure. Thanks Dan.

And you do have a follow-up question from the line of Craig Ellis with B. Riley.

Thanks for taking the follow-ups. So it's really nice to see the strength in the smartphone business and I understand the seasonal dynamics in the fourth quarter. But as the team looks ahead to 2020 and with such a significant emphasis by industry with 5G unit volumes next year which I think is going to dwarf anything that we saw with 3G or 4G, can you talk about the opportunity that Rogers has as the industry moves from 4G phones to 5G just it expands your SAM in that area and specifically what would it do?

So, again, this is as we know the time horizon for these designs and implementation of the designs for smartphones, it goes in cycles from six months to 18 months. And so our team is working right now on those new designs and a number of wins are coming in. But again, that's still out in early to mid-2020 that we would get a much clearer understanding of where those design wins end up for us. But like I said this is very typical of what we've seen historically in the smartphone world in terms of timings.

That's helpful. Thanks Bruce and then the follow-up is related to the ADAS business. Helpful to get the color on the 30% longer-term CAGR. I think as I look at the ecosystem the model year 2021, mid-2020 release vehicles I think they've always been seen as an era where you get more of an inflection in ADAS. And certainly, we have a lot of radar content as it relates to safety systems. But as you're working with your automotive customers and the automotive supply chain, can you give us some insight as to what you're seeing mid next year for a potential step function change in ADAS content? Thanks.

Go ahead, Bob.

Yeah, so Craig. Yes, we're working with everybody. And again, I think what we're basically the dynamic that I think we all expect is as you start to shift towards, I think you're referring to the shift towards Level 2, Level 3 autonomy where you basically -- it's mostly a content opportunity at that point where the number of sensors per vehicle goes up. And I think that's the expectation right now. All the OEMs are really driving towards a higher level of autonomy and most of what we're seeing out there would suggest that means more sensors per vehicle with that dynamic. I don't think that's translated into real projections at this stage. I think it will be a while before we can actually get a good handle on the scope of the increased opportunity.

Got it. Thanks guys.

Thanks, Craig.

And we have no further questions at this time. I'd like to turn the call back over to Bruce for any closing remarks or comments.

Thank you everyone for joining us on today's call. And have a great afternoon. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.