Good day. My name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Fourth Quarter 2019 and Full Year Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, 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. Good afternoon, everyone, and welcome to the Rogers Corporation fourth 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. 2019 was in many ways a tale of two halves for Rogers. In the first half of the year, our strategic positioning enabled us to take advantage of strong market growth and achieve consecutive quarters of record sales. In the second half of the year, changing macroeconomic conditions, trade tensions and a pause in the wireless infrastructure market combined to temper full year results. Even with these headwinds, we have reported modest growth in revenue and earnings in 2019. Net sales for the year were $898 million and adjusted EPS was $6.14. In addition, we delivered record cash from operations of $161 million and strong free cash flow of $110 million for the year. As mentioned, challenging market condition impacted the second half of 2019 and specifically Q4. For the fourth quarter, net sales were $194 million and below our guidance range, primarily due to a greater than anticipated pause in the 5G build out and lower 4G demand. This decline was partially offset by stronger sales of power semiconductor substrates for the EV/HEV market and aerospace and defense demand. Q4 adjusted EPS was $1.14, which was near the high-end of our guidance range. I will take a moment here to briefly discuss the coronavirus outbreak. Similar to other multinationals with sales and operations in China, we are closely following the situation. The safety of our employees is top priority and I'd like to acknowledge our China team for their effective handling of a very difficult situation. While Rogers is well positioned in a variety of growth areas, the still unfolding situation is expected to have a near-term impact on market demand, which is affecting our Q1 outlook. Mike will discuss this in more detail during his comments.…

Thank you Bruce, and good afternoon everyone. In the slides ahead, I'll review our fourth quarter and full year 2019 results followed by our first quarter guidance. Turning to Slide 12, fourth quarter revenues as previously noted, were $193.8 million, below our Q4 guidance range of $200 million to $210 million. A slowdown in demand for products serving the Wireless Infrastructure market for both 4G and 5G applications and seasonal weakness in the portable electronics market were the primary drivers of the lower revenues in Q4. In addition, continued soft demand for products serving the general industrial and conventional automotive end markets also contributed to lower sequential revenues. Gross margin for the fourth quarter was 33.1%. The gross margin was within our guidance range of 33% to 34% despite the lower revenues, as we took steps to reduce our manufacturing spending in all business segments to compensate for the adverse impact of significantly lower volumes. Adjusted operating income for Q4 2019 was $22.5 million or 11.6% of revenues, down sequentially due to the lower revenues in the quarter. The company had a GAAP loss in the fourth quarter of $28.8 million or $1.55 per share, that included a $43.9 million or $2.35 per share non-cash after tax charge, which resulted from terminating a pension plan in the fourth quarter. This decision continues our strategy to improve cost competitiveness and de-risk the balance sheet. On an adjusted basis, the company delivered EPS of $1.14 per fully diluted share within our guidance range of $1 to $1.15. The good earnings performance on an adjusted basis resulted from a lower than forecasted income taxes for the fourth quarter. The company generated $32.9 million of free cash flow in the fourth quarter and $109.7 million for all of 2019 compared to $19.7 million in…

[Operator Instructions] And your first question comes from Daniel Moore with CJS Securities.

Good afternoon. Thanks for taking the questions. I'll start with the toughest one first, I guess. And I know it's a crystal ball, but if the situation with the coronavirus were to resolve itself in the coming weeks, months, what is your sense Bruce for how much inventory is in the channel, how much supply chains have been disrupted. Just trying to get a feel for how quickly things could potentially ramp back up as it relates to the wireless telecom build out and any other end markets that you might want to discuss.

Sure. Thanks, Dan. Our view is that production is returning to China, right? Our plant is up, we're running somewhere between 50% to 70% of capacity. We've heard similar situations, for areas outside of Wuhan, the industrial areas outside of Wuhan, not in the majorly effected area. And so our sense is that things are starting to return to normal to let's say an equilibrium. And I think if the infection rate continues to decline we would anticipate as we move to Q2 to see a return to normalcy, let's say. From our perspective we're ready to go, we've had inventory within our system. We're in very good shape. We've made arrangements and have put in place the appropriate amounts of materials. So, overall, I think we're in good shape, ready to go when this resolves itself.

And to the extent that it lingers a little bit, do you see any risk or incremental risk or potential impact on your market share with Chinese telecom OEMs? Obviously, Huawei is specifically looking to displace as many American providers as possible, U.S. providers, but I guess any impact that you would see over the next one to two years assuming that it resolves itself normally on market share.

Yes. So the way we look at it, I think a couple of things here. First, the role – the 880,000 base stations that are projected for 2020 that might move into 2021, those volumes a certain portion of those depending again when things get started back up. But let me be clear from our perspective, we still see this 5G opportunity as a substantial growth driver for Rogers. Again, from our perspective, it's a multi year deployment. We think it's begun. We saw some of it certainly last year, obviously with the coronavirus it’s held back a bit, but it has begun and we think we'll have a very significant share of the market moving forward. Specifically, our view is for the next round of the 5G tender, we expect to be near our historic share with non Huawei OEMs and the Huawei situation is dynamic and less certain, but we feel pretty good about this as we move forward. Our customers look at us and depend on our products in terms of performance reliability and we still do command price premium in the marketplace. So this is an ongoing competitive situation. We continue to work with our customers on commercial arrangements. And even within our company, we have a robust product cost reduction program in place. So, overall, we continue to see 5G as a very, very strong opportunity for Rogers and we're well positioned to capitalize on it.

Very helpful. One last one, and while I'm beating the wireless telecom horse here. Just 4G, any change over the last, say, one to two quarters. It's hard to tell given all the moving parts in corona, but any changes in sort of the rate of decline or some setting of 4G. I'll jump back in queue if any follow-ups. Thanks.

Dan, I think there was – we had looked at 4G in 2019 and anticipated a decline. I don't think we anticipated the decline to be at the level that it was in 2019 and what's anticipated in 2020. But really what's happened here is that the CapEx pressure that the carriers are putting on the OEMs has really driven 4G down. That in conjunction with the adoption of the dynamic spectrum sharing technology to allow 5G systems to function as 4G as well also as cut in to the need for additional rollout or substantial rollout of 4G.

Very good. As I said, I'll jump back. Thanks.

Thanks, Dan.

Your next question is from Craig Ellis with B. Riley FBR.

Yes, thanks for taking the question. And guys, thanks for all the color just on all the different dynamics that are going on, tough environment out there. I wanted to start, Mike, just with a clarification. So it looks like we're looking at a first calendar quarter where revenues are pretty flattish sequentially, but can you just help us to understand where there might be some material gives or takes within the different segments as you look at the performance of the business sequentially into the March quarter?

Yes, I would say that on the PES side, we're encouraged by the EV/HEV. So we certainly believe we'll have – we'll see some slight increases there. There will be some gives and takes on the EMS side, but in general I think it's going to be relatively flat quarter on quarter. And I think again, the wildcard becomes ACS in around the 5G. And as you can see from – if you look at, let's say, the mid point of the guidance, it would suggest that the ACS business is pretty close to what – where they were in Q4 as well.

That's helpful. And then Bruce I’d wanted to just follow up, but in a different way, some of the earlier questions regarding communication infrastructure. So by no surprise given all the news that's been out there that the 4G opportunity is less than what all of us thought it would be six months ago and with the timing of China's 5G launch. But the question is this, as you look at the business and look at it on more of a half on half basis and not looking for specific quantitative guidance. But would it be fair to say that the calendar 2020 could be really the mirror image of 2019 in two ways. One, starting very low and ending high, but also with a business that that ends the year with just a much lower 4G component given what carriers are deciding to do around their 5G and 4G dollars or do you see 4G coming back more strongly in the back half of the year even as we get more of that 880,000 5G base station units?

Yes, I think the 4G decline and what's being projected for 2020 is about a 25% decline. And we don't really believe that will change as we go through the year. But what I think is really encouraging is the public pronouncements that have been out there in the 880,000 base stations that some of the consultants are projecting that might be shifted. But when we look at that and the content that's in there and so forth for Rogers, we see this as really being a nice growth tailwind for us overall for our wireless business.

Makes sense. And putting a finer point on that, is it your view given what you can see now that with that growth towards 880,000 and I am when exactly we get there, but can we get back to near record revenue levels in the back half of this year? Or really is that something that's a much more realistic next year as we get even more of the 5G help and maybe some return of 4G and some of the continued growth in businesses like PES and an ADAS?

Well, a very interesting question. I think if we take it by segment and we look at 5G and look at wireless in general for ACS, I think it could be a good year if things get going again and we see this 880,000 base station really come to fruition. I think we do have some macroeconomic headwinds that go across the businesses. We talked about industrial, automotive – traditional automotive that are flattish to down. Our view is in things like industrial things could come back pretty quickly. Historically, we've seen this return maybe in one or two quarters, things could roll back in. So the second half of the year certainly could be a strong half and whether we get to record revenues I think, you know, a number of things have to fall in line, but it's not beyond the realm of possibility.

Okay. That's helpful. And then lastly, a gross margin question for Mike and then I'll hop back in the queue. Mike, I thought I heard you say that the PES gross margin improvement sequentially was 600 basis points in the quarter one. Did I hear you correctly? And two, if so, what comprised that 600 basis points? And can you help us to see the shape of the things that are driving the improvement as we look ahead through calendar 2020? Thank you.

Sure. Yes, Craig, you did hear that correctly. So we did see a 600 basis point improvement in the gross margin, which also helps their profitability in the quarter and help the company's profitability. So yes – and what really drove that there were – there were two pieces of that. So we've been taking cost out of that structure and become much more efficient over the last two quarters. So we certainly saw – a good chunk of that was cost reduction, but we also had saw some benefits from the yield programs that that we put in place. And the new – I'd call the new operations management both at the corporate level as well as at the PES level have certainly, I think, helped to put a better approach to some of the challenges that we have there. So, we certainly have seen some benefits from the yield as well. I would say probably – on that I'd probably say it was probably more towards the cost structure benefits than yield, but certainly we are seeing improvements in yield. And so when we look out into 2020, as we said, we're still looking for an incremental 600 basis points improvement in the gross margin for PES as we moved through the year here. And I think the majority of that now is going to come from, I'd say, the harder work of characterizing processes and again improving yield. So I think that's going to – it's going to come slower than the first 600 basis points, but I think we're on a path to get that in. And I would expect we'll see a small improvement in Q1 and we should see incremental, more incremental improvement in Q2.

And can you just refresh us on what the other programs are for gross margin enhancement and how they could play out through the year? Thanks for indulging the follow-up.

Well, so on all of our businesses and PES is part of this. We have some fairly aggressive cost reduction programs that we have in place that center around those supply chain as well as yields. So while the yield challenges are probably more pronounced in PES, we believe we have yield opportunities both in ACS and the EMS business as well. And again, I think from a supply chain standpoint and procurement standpoint, we believe those are big opportunities for us. So when we think about – as we progress into 2020, right, we're expecting to see some nice fall through on incremental revenues, right. I would expect that going forward we should be seeing fall throughs in the 60% above adjusted gross margin. So I think we're pretty encouraged by the programs that we have in place to really kind of fuel our gross margin improvements.

Thank you very much.

Your next question is from Patrick Ho with Stifel.

Thank you very much. Maybe just first off in terms of the 5G rollout and your thoughts there in terms of the delays in the push out, do you believe this is more just capacity digestion? Or are there other variables that you believe are at work in that marketplace?

I really – I mean, our view is that the push out is really on two fronts. One, certainly the coronavirus is causing a lot of disruption there. And as we had talked about, I think in the last call around rep free and the redesign that's going on at Huawei. That has also pushed out the implementation as they went through that redesign. And our understanding, they're still engineering through – their way through that. So, our view is as the things settle in here with coronavirus, Q2, we should start seeing the rollouts begin in earnest.

Great. That's helpful. And maybe Mike, in terms of mitigating the supply chain issues that all technology companies are going through right now as it relates to the coronavirus. One, what are some of the things you can do in the supply chain? And maybe the kind of question I'm looking at is, are you building inventory in certain areas from other suppliers? And then how does that impact the gross margin line at least in the near term in terms of mitigating some of these supply issues?

I would actually say that the one thing that we're trying to do, Patrick, is to leverage our global footprint with respect to where we would be producing some of these materials. So, again, if we struggle or the challenges in terms of getting product or getting product into or out of our China factories means that we'll look to move production to other areas that we have qualified for similar materials. So that probably puts a little bit of a strain on the gross margin in terms of looking at maybe incremental freight costs and whatnot. I don't think it will have a material impact on gross margins in the quarter, certainly not nearly as much as what we're seeing from reduced volumes. But that's – that I think is how we're more or less managing through that is through our global footprint.

Okay, great. And final question from me, you mentioned that, it could take another quarter or two for markets like industrial and automotive to filing turnaround. On the industrial segment side, where do you believe you'll see the initial turn in kind of what marketplaces? And I guess how fast could you ramp up to meet demand because when you talk to some of the semiconductor company, it looks like a lot of those markets are at a bottom, some are beginning to turn, how do you look at it from your business perspective?

So from the industrial side, we would see – we think the turnaround coming in more on the industrial equipment, which would be in our PES business, specifically in the variable frequency drives. And as business starts picking up capital spending those equipment spending increases. And so, we think that's where we would see it. And certainly that's an area in the past where we've seen it recovered very, very quickly. It goes down quickly, comes back quickly. We know that the inventory in the system – in the supply chain system is now down to reasonable level. So if there's any uptake in industrial activity, we'll see it come through quickly.

Great. Thank you very much.

Your next question is from Daniel Moore with CJS Securities.

Thank you again. Just since you mentioned it, Bruce, want to tease the long-term goals a little bit. Obviously, understood given all the moving parts pushed out beyond 2020, no surprise to anybody. Do you – if things come back and given your incrementals, is that – are those – most of those numbers still achievable in the 2021 timeframe? Again, crystal ball, but just given the leverage in the business, is that a one-year push out or potentially longer?

So, I think, Dan, this is - so this is Mike. So if you think about the drop throughs that we talked about and you think about kind of – I – 1.2 billion that was out there, I'm not sure when we hit that, but in terms of getting to the 20% adjusted operating profit target, from our perspective, I think if you think about drop throughs and whatnot, it probably will take a 1% or 100 basis point improvement in gross margin is going to take somewhere in the $10 million to $12 million of incremental revenue. Of course that depends on the mix. So, if you think about it, for us to get to about a 20% operating profit, which would require about a 39% gross margin thereabouts. We need to be somewhere in the 250 to 260 a quarter I think with the right mix would allow us to get that. So, I don't know so much that I'd say what year that happens. I think it really is going to depend more on at least at this stage kind of how – particularly how the 5G market develops and again, and the improvements in the PES business, which I think we're on a good track to achieve those.

That's helpful, Mike. And then the second part of the growth is that that obviously the M&A piece. Are you seeing any additional dialogues, pickup finding opportunities, given some of the disruption and challenges?

As we've said in the past, this remains a high priority for us. We've got teams working on it and we're sifting through. We have our lists of targets and so forth. So, things could start shaking –could shake loose. We're anticipating trying to do something this year. There's a lot of work focused on that.

Got it. And I'll ask – I know I've asked in the past, Bruce, but this given the perfect storm that we're kind of living through, just a capital allocation question, would the board consider adding to the mix looking at your own stock given some of the near-term challenges in the marketplace maybe create a pretty interesting opportunity.

Certainly, our priorities are funding growth, whether it's organic or inorganic growth and stock buyback is always something that's looked at periodically with the board. And at the appropriate levels here, we're always looking and thinking about it. So it's, again, not a priority, but maybe opportunistically.

Got it. And then lastly just a housekeeping. What the tax rate for – related to the Q1 guide? Is that consistent with the full year 20%, 21%, Mike?

Yes, it is.

All right. Thank you.

And there are no further questions at this time. Bruce, I'll turn the call back over to you for closing remarks.

I just want to thank everyone for joining us today and have a good evening.

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