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Edited Transcript of ROG earnings conference call or presentation 27-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Rogers Corp Earnings Call

ROGERS Apr 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Rogers Corp earnings conference call or presentation Thursday, April 27, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce D. Hoechner

Rogers Corporation - CEO, President and Director

* Jack Monti

* Janice E. Stipp

Rogers Corporation - CFO, Principal Accounting Officer, SVP of Finance and Treasurer

* Robert C. Daigle

Rogers Corporation - CTO and SVP

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Conference Call Participants

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* Craig Andrew Ellis

B. Riley & Co., LLC, Research Division - Senior MD and Director of Research

* Daniel Joseph Moore

CJS Securities, Inc. - MD of Research

* Joan K. Tong

Sidoti & Company, LLC - Research Analyst

* Sean Kilian Flanagan Hannan

Needham & Company, LLC, Research Division - Senior Analyst, Electronic Manufacturing Services and Electronic Components

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Presentation

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Operator [1]

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Good morning. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2017 First Quarter Conference Call. (Operator Instructions) Jack Monti, Director, Investor Relations, please go ahead.

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Jack Monti, [2]

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Thanks, Dan. And thanks so much, everyone, for joining Rogers First Quarter 2017 Earnings Call. To follow along with the slide presentation, please see the Investors section of our website.

Turning to Slide 2, we have a disclosure on forward-looking statements. During the call, we will be making certain forward-looking statements subject to a number of risks and uncertainties, which may cause actual results to differ materially versus today's outlook. In addition, some of the financial metrics discussed will be on a non-GAAP basis, which management believes better reflects the underlying core operating performance of the business.

Turning to Slide 3. It's my pleasure to introduce Rogers' management team. Bruce Hoechner, President and CEO, is joined by Janice Stipp, SVP and CFO; and Bob Daigle, SVP and CTO.

I'll now turn the call over to Bruce.

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [3]

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Thanks, Jack. Good morning, everyone, and thank you for joining us on today's call. I'm extremely pleased to report that in Q1 2017, Rogers achieved all-time record quarterly net sales and earnings. Our sales were $204 million, an increase of 27% over Q1 2016, and above the top end of our guidance. Our results were driven by a double-digit year-over-year increase in organic sales with solid growth in each of our business units as well as exceptional performance in our recently acquired businesses. Ongoing implementation of operational excellence initiatives across the company led to gross margins of 39.4%, an improvement of 170 basis points over Q1 2016, a level that is approaching our strategic target of 40%.

Adjusted EPS was $1.67 compared with $0.94 in Q1 2016 and above the top range of our guidance. We believe that the strength in our organic and acquired businesses is sustainable and will carry forward into Q2 as demonstrated by our strong outlook. It is important to recognize that there were certain discrete items that bolstered our Q1 results and need to be considered as we look forward to Q2.

I'll speak to the operational and strategic execution in our business, and Janice will cover the Q1 to Q2 expectations in greater detail in her comments.

Please turn to Slide 5. I would like to begin by reemphasizing the importance of our strategic road map as the foundation of Rogers' robust performance and outlook. Our results over the past several quarters and our strong guidance for Q2 2017 are confirmation that we have implemented a winning strategy and our solid execution is taking Rogers to a new level of performance. As a market-driven organization, we are focused on select markets that are far outpacing global GDP growth. For example, forecasts indicate that shipments of vehicles with Advanced Driver Assistance Systems or ADAS will increase at a 25% CAGR from 2017 to 2022.

And Europe, the U.S., and Asia will deploy 25 networks to support the Internet of Things by the end of 2017. We have targeted these markets and developed industry-leading solutions so that we are well positioned to take full advantage of these significant opportunities as the markets grow. Rogers' innovation expertise is enabling us to develop a new product platform to meet the most challenging segment of the wire Internet infrastructure market. Our extremely low loss material is in various stages of customer qualification at key network infrastructure OEMs. Customer testing and feedback indicates that our material enables a performance level previously thought unachievable on copper-clad laminate systems this success was enabled by mirroring Rogers technology with technology acquired from Arlon, resulting in breakthrough innovation.

In Q1, we continue to execute on our M&A strategy completing the acquisition of Diversified Silicone Products, Inc. We are progressing well in our integration of both DSP and DeWAL Industries to achieve early wins that augment the product portfolio and technology capabilities of our EMS business. For example, we are qualifying existing Rogers equipment to meet exciting new product opportunities within the acquired PTFE product line. Our approach not only allows us to avoid CapEx, but also enables us to react quickly to seize revenue opportunities by satisfying customer requirements and market needs in real time. Our success here is a compelling example of how we can leverage Rogers capabilities to create additional synergistic value from our acquisitions. I am proud of the close cooperation across the entire Rogers organization to help drive this achievement forward.

Our operational excellence initiatives are helping us improve profitability in 4 key areas: footprint rationalization, process improvement, optimizing cost structure, and back-office utilization. In our PES business, yield, productivity, and throughput improvements help deliver an adjusted operating profit increase of over 130% in Q1. We have refined our growth strategy by business unit to enable ACS, EMS, and PES to capitalize on their individual market opportunities and capabilities to accelerate growth.

At the bottom of the slide, we have included our target of achieving top quartile operating profit growth when compared to our peer group. We believe this is a good indicator of our success combining top and bottom line growth to deliver leading shareholder returns.

Turning to Slide 6. We are confident that our technology portfolio, marketing initiatives and new product pipeline are well aligned with the growth drivers of advanced connectivity and advanced mobility, where our solutions are proven, innovation is valued and the growth outlook is compelling. In Q1, the advanced connectivity and advanced mobility sectors accounted for approximately 53% of Rogers sales.

Turning to Slide 7. From an M&A standpoint, our team continues to actively identify and pursue synergistic opportunities in the marketplace. We target businesses with market and technology leadership that provide differentiated products for highly engineered applications. Our objective is to strengthen our current product lines or in some cases, provide a new growth platform. Since early 2015, we have executed on 3 accretive value-adding transactions, including Arlon, and more recently, DeWAL and DSP. We are encouraged by our effective M&A execution and integration and we believe that we have the right strategic focus, management depth and financials strength to continue to add value enhancing businesses.

Please turn to Slide 8. ACS, achieved all-time record revenue growth in Q1 2017, driven by continued strong demand in ADAS as well as in aerospace and defense. Market demand in the 4G LTE wireless telecom sector was softer than the first quarter of 2016, although, in line with expectations. Rogers has achieved several substantial 4.5G design wins as telecom equipment OEMs and telecom service providers move to the next level of system performance.

Looking ahead, we are very encouraged by the acceleration and development of the 5G technologies. As the innovation leader in high-frequency circuit materials, we believe this step towards even more demanding performance requirements will provide significant opportunities for the ACS business. We continue to work closely with our customers to aggressively pursue more business in this area. In addition to the accelerated 5G introduction, there are many other promising opportunities within the ACS business. As we saw at the Consumer Electronics Show earlier this year, a number of automotive OEMs are offering more models with ADAS features and fast tracking their plans to introduce cars with autonomous capabilities, both of which utilize Rogers technologies. Overall, we continue to broaden the ACS portfolio of wireless infrastructure, wired infrastructure, advanced mobility, and aerospace and defense solutions to meet unsolved needs in the market.

Please turn to Slide 9. In EMS, demand across all of our product lines contributed to double-digit organic growth in the portable electronics, general industrial, automotive and mass transit segments. Significant contributions from our acquired DeWAL and DSP businesses helped EMS achieve all-time record quarterly net sales. As we look ahead, we expect to see continued penetration in the back pad solution for portable electronics as well as in high performance cascading for automotive applications. In addition, we anticipate more early wins as we integrate the acquisitions. Strategically, we are actively exploring additional acquisition opportunities to extend our current EMS product portfolio and technology capabilities with complementary, high-end, high-performance and high-margin polymeric materials.

Please turn to Slide 10. PES is also off to a very strong start in 2017 across all regions. Net sales during the quarter increased due to broad-based demand in many key markets, including renewable energy, hybrid electric vehicles, variable frequency motor drives, rail and laser diode cooling products. During the quarter, government mandates and consumer demand continue to drive adoption of e-Mobility applications, particularly, in electric and hybrid electric vehicles. PES is making solid progress in its operational excellence initiatives. On strong volume, the team has effectively reduced scrap rates and lowered our energy and freight costs. Also in PES, we are in the process of consolidating our Evergem and Afrikalaan facilities in Belgium to achieve efficiencies while reducing our manufacturing footprint and operating costs.

Looking ahead, we expect to see continued growth in PES, particularly in clean energy applications such as variable frequency drives, renewable energy and advanced mobility where the outlook remain strong as we maintain our focus on driving profitability through operational improvements.

Turning to Slide 11. We will continue to monitor the global markets for situations that could affect our business and we will adapt with agility should shifts occur. In some areas, it appears that regulations could be lessening and tax policies may be changing both of which are increasing business confidence. And we are vigilant regarding other indicators such as commodity pricing and geopolitical uncertainty. In summary, we are off to a tremendous start in 2017. We believe Rogers has broken through to a new sustainable level of performance, that will deliver additional value to our shareholders.

I will now turn the call over to Janice, who will report our Q1 results in greater detail as well as additional financial highlights. Janice?

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Janice E. Stipp, Rogers Corporation - CFO, Principal Accounting Officer, SVP of Finance and Treasurer [4]

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Thank you, Bruce, and good morning, everyone. Our Q1 results are outstanding with another quarter of robust sales growth, margin expansion and earnings growth. As strong sales include acquisitions, demonstrate our success in developing that portfolio of market relevant products to provide solutions to our customer needs.

As you see in the presentation today, the momentum we experienced in Q3 and Q4 accelerated into the first quarter of 2017.

Now if you turn to Slide 13, I'll review our third quarter results in more detail followed by the second quarter guidance forecast. Q1 2017 revenue, as previously noted, is $204 million, a record quarter, which exceeded both our guidance in Q1 2016. Our growth was primarily the result of strong volumes across all business units and recent acquisitions. Adjusted operating margin was up 530 basis points from 16.9% in Q1 2016 to 22.2% in Q1 2017, primarily due to higher volume, favorable performance and the acquisition revenues and synergies.

Adjusted operating income was $45.2 million including $18 million or $27.2 million compared to last year. Adjusted EBITDA of $54.3 million improved $20.4 million or approximately 60.4% compared to the first quarter of 2016.

Net income of $27 million in the first quarter of 2017 was up $12.1 million versus the prior year or 400 basis points as a percent of revenue. First quarter 2017 adjusted earnings per share of a $1.68 exceeded 2016 first quarter at $0.74, was above the midpoint of our guidance range by $0.54 and was a record quarter for the company.

Please turn now to Slide 14 for the review on quarterly revenue. Our revenue was up 26.9% on a year-over-year basis. The first quarter effect of currency exchange rates unfavorably impacted revenue by 1.6% or $2.6 million, primarily due to currency devaluation in the renminbi and the euro. Adjusted ForEx effects, our organic revenue was up $23 million or $14.%. The acquisition revenue was $22.7 million or 14.1%. More specifically, EMS had broad strength across its markets with increased sales in all regions, plus it was driven by the acquisition in higher demand in portable electronics, general industrial, automotive and mass transit. PES has strong revenue across its market, including growth in the renewable energy applications, HEV and laser diode cooler products. ACS has strong growth in automotive ADAS and increased sales in aerospace and defense, partly offset by weaker demand in the wireless, [RAS] and antenna applications.

Looking at our Q1 2017 adjusted operating income on Slide 15, first quarter results increased by 530 basis points or $18 million compared to 2016 first quarter. This is primarily due to bigger volume and performance driven by increased capacity utilization, operational profit enhancements and automation, conversion of 6 cost structure to variable where possible. Cost structure enhancements due to expansion of manufacturing capabilities within a low-cost country footprint, favorable healthcare expenses and in synergies of our recent acquisitions. This income was partially offset by $3 million increase in SG&A due to the acquisitions, increased appreciation and slightly higher R&D investments.

Now let's look at our adjusted EBITDA on Slide 16. Adjusted EBITDA at $54.3 million increased by $20.4 million in Q1 2017 as compared to the first quarter of 2016. And improved as a percent of revenue to 26.6%. This increase was driven primarily by many of the same reasons just noted during our discussion of adjusted operating income, such as greater volume and favorable performance. In addition, miscellaneous income expenses was favorable by $1.5, million primarily due to the gain on copper derivatives, revaluation of foreign currency, intercompany loans and JV income. Partially offsetting this was a $2.6 million increase in SG&A due to the acquisitions, professional services in IP and slightly higher R&D investment.

Turning to Slide 17. We exceeded the top end of our Q1 2017 guidance range for adjusted earnings per share as well as exceeded our Q1 2016 adjusted earnings per share by 78.7% or $0.74 resulting in $1.68 in adjusted earnings per share for Q1 2017. As the slide depicts, the $0.74 increase was primarily due to 60% of favorable volume and other, $0.12 favorable performance, $0.06 favorable to the lower tax rate at 32.3% versus 35.2%, $0.04 favorable miscellaneous and expense offset by $0.11 unfavorable SG&A investments, and $0.01 unfavorable due to higher R&D investments.

If you turn to Slide 18, you'll see our Q1 2017 segment revenue. ACS, EMS and PES segment revenues increased by 7%, 65.9% and 21% or by $5.2 million, $30.5 million and $7.4 million, respectively. More specifically, in Q1 of 2017, our ACS segment revenue increased, mainly a result of increased demand and high frequency (inaudible) materials for automotive ADAS and aerospace defense. These gains were partially offset by lower demand for wireless 4G LTE applications. The EMS segment revenue improved 65.9% in the first quarter, organic sales increased $7.8 million or 16.8% due to higher demands of portable electronics, general industrial, automotive and mass transit applications. In addition, the recent acquisition revenue contributed $22.7 million.

Finally, our PES segment was the second fastest growing segment with 21% growth in revenues, principally due to renewable energy, HEV, variable frequency motor drives and laser diode coolers.

Looking at Slide 19. You'll see our segment adjusted operating income. First, ACS adjusted operating income was $20.4 million, up $2.4 million from Q1 2016 with 280 basis points as a percent of revenue. This was primarily due to the favorable impact of volume and mix. Favorable performance with the productivity improvement focused on cost containment efforts, operational process enhancements and automation, converting fixed costs structure to variable and favorable capacity utilization. These favorable impacts are being partially offset by unfavorable pricing as a result of certain volume-related pricing commitments with excellent commodity purchases, foreign exchange and slightly higher trading higher pricing to increase volume, SG&A and R&D investment.

Next, EMS adjusted operating income was $17.2 million up $11 million from Q1 2016 or 900 basis points as a percent of revenue. This increase was primarily due to favorable impact of acquisitions and volume increases in the portable electronics, general industrial, automotive and mass transit applications, favorable performance as a result of operational excellence initiatives. Partially offsetting these favorable are slightly higher corporate allocation due to acquisitions and increased SG&A and R&D investments.

Lastly, PES adjusted operating income was $5.7 million, up $3.3 million from Q1 2016 or 660 basis points as percent of revenue. This increase was mainly due to favorable volume across this market, improved productivity as a result of operational excellence initiatives as well as leveraging our ERP assistance and partially offsetting these favorable items are FX, slightly higher SG&A and R&D investments.

Turning to Slide 20, you will see at the end of the quarter was a cash position $186.1 million. Rogers had another quarter of solid operational cash flow of $23.3 million. This represents a decline, however, of $3 million as compared to 2016, mainly due to an increased accounts receivable especially with the higher revenue, although we had an improved CSO metric.

Additionally, in 2017, we also incurred higher incentive compensation payouts relating to the strong performance in 2016. On the chart, you will also note that we have $60.2 million cash usage related to our acquisition of diversified telecom products in January of this year. Cash taxes paid in 2017 of $4.8 million was approximately $1.5 million higher than 2016 in large part due to increased earnings, although the effective tax rate was lower at 32.3% versus 35.2% last year. Lastly, we also had invested $5.3 million in capital expenditures during the first quarter of 2017 or 2.6% of revenue.

Taking a look at our Q2 2017 guidance on Slide 21, revenues are estimated to be in the range of $190 million to $200 million, with earnings in the range of the $0.98 to $1.08 per diluted share. On an adjusted basis, we guide earnings in the range of $1.16 to $1.26 per diluted share on an adjusted earnings per share basis. At the midpoint, our Q2 2017 revenue guidance represents a year-over-year revenue increase of 23.8% compared to Q2 2016. This revenue guidance includes anticipated unfavorable currency fluctuations of 3.3% or $5.2 million.

On a sequential basis, the midpoint of our guidance range is approximately $9 million below our first quarter revenue, with a slight deterioration due to the FX assumption and softer wireless 4G LTE revenue assumption. The deterioration in the wireless revenue is consistent with the trends we have seen over the last couple of years with the second quarter wireless telecom business below versus the first quarter (inaudible) our most recent customer discussion. Guidance for the earnings per share had a midpoint $1.03 per diluted share which reflects the increase of $0.74 per diluted share compared to earnings per share in Q2 2016 of $0.29.

On an adjusted earnings per share basis, guidance has been at the midpoint of $1.21 for diluted share, which is $0.33, 37.5% increase from $0.88 in Q2 2016. This year-over-year increase is primarily due to higher volumes, improved operational performance, partially offset by higher commodity prices and SG&A. On a sequential basis, we are forecasting a $0.47 decline in adjusted earnings per share from $1.58 to $1.21, roughly $0.20 of this decline is due to the wireless revenue deductions of generally higher-margin products. Approximately 21% is due to Q1 2017 onetime income in SG&A and favorable results on derivative contracts. The remaining $0.06 is due to the R&D and SG&A expenses, lead times to the second quarter.

For the full year 2017, Rogers expects capital expenditures to be in the range of $30 million to $35 million, and the effective tax rate to be approximately 32% to 33%.

Though our Q2 guidance was slightly lower demand, slightly unfavorable FX, and does not have the benefit of some onetime favorable income occurred in Q1 2017, Q2 2017 guidance is anticipated to increase adjusted earnings per share to over 37% versus Q2 of 2016 with revenue growth in the double digits, ranging from 24% growth on an reported basis, 27% adjusted for FX and FX adjusted organic growth of 13%.

In summary, Rogers will continue to deliver profitable growth and superior shareholder return over the long term. And we view the first quarter results as a proof point of our long-term potential. The first quarter of 2017 was a great start of the year and continues our journey in delivering long-term value creation.

I will now turn the call over back to Bruce.

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [5]

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Thanks, Janice. This concludes our prepared remarks. We'll now open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from the line of Craig Ellis with B. Riley.

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Craig Andrew Ellis, B. Riley & Co., LLC, Research Division - Senior MD and Director of Research [2]

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Bruce, I wanted to start with a question for you. You've mentioned in your prepared remarks that there are some complementary opportunities in the elastomeric business. Can you go into more detail on what you're seeing there and how should we think about some the milestones for those opportunities over the next couple of quarters or years, whatever is relevant?

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [3]

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So in the EMS business, with the acquisitions, with DeWAL specifically, I mentioned some of the work that's been going -- ongoing in the organization to get equipment from one of our other businesses lined up to support the demand that we're seeing. And this demand is really around automation of manufacturing related to OLED displays, and much more related to the robotics involved in our products being used in that build out. So from our perspective, we have very similar go-to-market approaches with the acquisitions, the 2 acquisition properties, so we're able to leverage our capabilities on the sales side of the house. I think of particular interest is where we've already seen in the regions outside of North America, some uptick in customer engagement and some wins already with the acquired businesses in other regions. So as we move forward, we'll continue to see, I believe, the synergies from the sales side but also the synergies internal to the company around our capability in manufacturing to utilize broadly the network of Rogers.

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Craig Andrew Ellis, B. Riley & Co., LLC, Research Division - Senior MD and Director of Research [4]

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And that sounds encouraging. Following up with Bob. In the prepared remarks, there was mention of a couple of things that I thought were striking at CES. One was the real significant step forward in automated driver assist for those that were there presenting. And then more broadly, it's been pretty clear since Mobile World Congress that it seems like 5G is pulling in, in terms of launches instead of pushing out, as we've seen historically, with some of the higher speed next-generation standards. Can you just help us on 2 fronts? One, with regards to automated driver, just help us understand the breadth of Rogers participation with manufacturers that are moving in that direction. Then on 5G, what are some of the milestones we should be focused on for its deployment over the next 2 to 3 years?

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [5]

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All right. Yes. So correct. So let's start with the Advanced Driver Assistance Systems. And I think what we're seeing, and then as you point out, we see it at CES where the major OEMs have made a significant commitment to adding these capabilities and anecdotally in shopping for vehicles. I'm seeing it really is a standard feature on basically mainstream vehicles that are now being off -- being provided with the adaptive cruise control, the blind spot detection, the transverse centers. These are primarily radar based and our participation is very, very broad. We're working with all the major providers of these advanced driver assistance radar systems. The generation today is really driven towards assist. The future, as we all see it, is really towards the autonomous and that will continue to build on these sensor technologies, which we participate in very broadly. We're very pleased with a strong performance in Q1. You continue to see market reports out there that the growth projections are 25%, 30%, and we have generally seen stronger growth than what's being projected. And I think part that is being is there's 2 factors. One is the adoption rates across various platforms of vehicles. The other factor is the increased number of centers per vehicle. And that, as you start to migrate from simply having blind spot detection to the adaptive cruise control and transverse sensors, you end up adding up more sensors, which is obviously very beneficial for us. So all in all, I think there seems to have been a little bit of acceleration in these systems. We're seeing it in the trade shows, as you pointed out, Craig, and I think we're very encouraged with what we saw in the first quarter. On the 5G front, yes, so that's another area where I think if you would have asked people 6, 9 months ago, there were concerns about how quickly 5G standards were going to be developed, how quickly these systems were going to be deployed. And again, we've seen -- we're seeing acceleration. We're seeing a lot of demonstrators and as you probably saw at CES, a couple of the OEMs basically were demonstrating very nice performance with their 5G systems at the trade show. There's demonstrators being deployed in some cities today. We see that as very, very positive for our business because of the complexity. And there are also -- 2 things are happening. One is in order to be able to deliver the type of performance that is being targeted for 5G, you've got very advanced antenna systems that are going to be deployed. Massive -- they're often referred to as massive MIMO. These complex antenna structures are very beneficial in terms of utilization of circuit materials. You're seeing also the frequencies go up and that in terms of being able to deliver at very high data rates, there will be migration to higher frequencies and generally that favors Rogers. I mean we're -- it drives up performance requirements, which will typically drive their needs for our materials. So we're -- what we're seeing, what we're hearing in the industry is very positive. There are still, I think, some question marks about when the big volume hits, but all indications are right now that it's going to be a lot quicker than people might have imagined 6 to 12 months.

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Craig Andrew Ellis, B. Riley & Co., LLC, Research Division - Senior MD and Director of Research [6]

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That's very helpful. And lastly, if I could, one for Janice. Janice, impressive margin performance and adjusted EBITDA performance in the quarter. On Slide 15, I believe, walking through the bridge in detailing the things that were driving improved performance. I think you listed by 5 items: utilization, automation, fixed to variable costs, etc. Can you just give us a sense of where we stand in terms of the sustainability of those items? And which of those items have the potential to make an even further more significant contribution to EBITDA expansion and margin expansion as we go through the year?

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Janice E. Stipp, Rogers Corporation - CFO, Principal Accounting Officer, SVP of Finance and Treasurer [7]

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Yes. Obviously, we do believe that they are sustainable. I mean we do have improvements continual and we're putting in more automation. We're taking out all our bottlenecks that we see in our production, so we should see efficiency as the volume growth even further. In addition, as Bruce mentioned, we are in the process of consolidating 2 facilities in Belgium. That will actually help our efficiency even further. And we're moving some things to a Hungary plant. So we see that there's even more potential in the future for the consolidation and the automation that we're seeing. And then of course, we're actually more profitable. Fixed costs, using a certain percentage of [temps] to the ups and downs of our production schedule. So we actually are managing it quite closely, and we see some improvements going forward.

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Operator [8]

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

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Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [9]

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An obviously impressive performance, Bruce. I did want to touch a little and drill down a bit. Obviously, you've got a lot of end markets that seem to be moving in the right direction. 4G and wireless telecom, just roughly what percentage of revenue are we looking at now in Q1? And what type of growth rates are -- do we experience or are we likely to experience on a year-over-year basis?

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [10]

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So on 4G, we're -- of the corporation, it's approximately between 15% and 20% of the total. And as we look forward, what we're seeing is we've seen basically flatness in the 4G LTE area, both base stations and antennas. But we also have some seasonality, and I think we referred to this in the prepared remarks. What we have historically seen over the last 3 years as Q1 is relatively strong, Q2 tends to drop back. Not -- part of that is probably a bit of overbuild, or whatever you might want to call it, in Q1. And then people kind of adjust their inventories going forward in Q2. And then the rest of the years tend to even out and tends to end more strongly. So our sense is that while things are relatively flat on the 4G LTE area, there's pockets of goodness, let's say. I mean certainly places like Korea, Japan, we see some strength in Europe. In China, we see things, as I said, relatively flat. Where we're somewhat disappointed is in India where there's been sort of a pullback on some of the capital investment there on the telecom systems. Part of that is the shake out of the carriers there. And we think sometime during the year, maybe towards the second half of the year, that will return.

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Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [11]

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Extremely helpful. And a similar question as it relates to ADAS. I know that was kind mid-single digit or little better. Where are we as a percentage of revenue as that continues to ramp up?

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [12]

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Well, again the ADAS or auto radar systems are approaching 10% of revenue for the corporation. And we see this, as we've mentioned, 30% type growth rates moving forward because of the penetration there. Now certainly there is -- on the horizon, we've seen some announcements by Ford and GM and so forth curtailing some manufacturing in -- towards the end of Q2 over the summertime. So we'll be watching that very carefully to understand the impact that, that might have on us. But the big story here is the penetration. I think Bob referred to that when he talked about his personal shopping expeditions for automobiles. We're seeing the broad penetration of blind spot, adaptive cruise, transverse sensors across the product lines for automobiles, not just in the Mercedes and the BMWs of the world.

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Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [13]

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Excellent. And then maybe one more. Bob, maybe just take a minute and talk about in terms of the Internet of Things, Rogers specific materials and enabling technologies. And just give us a little bit more color and specificity as to how the company is leveraged to that opportunity as it evolves?

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Robert C. Daigle, Rogers Corporation - CTO and SVP [14]

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Yes. Okay, Dan. So it's really a couple of things. So first, you've got the ongoing deployment of -- they call it NBIOT, Narrowband Internet of Things, and you've seen there's a roll up of some of that infrastructure today in China, for example, and in a lot of the developed countries. So in the near term, I think the way you see this play out, it's really traditional wireless spectrum capabilities that are going to roll out to support really the machine to machine interface technologies, basically redeploying current frequencies bands. But the longer term, which is really the story, is that's a key component of what is going to be part of the 5G standards, and in terms of having the capability to -- they call it low latency, very quick communication between devices, eventually to the point where you're starting hear about standards being developed for vehicle-to-vehicle communications. And it ties in a little bit to what we talked about in the ADAS world where you're -- basically you've got sensors around the vehicle that are detecting things that you might -- might be obstacles for the vehicle. But we can see in the not-so-distant future, when you're on the highway and there's a tractor trailer in front of you and there's a car in front of that, that your car basically has information about that tractor trailer in front of you, it's speed, what's it doing, the car in front of that and in front of that. So it's not just a question of reacting to something ahead of you that you've got -- the vehicle has some insights, and that's all part of this, what will be a very connected world, vehicle-to-vehicle communication, machine to machine interface. And it plays very well into, again, in our infrastructure business, our circuit materials that go into infrastructure will be required, are required, for all of those systems.

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Operator [15]

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And your next question comes from line of Joan Tong with Sidoti.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [16]

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Just a couple of questions. Just want to ask about portable electronics. Obviously, your EMS organic growth is really, really strong. So you mentioned, you called out a bunch of different businesses: general industrial, automotive, mass transit. But one thing that stands out is the portable electronics, and you talked about, in the past, some extended business in that particular segment. Can your just talk a little bit more, other than the back pad business or that new application, anything else that is interesting there? And also just want to get a sense of the visibility in that particular business because you talked about Consumer Electronics, a pretty long supply chain. Just want to get a sense like are you selling to demand right now? Or are you selling ahead or behind? Just want to get a sense of where you are at.

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [17]

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Okay, Joan. So couple of things. On the portable electronics, we have a very -- in EMS, we have a very strong base load of portable electronics business. These are the gaskets that go around the cameras, the switches, the microphones and so forth. And so that's a very nice space that generally doesn't vary too much with designs. We're in and we're pretty well locked in there. Where we see variability is some design wins on things like back pads and so forth. And that's very specific to specific producers, OEMs. And so the visibility on that, as we all know, is not that good particularly, on new designs because the OEMs keep their design decisions tight to the vest until they get very close to introduction and then we'll get the notifications. So that's a bit of a visibility issue that we have in that sector. Overall, we see -- still see this as a very good opportunity for us particularly as we see progression towards the OLEDs. We, right now, have had some success with smaller manufacturers in handheld equipment, handheld devices for OLED but these are some of the smaller folks. We still see opportunities with the bigger producers of portable electronics that we are not counting on at this point. So it's not in our guidance and we see this as an upside, and we continue to work very closely with those OEMs to provide solutions that meet their needs. And I will also say in that sector, that's a very competitive area for us right now.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [18]

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So when you sell your products to like specifically related to OLED, you don't sell to the OLED vendors, you sell directly to the OEMs, the phone OEMs. Am I correct ?

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [19]

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Well, the way it works actually is the phone OEMs get us on the design -- on their design blueprints. And then those blueprints are provided to a group that will cut the gaskets or cut the materials and then provide it to the assemblers. So we get specified in by the OEMs. We actually sell to the converters based on the demands of the OEM.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [20]

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Okay. And if I were to ask you about market size, like, how big is the opportunity? I know that's still early on. You're selling to a bunch of smaller guys, but any sort of like indication, how we think about this long-term market, like, in terms of size and growth rate?

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [21]

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Well, certainly it's -- it will be determined by the conversion to OLED displays. And we've seen some things in the press. One of the large OEMs is saying that their next generation will have 3 different designs, one of which will have OLED, the other 2 LCDs. So I think that the market size will evolve. It's certainly a tremendous opportunity. But I think it's a timing issue and a performance issue on the part of what's required and what we can provide those folks. And again, this is not built in to our go-forward guidance. We're still working very closely to see how it all turns out here.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [22]

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Okay. And then -- and I have a question on the hybrid electric vehicle. That particular segment, what do you guys call the advanced mobility, it seems like it's doing pretty well. And obviously -- so in a country, for example, China, is very vocal about the supporting or subsidizing, like, consumers on that front. Any other regions you think that outside China and Asia, it's doing particularly well? Can you just give us some color on that?

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [23]

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Well, again, included in advanced mobility is what we call x-by-wire, which is the electrification of the internal combustion engine systems. So this is the power steering, power brakes, those kinds of air conditioning, those kind of controls, which require a high energy switch gear, which, of course, plays well to our [caremic] materials. So we see that growing quite well. And that's across the board, that's not just in China, that's across all regions, across all car manufacturers. So we see that as a very nice tailwind for our business. And we continue to see strength certainly with -- in the United States with the one major electric vehicle manufacturer. They're talking about some very big growth numbers when they come out with their new model, their smaller lower cost model. So we see that also as a growth driver for us. What I will tell you, the data indicates that China is the leader in EV manufacturing and we continue to participate there as well.

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Operator [24]

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And your next question comes from line of Sean Hannan with Needham & Company.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst, Electronic Manufacturing Services and Electronic Components [25]

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Just want to see if I can go back to talk a little bit about the quarter. If there is the way, maybe if you can detail a little bit more your perspective in looking at the demand that you saw in terms of where your specific surprises were. And to what extent? Is there any possibility that there may have been some pull-ins or other factors? And then I suppose Part B to that, when you think about your guidance for next quarter, is it really the sustainability of what you're seeing of current demand conditions, excluding that seasonal factors that would come from the wireless business?

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [26]

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So in the -- thanks, Sean. In the quarter, in Q1, there were some pull-ins that, I think, we've outlined in the -- in some of our prepared statements. And they were some things that were pushed forward into Q1 from Q4, and some pull-ins from Q2 into Q1. So that's part of the change in Q2 guidance. The other part of Q2 guidance that's impacting is, as we mentioned, particularly with ACS, we're seeing a -- we're projecting some slowing there in the 4G LTE area going from Q1 to Q2, so that's part of it. And so that has impacted us. And also EMS, a little bit of slowing on the portable electronics as well that we're looking at. But we're also looking at some outperformance and continued strong performance with our acquisitions going into Q2. So it's a bit of a mixed bag. We still see good growth across all of the businesses in Q2, but there were some of these pull-ins and push-outs that affected us in Q1.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst, Electronic Manufacturing Services and Electronic Components [27]

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Okay. And then on the SG&A front, I know it's been touched on a few times. Obviously, being able to generate the type of operating margins you guys did, that's well above that kind of minimum threshold, 15% target, I think, we've talked about in the past. I thought that I heard something about some one-time factors and some derivative contracts that had created an impact there. So just wanted to see if I could understand that a little bit better? It seems, perhaps, that your guidance might be implying an operating margin near 18% for next quarter. So I just want to get a little bit more clarity around this.

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Janice E. Stipp, Rogers Corporation - CFO, Principal Accounting Officer, SVP of Finance and Treasurer [28]

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Yes. I mean we had some onetimers. Obviously, derivative copper, we don't hedge. As we talked about, we don't have hedge accounting, so we have to take the gain as it comes because of the fact that we use different sizes and we have to use process copper. The gap is changing, we're hoping to get hedge accounting in the future. So that was about a $1 million that was favorable. We had favorable healthcare, around $600,000 that happened to hit us, also, that was quite good for us. So there's a couple of onetimers that we don't anticipate that will actually improve. And yes, the derivatives are not in the SG&A for the other income on that. And then the SG&A, we actually just had some things time out. Obviously, we had increased SG&A due to our acquisition of just over $1 million that we actually -- as we acquire, we have SG&A that comes with these positions. So that was about a $1 million that will continue on that to get better. And then some of the cost here actually were just pushed out from quarter-to-quarter that is going to end up in the second quarter that was not in the first quarter. Just retiming of some of the expenses. And that's about $1 million that we're seeing quarter-to-quarter that will go into the second quarter.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst, Electronic Manufacturing Services and Electronic Components [29]

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Okay. And then there was some commentary, I think, around ACS in terms of that there were some slight price concession as a consequence of volume. Just trying to understand, is that specific to auto or ADAS? What was that relevant to? And what type of future reductions would we potentially see in pricing? Just trying to understand some sensitivity around that.

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [30]

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Yes. So on the pricing side, it's minimal, quite frankly. I think we just felt that we -- because it was a bit there, we wanted to report it but certainly, what we're seeing going forward is pricing stability. We don't anticipate any major movement on pricing for us as we look out. What we've historically done on pricing, and we've reported this in the past, big contracts that give us significant volume and lock in with some of these bigger customers. And in the end, it's certainly a huge benefit to Rogers. So we do not see that right now. Some of these contracts are going for multi years, so we're not -- on a year-to-year basis, we're not seeing any movement down on pricing.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst, Electronic Manufacturing Services and Electronic Components [31]

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Okay. And then last question here. Obviously, with the acquisitions you guys have done and how you're performing organically, you're performing very well. Is this a point in time now where you continue to ride this performance, try to maximize what you've acquired, what you've developed internally? Or is M&A still very much on the table in order to bolt on here or even in '17?

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [32]

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So as I talked about in my remarks, this is -- M&A is still a core part of our strategy moving forward, where we continue to seek synergistic targets. I think what we've demonstrated with Arlon, DeWAL and DSP, these are the types of acquisitions that we are able to leverage our infrastructure, able to leverage our capabilities very quickly and show nice synergies on the cost side but also on the revenue side. So we continue to be out looking in the marketplace for these kinds of opportunities. And as I said, this is still part of our core strategy moving forward. I will also say that our organization is busily integrating these acquisitions, and we have robust targets and timetables for that to occur and we feel very good about progress so far. And with each acquisition, we refine our processes and our approaches and continue to really add value as we move forward.

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Operator [33]

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And we have no further questions in the queue at this time. I will turn the call back over to Bruce Hoechner.

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Bruce D. Hoechner, Rogers Corporation - CEO, President and Director [34]

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All right. Well, thank you, everyone, for joining us. As we look forward, we see some really good opportunities moving into Q2 and we look forward to another great quarter. So thanks for joining us, and we'll talk to you soon.

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Operator [35]

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Thank you to everyone for attending. This will conclude today's conference call. You may now disconnect.