Rogers Corp (ROG) 2015 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Rogers Corporation third-quarter 2015 earnings conference call. The slides for today's call can be found on the Investor Relations section of our website, along with the news release that was issued yesterday. Turning to slide 2, with us today is Bruce Hoechner, President and CEO; David Mathieson, Vice President, Finance and CFO; and Bob Daigle, Senior Vice President and CTO.

Please turn to slide 3. Before we begin, I would like to note that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in Rogers' operations and environment. These uncertainties include economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking 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 these 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.

I will now turn the call over to Bruce.

Good morning, everyone. In Q3 2015, Rogers achieved another quarter of strong non-GAAP earnings, delivering $0.79 per diluted share, exceeding our previously announced guidance. Although net sales decreased by 1.6% from Q3 2014 to $160.4 million, we delivered non-GAAP operating margin of 14.7%, which is in line with our goal of 15%.

The Company believes our revenue decline is linked to the impact of the uncertain global macroeconomic conditions. This situation has resulted in the delay of infrastructure spending, leading to weaker demand in certain applications across all three business segments.

During the third quarter, we maintained a disciplined approach to cost management and continued our focus on operational excellence initiatives. These efforts contributed to our solid margin performance, despite sizable market headwinds. While we are cautious in the near term based on current market conditions, we remain confident in the longer-term growth expectations in our key megatrend markets. I will speak more about the growth outlook for our key markets later in the call.

Turning to slide 4, I'd like to review the four elements of our growth strategy. This roadmap has proven to be the right approach, and we firmly believe that it will lead us to a strong recovery when the global markets improve. As a market-driven organization, we believe the diversity of Rogers' three megatrend categories provides an effective counterbalance for the variability of any specific market.

For example, the impact of slower-than-expected recovery in China's wireless telecommunications base station buildout has been partially offset by the strong demand in advanced driver assistance systems. We remain confident that we are in the right global growth markets based on the projected long-term growth rates in key applications.

In the area of innovation leadership, we are pleased to announce the September opening of the Rogers Innovation Center in Asia. Our approach has been to collaborate with leading researchers to bring breakthrough technology to our customers. China has great capabilities in this area, so we expanded our scope to give us better access to the technology development in that region.

I am encouraged by what I see in the pipeline from our innovation centers, as well as from the business segments where our R&D teams continue to focus on next-generation solutions. During 2015, we have increased our R&D investment to over 4% of revenues to support this strong pipeline of next-generation and new technology to meet market demand.

Our focus on synergistic M&A is making a positive contribution to revenues, as well as providing greater technological capabilities and market access to Rogers. We are pleased with the smooth integration of Arlon, which is now substantially complete. Most importantly, the business has performed consistently, exceeding our revenue and profitability targets we established at the outset of the integration.

Rogers' bottom-line performance is evidence of our solid execution of our operational excellence initiatives. With fluctuating market conditions like the ones we face now, we are aggressively controlling what we can by operating the business more efficiently. And we are making great progress in implementing process and system improvements across the Company, from the manufacturing floor to our back-office functions.

Our approach includes formalized programs such as Six Sigma and supply and demand planning, as well as active engagement from front line employees for operations improvements. Together, these approaches are assisting all three of our business segments to improve yields and lower costs.

At the bottom of this slide, you'll see our interim three-year financial goals, which serve as a checkpoint in our long-term plan. While we are facing some unanticipated market headwinds, we remain confident in our long-term growth prospects of achieving 15% revenue growth through a combination of organic and acquired growth.

Turning to slide 5, I'd like to review our Q3 operating highlights. As mentioned, net sales for the quarter were $160.4 million, a 1.6% decrease from Q3 2014. Non-GAAP earnings exceeded guidance, with EPS of $0.79 per diluted share. On a currency adjusted basis, organic net sales declined 14.1% compared to Q3 2014. Fluctuations in foreign currency exchange rates unfavorably impacted Rogers' revenue by approximately 4.6%. During the quarter, the legacy Arlon business helped to substantially offset the decline in organic sales, contributing $27.8 million in net sales, and EPS of $0.19.

Gross margin declined 250 basis points from 39.6% in Q3 2014 to 37.1% in Q3 2015. As previously mentioned, our discipline around operational efficiency helped us deliver non-GAAP operating margin of 14.7%, which was down 270 basis points from a record high of 17.4% in Q3 2014.

Turning to slide 6: for the quarter, ACS achieved record third-quarter net sales of $66.2 million, driven by $16.6 million from Arlon, which is an increase of 4.4% over Q3 2014. We saw healthy revenue for 4G/LTE antenna applications, as well as advanced driver assistance systems, and aerospace and defense applications. The demand in these segments was not enough to offset the weakness in power amps for wireless base stations and higher inventory levels still being worked off in the supply chain.

The ACS team is committed to manufacturing process efficiency and implementing process and system enhancements to reduce costs and improve on-time delivery for our customers. Based on what we're seeing in the marketplace, such as uncertainty from the equipment providers, we're cautious in the near-term. We maintain our belief that global coverage and capacity requirements for 4G/LTE infrastructure will drive stronger demand in the mid- to long-term.

For base station antenna applications, we believe the inventory in the supply chain is balanced, and we expect demand to remain strong as more multiband antennas are deployed to support the 4G/LTE rollout and wireless data traffic requirements.

In the automotive market, we expect to see strong growth in advanced driver assistance systems, where the compounded annual growth rate is projected to be 31% through 2020.

Turning to slide 7, EMS achieved a net sales of $46.8 million, including $6 million from Arlon, which is roughly flat year-over-year. Solid top-line results and mass transit and automotive were more than offset by weaker demand in portable electronics. As we reported last quarter, the demand shift in portable electronics is twofold. First is the decline in overall mobile phone volume, and, more specifically, feature phone volume. Second is the continued migration away from the use of LCD phone gaskets in smartphone and tablet designs.

The EMS organization is addressing the headwinds in the portable electronics market by refocusing the business on other growth categories. We continue to see opportunities in the general industrial and mass transit markets, where experts predict strong long-term demand despite near-term softness due to market conditions, as well as in consumer impact and protection. And we see more opportunities for growth through geographic expansion in all of these segments.

In addition to pursuing these growth opportunities, EMS has implemented a number of process improvements that are contributing to ongoing yield increases and cost savings. Enhancements to sales and operations planning have led to greater accuracy in production planning and on-time delivery, improving customer satisfaction.

Turning to slide 8, PES net sales were $36.6 million, a decrease of 21.3% compared to Q3 2014. On a currency adjusted basis, PES sales declined 9.7% from the prior year. We believe slowing investments in infrastructure caused by weakened economic conditions has delayed spending that is a substantial part of the PES business. Foreign exchange rates have also impacted PES significantly, more than our two other segments, due to the customer and manufacturing locations of the business.

Our results reflect steady demand in EV/HEV applications, as well as a moderate increase in laser diodes. This performance was more than offset by weaker demand in mass transit variable frequency motor drives, and certain renewable energy applications.

Within the PES markets, we see long-term growth in EV/HEV markets based on worldwide demand for improved fuel efficiency and a reduction in CO2 emissions. This focus is also driving growth in vehicle electrification, or X-By-Wire applications, where the compounded annual growth rate is expected to be 13% through 2020. We see tempered demand in the near-term, due to continued delays in infrastructure spending.

From an operational standpoint, PES continues to invest in automation and process technology to improve -- improvements to lower costs and increase throughput. These efforts are also leading to yield increases, more consistent product quality, and a substantial reduction in cycle time.

Turning to slide 9, you'll see that 65% of Rogers' Q3 revenues came from our megatrend markets. While the short term is less clear due to economic conditions, we believe that the macro trends in our specific markets point to continued growth in the coming years. The Internet connectivity, for example, consumer demand for mobile video content is expected to drive a 57% compounded annual growth rate in mobile data traffic over the next four years.

In relation to clean energy, consumer demand and government mandates for fossil fuel alternatives are contributing to a strong growth outlook in the EV/HEV market, where the compounded annual growth rate is 32% through 2020.

In addition, experts are predicting a compounded annual growth rate of more than 6.4% through 2020 in industrial motor drive applications. Our newest megatrend, safety and protection, also presents many opportunities. This megatrend is driven, in large part, by the strong demand for applications in automotive radar systems, where industry experts are predicting a compounded annual growth rate of more than 30% through 2019. Another key opportunity for Rogers lies in the personal protective equipment market, where government regulations and workplace mandates are driving compounded annual growth rate of 7.3% through 2020.

Before I turn the call over to David for a detailed review of our financial results, I'd like to take a moment to expand upon yesterday's announcement regarding David's upcoming retirement from Rogers. Since joining us from early retirement nearly a year and a half ago, David assisted us through the successful acquisition of Arlon, led the restructuring of our debt, raised our visibility in the capital markets, and further developed our global finance organizational capabilities. He is leaving a lasting, positive impact at Rogers. I personally want to wish David all the best as he returns to his retirement. We expect to announce David's successor in the near-term.

With that, I'd like to turn the call over to David, who will report our Q3 financial results in greater detail.

Thanks, Bruce. In the third quarter of 2015, we achieved net sales of $160.4 million, down 1.6% compared to the third quarter of 2014. Net sales were slightly below, and non-GAAP earnings exceeded the Company's guidance provided on July 29, 2015. Despite the lower organic volume, we continued to be pleased with our margins due to operational excellence initiatives and cost management.

Turning to slide 12, as Bruce mentioned, the macroeconomic conditions weighed heavily on our organic sales this quarter, which declined by 14.1%. And we estimate an unfavorable currency impact of 4.6%. The acquisition of Arlon contributed $27.8 million or 17.1% of additional revenue in the quarter.

On slide 13 is a waterfall chart to help explain the changes to EPS from the third quarter of 2014 to Q3 2015. The $1.09 of EPS last year was reduced by the lower volume impact to margin of $0.58. Continued improvements from operational excellence programs and lower commercial expenses, primarily due to lower incentive compensation accruals relative to 2014, contributed $0.19 of EPS improvement. This was further offset by another $0.10 related -- unfavorable foreign currency transaction costs, increased interest expense due to the debt related to the Arlon acquisition, and a higher tax rate.

Arlon added $0.19 to the EPS. This results in a subtotal of $0.79, which is the non-GAAP earnings from these adjustments, after which we deduct $0.02 from restructuring severance charges and $0.10 for a discrete tax charge related to an update of intercompany transfer pricing, which impacted prior periods, to arrive at our GAAP EPS of $0.67 for the quarter.

On slide 14, consolidated gross margin of 37.1% in the quarter is lower by 250 basis points compared to the previous year. Gross margin from organic business declined by 180 basis points due to lower organic sales, partially offset by operational excellence initiatives. This was further offset by a lower gross margin profile from the acquired Arlon business of 70 basis points.

On slide 15, year-over-year non-GAAP SG&A decreased by 60 basis points from 18.5% to 17.9%. This amount excludes restructuring severance costs, but does include $2.3 million of incremental costs from the Arlon business, $1.7 million of SG&A, and $1.6 million of purchase accounting. Organic SG&A increased by 60 basis points mainly because of the lower organic sales, partially offset by lower variable costs primarily due to incentive compensation accruals and spending controls. Arlon lowered overall SG&A as a percent of sales by 120 basis points, which includes amortization related to purchase accounting.

Research and development of $7.3 million or 4.5% compared to $6 million or 3.7% in the third quarter of 2014. The overall increase of 80 basis points was driven by an 140 basis point increase in organic R&D due to the continued investment in the innovation center, including the opening of a new location in China. Lower R&D as a percent of sales from the acquired Arlon business lowered the rate by 60 basis points.

On slide 16, non-GAAP operating income was $23.6 million, down 16.9% from the prior year. Non-GAAP operating margin was 14.7% in Q3 of 2015, down 270 basis points from prior year. This was due to a reduction of gross margin of 250 basis points, as well as a reduction of 20 basis points primarily due to a higher rate for R&D investments, partially offset by the lower rate for SG&A spending.

On slide 17, ACS achieved third-quarter sales of $66.2 million, up 4.4% from Q4 2014. Organically, sales were down 20.3%, and currency lowered sales by 1.5%. The Arlon acquisition increased net sales by 26.2%. Operating income was $11.9 million, down $2.2 million from Q3 2014, or 410 basis points as a percent of sales. This decrease was a result of lower organic sales.

On slide 18, EMS achieved third-quarter sales of $46.8 million, flat from Q3 2014. Organically, sales were down 10.5%, and currency lowered sales by 2.1%. This was offset by the Arlon acquisition that added 12.8% to net sales. Operating income was $8.1 million, down $0.3 million from Q3 2014, or 80 basis points as a percent of sales. This decrease was the result of lower organic sales.

On slide 19, PES achieved third-quarter sales of $36.6 million, down 21.3% from Q3 2014. Organically, sales were down 9.7%, and currency lowered sales by 11.6%. Non-GAAP operating income was $1.6 million, down $2.1 million. As a percent of sales, the decrease was 350 basis points. This decrease is due to lower organic sales, partially offset by yield improvement programs and lower spending.

On slide 20, in the first quarter of 2015, we acquired Arlon, using borrowings of $125 million under our bank credit facility, in addition to cash on hand, to fund the acquisition. Cash flow from operations for the nine months was $45.6 million, with capital expenditures of $21.6 million. In addition, we repaid debt, including leases of $5.9 million. And we repurchased shares of $33 million, ending the quarter with a cash balance of $192.6 million and a debt balance of $179.3 million.

I would like to take this opportunity to discuss a recent development in our business. When Arlon was acquired, the operations related to high-frequency circuit materials and silicon elastomers were integrated into the existing ACS and EMS businesses. The parts of Arlon's operations that manufactures polyimides and epoxy-based laminates and bonding (technical difficulty), was not considered part of Rogers' strategic focus. This is reported as part of our Other segment, and generates approximately $20 million of revenue annually, with minimal impact on profit.

After taking time to evaluate this business more fully, we have decided to actively market this business for sale. The diluted assets and liabilities have been reclassified as held for sale, and are reported separately in our financial statements as of September 30, 2015.

On slide 21, during the quarter we repurchased 678,300 shares of our common stock for $37.5 million under a previously announced $100 million share repurchase program. All repurchases were made using cash from operations and cash on hand. The shares equate to approximately 3.5% of outstanding shares as of September 30, 2015.

On slide 22, guidance for the full quarter is for our revenues to be in a range of $145 million to $155 million, and for net earnings to be in the range of $0.53 to $0.63 per diluted share. At the midpoint, our Q4 revenue guidance represents organic sales decline of 13% over Q4 2014. The Company expects sales will be unfavorably impacted by approximately $4.7 million due to the decline in value of the euro on a year-over-year basis of 3%. Acquisition growth will be approximately 18% over prior year.

Guidance for our EPS has a midpoint of $0.58 per diluted share. This guidance shows a reduction of $0.31 per diluted share compared to the EPS in Q4 2014. This decrease is due to several factors, including, firstly, $0.55 related to the lower volume and unfavorable absorption; secondly, lower JV results, higher interest expense related to the Arlon acquisition, and unfavorable currency transaction costs of $0.06; thirdly, lower commercial expenses of $0.14, primarily due to lower incentive compensation accruals, partially offset by higher R&D investment; and, fourthly, the Arlon business adding $0.16 per diluted share.

Given the recent developments in the global markets, I'd like to take a moment to also compare the Q4 2015 guidance estimate to the Q3 2015 results. Compared to Q3 2015, we expect the fourth quarter to decline in revenues by about 6% at the midpoint, primarily due to the decline in the organic business. This is driven by global macroeconomic conditions and business seasonality. We also expect a sequential decline in non-GAAP EPS of $0.21 per diluted share at the midpoint from Q3 2015 non-GAAP EPS. This decrease is due to lower volume and unfavorable margin impact, primarily due to absorption.

I also want to thank Bruce and the entire Rogers organization for the opportunity of working at Rogers for the last 18 months. I had been contemplating returning to my retirement for some time. And I was comfortable making my decision this week with the changes we have made to the finance leadership, and the succession plans firmly in place. I have great confidence in the Rogers team, and I look forward to following its success in the future.

This completes my commentary, and I will now turn the call back over to Bruce.

Thanks, David. So this concludes the prepared remarks. Let's open the lines for Q&A.

Tonya?

(Operator Instructions). Daniel Moore, CJS Securities.

Bruce, you mentioned obviously some of the inventory challenges that you are seeing. How much of the declines in revenue in Q3, and what you expect in Q4, and maybe break it out between ACS and [PCS]. Would you attribute to draw downs in inventory versus actual declining or weakness in end market demand? And any data points that could help us understand where that confidence or that thought process is coming from would be very helpful.

Sure. So as we look forward into Q4, and look at where we are on the inventory side, specifically around the base station materials, we think that the inventory is relatively imbalanced; could be a little bit -- or should be in balance; perhaps a little bit more to pull down. But what we've done, going out to the board shops and so forth, what we're hearing is that we're pretty much in tune and in balance. On the antenna side, we're very, very sure about that side of the balance on inventory.

I think you meant the PES side of the business.

Yes.

I think that's more strictly a straight demand, and we don't see inventory necessarily being an issue in that world. It's just a question of when the orders come in. And this is much more related to CapEx. And of course with the headwinds with the economics around the world, that is what we're seeing driving what we'll say is the decline there in the quarter.

Okay. And then as a corollary, any evidence that you could point to, or help us gain confidence that the delays in infrastructure investments are, in fact, temporary and not systemic? And what is your visibility to exactly how temporary you think they may be?

Well, we're paying very close attention to what our co-suppliers, the equipment manufacturers, are saying, and the visibility that they have. And frankly, if you look at the releases that have come out over the last week or so, they are basically saying they don't have very good visibility, but very confident in the mid-term and longer-term outlook for the markets.

So if we look specifically at China, where we have heard and seen the announced 930,000 base stations, what we're hearing is they probably won't get there this year. So it will be off by about 100,000, so it will be about 830,000 produced this year. Our belief is that will roll into next year, and so that will add to the demand that was on tap for next year. So we see this coming back; it's just a question of variability on the timing of it. That's specific to the China 4G/LTE buildout.

More broadly -- and this is where the visibility is a little bit more difficult -- is the macroeconomic impacts, whether it's in China, whether it's in Europe or North America. We're seeing pull-back, and a lot of our business is driven by capital investments and expansion. And so that's what we're seeing in terms of pull-down in the near-term.

When we see things start picking up, our belief there obviously is that things will pick up for us. I will reiterate also that our belief is that in each of the markets and the applications that we're in, these are still very, very good outlooks, very strong outlooks for us. We don't see any major share issues or anything like that within Rogers, within our markets. This is very much related to what I'll call the macroeconomic impacts.

Very helpful. I'll ask one more and jump back. Just switching over to EMS, just in terms of smartphones and tablets, do you see your revenue as bottoming out anywhere here in the next few quarters? Or do you expect the declines that we've seen, given the changes in technologies, are more likely to continue going forward?

Our belief is that we've come to a reasonable point of stabilization. Now, there's still variation quarter-to-quarter that is having to do with new releases, and so on. But our view, going forward, is there's maybe a little bit more downside pressure on us in the tablets area. But what we're looking at is the return to growth in that business that will be really powered by the consumer impact area, as well as general industrial, as we see the economies start picking up again and seeing that investment.

Automotive is also an area that we've seen some good strength, moving forward, that will help offset maybe a little bit of the weakness and softness on the portable electronics side.

Okay. I'll jump back in queue. Thank you.

David Cohen, Midwood.

Looking at the revenue bridge you provided, Q3 and Q4, that organic dollar decline was $7.5 million in Q2, $23 million in Q3. I was wondering if you can give some more detail about the sources of that organic decline. I know you've generally attributed it to, say, base stations offset by [beta asset] sort of thing, but what are the biggest contributors there? And, also, what is the expectation for those contributors in Q4, from an organic perspective?

Our view on the organic side is that this is a broad economic headwind that we see across the economies. And it's not as specific -- it's really not related to a specific area. We're just being very, very cautious on our outlook, given what occurred in Q3, and what we're seeing in the global markets. So, we don't necessarily see this as a specific application or market issue. It's a general issue. And like I said, we're being cautious, in line with what we're hearing and seeing with our co-suppliers and OEMs in the market.

Let me ask it a different way. Let's say for base stations, was the decrement from base stations significantly bigger in Q3 than it was in Q2? And what is your expectation for the base station impact in Q4 versus Q3, in terms of dollar decline year-over-year?

Yes. We think it will be similar; slightly, perhaps down; but similar to Q3 in many areas. We think that in China, specifically, again, we had basically thought that we would start seeing a buildup in September. We haven't seen that. People are still projecting that for the rest of the year. We're stepping back and saying, let's see it before we actually say it in our guidance. So, we don't necessarily view that the base stations are going to significantly decline, but we haven't built in any real return to what we think would be a normal level there.

Okay. And one last question: in terms of your use of capital, buying back stock like you did, maybe you could just provide some degree of -- the framework from a returns perspective that you look at and say, okay, this is the highest return of use of this chunk of capital. What is the financial logic between whatever level of buybacks, versus deploying the capital elsewhere?

Well, we think buying back stock at $55, I think the average was for the third quarter, is a great deal for our shareholders. We think at these levels, we're getting significantly good returns, given our long-term outlook.

Okay. (multiple speakers) Because your recurring return on that is basically single-digit, right? If you think about your earnings -- the inverse [ERP], your earnings yield, and what you're buying back, that's a single-digit return. So you are making a longer-term view about the earnings yield of this Company and the multiple that you are effectively buying. Is that fair?

Absolutely. We're not looking at the short-term here. We're looking at the long-term. The long-term trends are still intact; the megatrends are still intact. And our Company is capable of growing at a faster rates than we are currently, and we're looking at that. And, currently, we think our stock price is undervalued. So we think we're doing -- we're making the best use of our surplus cash.

All right. Thanks, guys.

(Operator Instructions). Juan Molta, B. Riley.

Nice job on the cost management.

Thank you.

A question we've gotten here from some people, regarding your guidance and the limited visibility: as you enter these higher-growth markets where we only have expected CAGRs, do you expect the visibility to continue as-is? Or will that be -- will you have a little bit more clear visibility as the markets mature, or any other factor?

Historically, we have not had more than really one good quarter of visibility across our businesses, and that's why we don't actually give annual views on where we're headed. But we do believe that these markets, as they recover, we'll start seeing indications. And as we go through the fourth quarter and into the first, I anticipate that, if the global economies cooperate and things start recovering, we'll see that very much in our back orders and so forth, that will come through the system.

Okay, perfect. Quick question -- I'll jump around maybe a little bit. On China, is the transfer of the tower assets from [tricarrier] to the tower corporation, has that contributed to the slow down here, the temporary slowdown in base stations?

Actually, it has not been a factor. As a matter of fact, what it is, it's consolidating the three providers to one piece of real estate, one tower. And actually we've seen continued strong demand there because they still have to install individual antennas. So it's actually making it better for us. Because there had been a tower shortage issue on the real estate side, and now with the consolidated approach that they're taking, each one of the carriers will install their own antenna, which is good news for us.

And as a matter of fact, in Q3, as we look back at that -- and this was a lot of the Arlon business that we acquired -- is in those tower antennas. And that's been -- stayed very consistently strong for us. So, going forward, we see this as a positive for us.

Okay. That's great. And a broad question: as you look across the three operating segments, could you comment if there's anything to highlight on pricing versus volume, what you saw this last quarter?

Our pricing has remained steady. In a few market areas, we've been able to push some pricing. But we've kept pricing in line, and our margins are showing that. As a matter of fact, given the decline in the top line, I would say that our gross margins have really demonstrated a lot of the good work that we've done on the operational excellence side. And coming in with a 14.7% operating margin in this environment, I think demonstrates that. So the leverage we're getting on the margin side has not really been driven by pricing, although we've held it; it's much more on the operating side.

Okay. And then I'll ask one more. Don't know if it's possible to answer, but if we could do best efforts. Regarding the different scenarios in terms of your quarterly revenues, as we model out for 2016 and we look at what type of revenue level you can deliver, and look at historical margins based on that revenue level, can you give us a sense of where your margins would look? Given, say, you're making $160 million quarter, this quarter, what would it look like at the $150 million or $170 million, given that you've made all these operating initiatives to improve efficiencies on the rest?

Well, again, we don't go beyond the quarter in terms of estimates, but what I will tell you is we still see many opportunities on the operating side of the Company to continue to take cost out and continue to be more efficient. So, quite frankly, obviously we're very disappointed with the top line and with how the markets have performed, which directly impacts us on our margin side because of the lower volume. But at 50% to 60% contribution margin, when things come back in place here on the volume side, a lot of that drops right to the bottom line.

That, in addition to the operational excellence initiatives that are ongoing, I think you could make a case that the margins will continue to be strong and move upward.

Okay. Thank you very much, guys.

Alan Mitrani, Sylvan Lake Asset Management.

I appreciate all the color and the detail, so thank you. With regard to Dave, is there already a replacement hired, or are you currently interviewing?

Well, we've identified a suitable candidate. And that's why David now has decided that now it's time for him to go back to the golf course. So, it's just a question of timing, and getting that person on board.

Okay, I appreciate that. And then with regard to the non-core assets from Arlon, you said it's roughly $20 million, and it's basically breakeven. That's on an operating line?

Yes (multiple speakers).

Can you maybe just give us a little more detail as to what specifically that goes towards and what you think -- I mean, I realize -- are there strategics that might buy it, or is it the kind of thing that it might be a management buyout? Because a company not making any profits at $20 million of sales probably doesn't rank high on people's wish list.

I'm going to ask Bob Daigle, who is also overseeing our M&A and divestitures, to have some comment on that.

Yes, so I think as David mentioned, when we bought Arlon, and I think we were -- we talked about it in the announcement, there were really three pieces of the Arlon acquisition. About half the revenue was around our high-frequency circuit material area, with a large part of that, what's driving our growth in the antenna area. There was a piece that was about -- over 25% that really was new platform technology for our EMS business in silicones area.

And then there was this piece that we call -- that's out in Rancho, California, that does some polyimide and epoxy materials. And frankly, that, for us, when we looked at it and we diligenced it, it was a negative. It was something that we didn't consider to be an attractive part of the portfolio and has, as David pointed out, a relatively low margin profile.

We have had a fair amount of -- there are always buyers out there that are looking for businesses that do generate some cash and potential to bundle with other things they might do to get some growth out of it. And then that's really what we're focused on is, is there a good home for there with somebody who -- frankly, for us, it's a distraction. For others, we think it could be hopefully a good, viable business for them.

Do you think this is a 2015 close in terms of being able to exit that business?

Yes. Right now, again, we are just actively marketing. And time will tell as we move forward here on when we can do something.

And then lastly, in terms of acquisitions, I realize you still have some of the stock buyback out. Stock is down today to $49. I'm just wondering how the stock buyback fits in with acquisitions and whether you still think here the market is good for acquisitions or buybacks. Just talk a bit about where you see capital allocation in the next year.

Well, we believe we can do the level of buyback over time and still continue to do acquisitions. We use cash basically to buy back stock, so far. And our borrowing capacity is intact. And we could do another [buyback] today. So that remains intact.

We have a pipeline in place. We are putting a lot of effort. We've got our business unit and our corporate teams really focused on trying to find new platforms to bring into the Company, again, supplement organic growth with some new capabilities. So we are driving there. I think the environment is actually pretty good right now for trying to bring something into the Company.

Great, thank you.

Daniel Moore, CJS Securities.

Just wanted one or two on some of the areas where you are still seeing growth. Advanced driver assistance systems, the number is still relatively small, but has the rate of growth slowed or changed at all in the back half of this year compared to what you have been seeing previously?

No, Dan, as a matter of fact, this is a bright spot. And it really is a nice counterbalance to some of the other parts of the business, as we have seen growth here in this quarter, year-on-year growth of 39%. And so this is becoming a much bigger part of the ACS business. And again, the projections out there are for nominally about 30% CAGR up through 2020. So we are very positive on that. And again, we have been able to really maintain our position in that market quite well.

And similar question. You mentioned, Bruce, some tempered expectations for X-By-Wire near term. Can you elaborate on those and how temporary you think that might be?

Well, I think some of that has to do with timing of these new designs coming in and some designs moving out. That includes some of our material. So that still is a very positive outlook on X-By-Wire for us in the PES business. So I think there's some noise quarter to quarter, but on the uptick and moving forward.

And lastly, just a follow-up on the capital allocation question -- significantly aggressive. You bought 680,000 shares, almost, in Q3 at prices higher than we are today. Assuming when the blackout period ends, any reason why you wouldn't be similarly aggressive going forward?

We wouldn't like to give guidance for that, Dan. It's something we are looking at, but it's certainly not something I'd want to figure into our guidance.

Okay, understood. Thank you again.

(Operator Instructions) David Cohen, Midwood.

Yes, I was wondering if you could give a little more color on the cadence of Arlon, what sort of performance on a year-over-year basis, if it is comparable to the preacquisition period, or sequentially you are expecting for Q4, because at least Q2 to Q3 it actually held up very well, certainly in contrast to the core business or the legacy business.

Yes, absolutely. And so we see continued strength in Arlon, particularly in the ACS side of the business, where, as I mentioned earlier, the antennas, the multiband antennas are a big part of that acquisition for us. And so, moving forward, we see continued strength. So the nominal increase year to year, 3% to 5%, is what we are thinking about through the rest of the year. So we are pretty pleased with that.

Great. Thank you.

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

Thanks, Tonya. Like many global companies, Q3 presented Rogers with greater challenges than anticipated a few months ago, due to the increasing uncertainty in our global economy. Our markets were softer than we expected, and that was reflected in our revenues.

Looking ahead, we will continue our discipline around operational excellence as well as cost management to help us deliver solid margin and profitability performance. We remain confident in our growth strategy, including the long-term strength of our global megatrends markets and our approach to M&A. This blueprint for our future has us well positioned for growth when the global macroeconomic conditions improve.

Thank you for joining us today. Have a great day.

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