Rogers Corp (ROG) 2016 Q2 法說會逐字稿

Good morning. My name is Chris and I will be your conference operator today. At this time, we would like to welcome everyone to the Rogers Corporation 2016 second-quarter conference call. (Operator Instructions)

Bill Tryon, Director of Investor and Public Relations, you may begin your conference.

Thank you, Chris. Good morning, everyone, and welcome to the Rogers Corporation 2016 second-quarter earnings call.

The slides for today's call can be found on the investors section of our website, along with the news release that was issued yesterday. Please turn to slide two.

With me today is Bruce Hoechner, President and CEO; Janice Stipp, Vice President, Finance, and CFO; and Bob Daigle, Senior Vice President and CTO.

Turning to slide three, before we begin I would like to advise 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 those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call, which is posted on the investors section of our website.

I will now turn the call over to Bruce.

Thanks, Bill. Good morning, everyone, and thank you for joining us for today's call.

Before we talk about the quarter, I would like to comment on the other announcement we made yesterday, which is the relocation of our corporate headquarters to Phoenix, Arizona. This move aligns well with our growth strategy, providing us with better access to emerging business and technology centers on the West Coast, as well as to operations in Asia. Our ACS business segment has been in the area for 50 years, employing nearly 400 people, so the benefits of the greater Phoenix market are well known to us. Please turn to slide four.

In Q2 2016, Rogers achieved net sales of $157.5 million, in line with our stated guidance. ACS showed modest growth, while sales in our EMS and PES business segments decreased slightly in Q2, due to volume and currency fluctuations. Net sales declined 3.4% from the comparison period.

Net of the $4.8 million revenue impact from the 2015 divestiture of non-core assets, overall revenues for Q2 were essentially flat.

Adjusted operating margin decreased 110 basis points to 13.5% as a result of higher SG&A-related costs to strategic -- related to strategic business investments. These investments include establishing the framework to efficiently repatriate foreign earnings, as well as key market analyses to support our growth. Janice will discuss this in greater detail later in the call.

Second-quarter gross margin, which is not reflected on the slide, was 38.2%, an increase of 100 basis points over Q2 2015, demonstrating our continued focus on implementing operational improvements. Q2 adjusted EPS per diluted share was $0.88, within our guidance range, and adjusted EBITDA was $29 million, or 18.4% for the quarter.

We experienced slower than expected growth in certain key markets in Q2. We believe that ongoing global economic uncertainty, which constrained capital expenditure during the quarter, may contribute to a greater quarter-to-quarter variation. We maintain our confidence in the long-term growth prospects for our core markets and will continue to execute our growth strategy to capitalize on the opportunities ahead.

Turning to slide five, I would like to review our growth strategy. This roadmap has enabled us to deliver solid results and positions us for the projected growth in our megatrend markets. Rogers is a market-driven organization and we leverage our deep understanding of the link between our markets and technology to develop solutions that fill unmet needs in the marketplace. We recently hosted a day-long innovation event where we brought together Rogers engineers and a key customer's top technologists. These events deepens our customer partnerships so together we can develop a roadmap to meet their future technology needs.

In the area of innovation leadership, we are very pleased with the advancements we are making in our innovation centers, as well as in the operating units where our R&D teams are focused on next-generation solutions. Our approach to partnering with local universities in the US and Asia is yielding results. We are filing for new patents in record numbers and we are evaluating a robust pipeline of groundbreaking new technology platforms at our innovation centers.

Growing organically and through synergistic M&A remains a key focus for the Company. We continue to invest in activities that will help us identify and pursue opportunities that will add value for our shareholders. To increase the profitability of the Company, we have a number of projects underway within our operational excellence initiatives. Over the past several years, we have improved our on-time delivery and reduced our raw material inventory. Our teams continue to increase yields and implement productivity improvements and our Q2 gross margin reflects these efforts.

We are also pleased with the progress we have made on our safety journey. Since 2011, we have reduced our OSHA recordable rate by more than 300% as a result of the system improvements implemented by our EH&S team, as well as the commitment of each employee.

On slide six, the longer-term outlook and corresponding growth expectations for our key markets remains positive over the next two to three years. For example, consumer demand for mobile video content is expected to drive a 45% compounded annual growth rate in mobile data traffic over the next five years. To support that explosive growth, the FCC recently voted to open high-frequency spectrum for 5G networks in the US. Such actions bode well for Rogers since our core strengths in advanced antenna technology, power amps, and other wireless telecommunication components should enable us to capitalize on that growth.

Other areas of importance to Rogers are energy efficiency and safety, which continue to be at the forefront of technology advancements across many markets. In particular, we expect to see solid growth for EV/HEV and automotive safety system applications going forward.

We are not anticipating significant shifts in commodity pricing, foreign-exchange rates, or inflation at this time; however, as we experienced in Q2, there continues to be considerable uncertainty in the world economy, leading to variability in capital expenditures. As we face these challenges, we will take a disciplined approach to managing our business and delivering on our strategy. We will continue to drive new innovations, implement our operational excellence initiatives, and identify acquisitions that can add to our current businesses and bring new technologies to Rogers to supplement organic growth.

We are confident that the strategic investments we are making will drive greater agility and flexibility in the face of market uncertainty.

Turning to slide seven, ACS delivered net sales of $67.2 million during Q2 2016, which is an increase of 1.2% over Q2 2015. Adjusted operating margin was 17.3%.

Our Q2 ACS results were driven by demand in applications for high-frequency circuit materials used in automotive safety and other high-reliability applications. Demand for wireless telecom applications was up slightly, but lower than expected, due to delayed spending in both India and China, which we expect to occur now in 2017. This resulted in a gradual softening of demand as we moved through the quarter.

Growth in ACS was partially offset by lower demand in satellite TV dish applications.

We are executing on our strategy to deliver growth in ACS. In the near term, we expect to maintain our leadership position in 4G LTE wireless infrastructure, as well as in automotive safety systems where manufacturers are offering more of these features across luxury and mass-market models.

As mentioned previously, we are well positioned to capitalize on the growth we expect to see with the buildout of the 5G networks.

Turning to slide eight, EMS achieved second-quarter net sales of $45.8 million, a decrease of 2.6% from Q2 2015. Adjusted operating margin was 13.4%. During the quarter, EMS results were driven by an increase in demand for portable electronics and automotive applications. This demand was offset by lower demand for general industrial, mass transit, and consumer applications. Softness in the general industrial market was a result of reduced capital expenditures in North America, due in part to the decline in energy-related infrastructure investments. EMS's consumer category was affected by lower demand for protective footwear, due to slowdowns in the mining and construction categories.

Our strategy to drive growth in EMS through geographic expansion was evident during the quarter, as the European region delivered another quarter of double-digit revenue growth. In addition, our R&D efforts are helping us to expand our portfolio of opportunities. For example, we are pleased with the traction we are gaining for our new back pad materials, which eliminate the ripple effect that can appear on the screens of certain portable electronic devices.

Turning to slide nine, PES net sales were $38.4 million, essentially flat compared to Q2 2015. Fluctuations in currency-exchange rates had a slightly favorable impact on PES net sales. PES adjusted operating margin was 3.9%.

Overall, we saw increased demand for energy-efficient motor drives, due to strong results at one of our key customers. In addition, certain renewable energy and vehicle electrification applications also posted solid growth during the quarter. Demand for EV/HEV was essentially flat, due to a slower than expected ramp-up rate at a key customer in Q2, but we expect to see improvement in Q3. The positive results in these segments more than offset by -- was more than offset by weaker demand in mass transit, where rail demand was much lower. We expect that market to remain weak for the foreseeable future, due to declines in energy and mining markets.

For the PES business, we maintain a positive outlook for the mid- to long term. We expect government mandates and climate change agreements to continue to drive demand for energy-efficient motor drives, renewable energy applications, and EV/HEV content.

I will now turn the call over to Janice, who will report our Q2 results in greater detail, as well as additional financial highlights. Janice?

Thank you, Bruce, and good morning, everyone.

Overall, second-quarter 2016 financial results were within our guidance range, despite continuing global economic uncertainty. Adjusted earnings per share of $0.88 was above our midpoint guidance. $157.5 million in revenue was the same guidance level, although down compared to Q2 2015 of $163.1 million, primarily as a result of $4.8 million in reduced revenue attributable to the Q4 2015 non-core asset divestiture.

Improved gross margin of 38.2%, compared with Q1 2016 of 37.7% and Q2 2015 of 37.2%, which was the result of our operational excellence program, cost-containment initiatives, and an improved margin profile associated with the non-core asset divestiture just noted.

Continued strong cash generation ended the quarter with cash of $247.4 million on the balance sheet, or approximately 87% adjusted EBITDA operational cash flow conversion for Q2 2016. Net income at $5.4 million was lower than Q2 2015; however, this was impacted by increased tax expense associated with repatriation of foreign earnings, which we'll discuss in more detail shortly.

Now if you turn to slide 11, I will review our second-quarter results in more detail, followed by our third-quarter guidance forecast. Q2 2016 revenue, as previously noted, was $157.5 million, which was within guidance but down from Q2 2015, primarily as a result of sales attributable to the 2015 non-core asset divestiture.

Adjusted operating margin was down 110 basis points from 14.6% in Q2 2015 to 13.5% in Q2 2016, mainly resulting from higher SG&A, due to timing in strategic business investments to establish the framework to efficiently repatriate foreign earnings, as well as key market analysis to support strategic growth initiatives.

Adjusted EBITDA of $29 million was down $0.5 million compared to the second quarter of 2015; however improved as a percent of revenue at 18.4%, despite the lower revenues of the second quarter of 2016, demonstrating the effectiveness of our cost initiative programs today.

Net income of $5.45 million -- $5.4 million in the second quarter of 2016 was impacted by withholding tax and non-cash tax associated with the repatriation treatment of accumulated foreign earnings previously considered permanently invested. These charters represent approximately 48% of the unusually high effective tax rate of 40 -- of 71% for the second quarter of 2016; however, the change in treatment established the framework to efficiently bring those earnings back to the United States.

In addition, the 71% tax rate for Q2 2016 is being favorably impacted by approximately 20% related to the release of a provision associated with uncertain tax positions.

We currently estimate our 2016 effective tax rate to be approximately 42%; however, we anticipate this will be approximately 10% -- percentage points higher than our normalized run rate after considering the impact of the discrete items just discussed.

Adjusted earnings per share of $0.88 in the second quarter of 2016 was $0.11 better than our Q2 2015 results, mainly due to the impact of the discrete tax items.

Please turn to slide 12 for a review of our quarterly revenue. Although our revenue was down 3.4% on a year-over-year basis, the impact related to organic volume and other was essentially flat. Volume and other was down $0.5 million at 0.3%. Our ACS business had strong second-quarter revenue, due to performance of automotive safety and wireless telecom applications helping to partially offset volume pricing with certain customers.

We were also pleased to see healthy revenue performance across the board in our megatrends, of which Internet connectivity was up 7% from Q2 2015, clean energy higher by 6%, and safety and protection increased by 3%, although in total these megatrend increases were partially offset by lower demand in general industrial and consumer applications.

Q2 2016 revenue decline related to the divested sales was $4.8 million, or 2.9%. The effect of currency exchange rates was minimal for the second quarter of 2016, unfavorably impacting revenue by 0.2% or $0.3 million, primarily related to fluctuations in the renminbi and euro.

Looking at our Q2 2016 adjusted operating income on slide 13, second-quarter results declined by 110 basis points, or $2.6 million, compared to the 2nd quarter of 2015. Positive performance of $1.5 million was partially offset by $2.2 million higher SG&A and a $1.9 million decline in volume and other. Improved yield, along with favorable overhead and purchasing performance, including savings resulting from lower copper pricing, was the main factor contributing to the second quarter 2016 positive performance.

While Q2 2016 volume and other benefited from improved volume within the ACS business, as well as favorable product mix in our other business segment related to the Q4 2015 non-core asset divestiture, this was more than offset by unfavorable product mix within our EMS business, as well as the unfavorable volume pricing in certain customers I noted earlier.

SG&A expense increase in Q2 2016 as compared to Q2 2015 resulted from timing of the Q1 2016 spending, as well as strategic business investments establishing the framework for the efficient repatriation of foreign earnings, as well as supporting strategic growth initiatives.

Now let's look at our adjusted EBITDA on slide 14. Adjusted EBITDA declined by $0.5 million to $29 million in Q2 2016 as compared to the second quarter of 2015, although improved as a percent of revenue to 18.4%. This decline was primarily driven by many of the same reasons just noted during our discussion of adjusted operating income, such as EMS product mix, increased SG&A expense already discussed, and volume pricing, partially offset by improved ACS volumes, improved mix in other business segments, and improved operational and purchasing performance.

Turning to slide 15, we are slightly ahead of the midpoint of our Q2 2016 guidance range for adjusted earnings per share by $0.02, as well as exceeded our Q2 2015 adjusted earnings per share of $0.77 by 14.3%, or $0.11, resulting in $0.88 adjusted earnings per share for Q2 2016. As you can see on this slide, the $0.11 variance was primarily due to $0.07 unfavorable volume and other, $0.07 favorable performance, $0.08 increased SG&A expense for the reason explained earlier, and $0.21 of favorable miscellaneous expenses. Miscellaneous expenses are primarily a result of discrete tax items for the quarter, unrealized gains on derivatives contracts, and the effect of share repurchase activity.

If you turn to slide 16, you see our Q2 2016 segment revenue. Since Bruce already reviewed this earlier, I'll touch upon some of the highlights. ACS revenues improved 1.2%, while both EMS and PES segment revenues declined 2.7% and 0.5%, respectively. As we spoke earlier on the consolidated basis, we experienced increased volume across our megatrend market, although this was more than offset by lower demand in general industrial and consumer applications, the divested sales related to the non-core asset, as well as volume pricing with certain customers.

More specifically, our ACS segment revenue improved in the second quarter of 2016 primarily due to strong growth in sales of high-frequency circuit material used in 4G LTE wireless telecom and automotive safety applications. Despite having favorable [goal] for our EMS segment and automotive and portable electronic applications, lower demand in mass transit, consumer, and general industrial applications more than offset this favorability.

Finally, our PES segment experienced continued weaker demand in mass transit, which more than offset gains in variable frequency drive, certain renewable energy applications, and vehicle electrification applications.

Looking at slide 17, you will see our segment adjusted operating income. First, ACS adjusted operating income was $11.6 million, down $2.1 million from Q2 2015, or 330 basis points as a percent of revenue. This decrease was primarily due to the unfavorable impact of corporate allocations, due to timing and increased costs associated with strategic business investments, as discussed earlier.

The unfavorable impact of volume pricing with certain customers as compared to Q2 2015. These unfavorable impacts are being partially offset by volume growth in automotive safety and wireless telecom applications, favorable negotiated purchase savings, as well as favorable impact from lower copper and fuel pricing and favorable overhead performance due to focused cost-containment efforts.

Next, EMS adjusted operating income was $6.1 million, down $0.8 million from Q2 2015 or 130 basis points as a percent of revenue. This decrease was primarily due to the unfavorable impact of volume and mix, partially offsetting our favorable purchasing savings and favorable performance as a result of operational excellence initiatives focused on improving yield.

Lastly, PES adjusted operating income was $1.5 million, up $0.2 million from Q2 2015 or 60 basis points as a percent of revenue. This increase was primarily due to improved yield performance as the result of our operational excellence initiatives, as well as lower copper pricing. Partially offsetting these favorable items are reduced pricing as a result of certain customer volume commitments, as well as timing of copper indexing.

Given the ongoing economic uncertainties, we continue to review actions to improve profitability in all our operating segments as part of our operational excellence programs in cost-containment initiatives, which should leave us well positioned to capitalize on opportunities when economic conditions improve.

Turning to slide 18, you can see we ended June with a strong cash position of $247.4 million. Rogers had solid operational cash flow of $51.3 million in June 2016, representing 81% operational cash flow conversion rate of adjusted EBITDA. Included in our operational cash flow is $4.5 million of positive cash flow due to managed working capital.

On the chart, you also note we have $14.1 million on cash taxes paid. The significant increase from our Q1 2016 result was primarily due to withholding taxes paid on repatriated foreign earnings, in addition to our normal activity. We have also invested $10 million in capital expenditure in the first half of the year, or approximately 3% of revenue.

In addition, we continue to execute on our share repurchase program with $4 million in repurchases year to date and $2 million in Q2 2016, bringing the aggregate total to $44 million since the program was announced in Q3 2015. Overall, we have repurchased just over 797,000 shares since we started the program.

Lastly, included in other is the effective exchange-rate fluctuations on cash, which is $5.7 million for the year-to-date results ended June 30.

Taking a look at our Q3 guidance -- 2016 guidance on slide 19, revenues are estimated to be in the range of $150 million to $160 million, with net earnings in the range of $0.60 to $0.70 per diluted share and a range of $0.69 to $0.79 per diluted share on an adjusted earnings per share basis. At the midpoint, our Q3 2016 revenue guidance represent a revenue decline of 3.4% over Q3 2015. This revenue guidance includes anticipated unfavorable currency fluctuations of 1% and another 3.2% unfavorable impact resulting from our Q4 2015 divestiture of the non-core product line.

Guidance for earnings per share hit the midpoint at $0.65 per diluted share, which reflects a decrease of $0.14 per diluted share compared to earnings per share in Q3 2015. This drop is mostly entirely due to the reversal on incentive compensation which occurred in Q3 2015.

Also, we have a full year 2016 Rogers expects capital expenditures to be approximately $25 million and the effective tax rate to be approximately 42%, which is around 10 points higher than we would otherwise anticipate as a result of the Q2 2016 discrete tax items I just discussed earlier.

In summary, we believe we remain well positioned to enhance shareholder value in 2016 and beyond by being in strategic position to capitalize on growth in our megatrend markets, actively pursue an accretive acquisition, and through our commitment in investment and technology innovation to address our customer needs.

Now I'll turn the call back over to Bruce. Bruce?

Thank you, Janice, and this concludes our prepared remarks. I will now open the line for Q&A. Chris?

(Operator Instructions). Daniel Moore, CJS Securities.

Good morning. Bruce, obviously you touched on a little bit of a slowdown in 4G. I think a couple of months back you'd expressed confidence that 4G-related spend was starting to build again. What happened to sort of cause that momentum to stall? Maybe when did you start to see it, and your expectations for the remainder of the year and confidence that we are going to pick up in 2017, as you alluded to in the prepared remarks?

Great. So what happened -- it was interesting. During the quarter, we saw softness show up probably halfway through the quarter in 4G LTE, primarily driven by the pushout in India and China into 2017 of the buildout, both antenna -- primarily antenna, but also base station was pushed out. So as we look forward into 2017 and beyond, we still see some very good opportunities on base station and antennas, particularly on the antenna side. We think we'll see some good growth there.

But what I'd like to do is have Bob comment on some of the technology advancements that we see coming in 2017 and beyond that really will also energize this business.

So Dan, Bob Daigle, so I think a couple of things which we are spending a lot of time and energy obviously because you are reading more and more about pulling in the next generation, which at first everyone was talking about 5G being the next wave, but you are hearing more and more plans right now around 4.5G, which -- so very similar if you remember back in the 3G days and pre-4G LTE, there was this interim step and a lot of that interim step between -- which was called 3.5G was really around software.

The good news here is it looks -- what we're seeing, what we're hearing because of what they're trying to do with MIMO for 4.5G, so basically a lot of carrier aggregation and what's being called massive MIMO in order to increase capacity. That, in combination with the new bands that are being allocated, really creates a situation where they need new infrastructure, so it's not just software for 4.5G, but you start getting into new hardware requirements.

In the base stations themselves, and to Bruce's point, especially when you start getting into MIMO, that is new antennas. You start going on what they call higher-order MIMO, you will be replacing the antennas on tower tops.

So, we are obviously spending a lot of time and effort, but we have the right products for 4.5G. Our expectation and what our team is driving for is to end up with the same share -- 90%-plus in this base station area for 4.5G.

Now if you look a little bit further than that and what's happening and what's the approach that the equipment providers are using to get to 5G to meet 5G standards, which is about 10 times the data rates we are accustomed to with 4G, that's playing out about as well as we could have ever hoped, frankly, because it's a combination of more frequency bands, which is always very positive for us because that means, again, more hardware in combination with MIMO, which is very positive for us, again, especially on the antenna side. And then, the third element, which we were hopeful it would play this way, which is the allocation of higher frequency, so starting to get up maybe even as high as 60 gigahertz in some of the bands being looked at.

As you move up in frequency, that generally has benefited us, so you are starting to see -- and again, our teams are very focused, keep the same share, but also potentially here are some opportunities for more content, and that's where we are putting a lot of energy in terms of maintaining share and trying to drive more content as these next-generation technologies get deployed.

Thanks, Bob. I'll add one more comment for the ACS business. The automotive radar side of things remains strong. We see that moving forward. Strong growth rates in various published accounts or market studies globally close to 30% when you include the China growth, as well as rest of the world. So, that also is very positive for us moving forward.

Very helpful color. I guess I'm still just trying to drill into is it the interim step, or as things have started to crystallize in terms of getting to next generation, that that's what's causing the delay this year in spend in India and China. Maybe to the best of your ability just help me understand that bridge a little bit better.

I think the delay is really around just infrastructure spending in both India and China and the pushout into 2017. We don't have very good visibility. If we look at what's been published by other suppliers into that marketplace, I think they pretty much echo the same point of view, that it's a bit hazy. We believe that the demand is there. It's just a question of timing of the buildout and that's why we remain cautious in our guidance in Q3.

Okay. And maybe switch gears and then I'll jump back in queue. Industrial, remind us what percentage of ACS you would classify as industrial, as well as what percentage of Rogers overall, and just talk about geographies, verticals where you are seeing the most headwinds here.

So, really, the industrial applications are primarily in the EMS business and the PES business, and for EMS, it's approximately 40% -- general industrial is about 40% of the EMS business, and if we consider in the PES business that the variable frequency drives comprise a significant amount of industrial, that would be also about 40% of the PES business.

So what we're seeing, and let me speak specifically about the EMS business, taking a closer look at general industrial in the first two quarters of the year in EMS, we saw essentially the growth rate there was flat, and that's pretty consistent with what we believe is the industrial growth in the United States at this point.

The good news is that we saw very good industrial growth in Europe, double-digit growth for the EMS business. We believe there that that is really penetration in that marketplace for us. We've concentrated on growing the European market. A lot of it is for us general industrial and EMS, and over the last -- both of the last two years, we've had double-digit growth for ourselves in that business.

So going forward, just general industrial and North America, we think that it will be relatively soft and it's very dependent on the industrial growth in the US. On the other side, in PES -- and again, variable frequency drives are the big industrial part of PES -- we see that relatively strong, but part of that, and you heard this in my comments earlier, is related to a very strong customer -- a very good customer of ours who has had very good position in that marketplace, we think probably taking share from some others. So we've had some nice growth in variable frequency drives because of that and we believe that should continue as that customer continues to expand.

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

Joan Tong, Sidoti & Company.

Good morning, guys. So I guess you mentioned a couple of times that mining and energy, the particular vertical market, is affecting the business across segments and across different applications. Can you just quantify for us, if you can, how much of your business is exposed to that particular vertical market? Now, obviously, it doesn't look like in the near term that area is going to improve, and what is really your strategy going forward? And we are looking at this particular area would be soft going forward. Anything you can do to improve on that? And then, I do have a follow-up.

So, really, a lot of the mining and so forth and transportation is related to the RO-LINX business, and we see that affected by what we talked about earlier around the downturn in energy and mining, but also affected by the consolidation that I believe we mentioned last quarter of some of the Chinese rail -- two of the Chinese rail organizations combining and not really coming back into the market in a big way for locomotives. We believe that at some point, and it's hard to predict on that end, they will return to the marketplace.

On the mining side of things and energy side of things, we believe that will be down, but we do see growth, as I mentioned earlier, in areas like variable frequency drives, renewable energy, HEVs, which will take up some of that slack, and so we're working very carefully on design wins and activities in those other areas to help us recover on the mining and energy sectors.

Okay. All right. And then, Bruce, I think you mentioned that the new product development and the patents filed, it is at its highest, so obviously in light of the tough macro capital spending environment, when are we going to see some of those new products going to start having a little bit more impact on your revenue growth? Thank you.

So these are specific areas, mostly ACS, some in PES, and I'm going to ask Bob to expand a little bit more on some of those technologies and the timeline that we see.

I think a lot -- there's some of the new products which are aimed at the defense antenna area, and the incubation period for those things tends to be three to five years.

Some of the things we're working on in the wireless area, again, would be aimed towards things like the MIMO opportunities, which -- the higher-order MIMOs, which are really around 5G, so again I think realistically we should be thinking that the innovation center related activities are usually out around three years before you see meaningful revenue. It doesn't mean we won't get revenue sooner, but in terms of things that really move the needle for us.

So a lot of the pipeline that really drives the growth in the next few years are things that are closer in the business units. I think you are aware that we've introduced some new antenna materials that are really, I think, going to be very helpful to our customers in terms of developing multilayer antenna construction, things like integrating antennas with the power amplifiers and the digital circuitry. So I think those are the types of things which can have more impact sooner than the innovation center projects.

The other thing that we are pretty excited about in the EMS business, you may have caught it in my comments, but portable electronics is in the growth mode again and this is directly related to work done by our R&D organization to understand the needs of the back pads and the performance of the back pads in the personal electronics space, and this is primarily in some handheld devices.

And we've hit on a very good product -- family of products there. We're seeing very, very nice growth. We were up 29% in portable electronics in the past quarter. So you are seeing some of the shorter-term R&D and innovation work that is paying off, and I think for those of us who have been around the EMS business now for a few years and have seen the personal electronics side struggle, we think we're back in a good position and we see this moving forward, these back pads, as a nice growth opportunity for us.

Thank you for highlighting the portable electronics, that business, finally saw some growth there after a couple of quarters, almost like two years in decline, so definitely it's a positive.

And then, I guess really my last question is for Janice for next-quarter guidance. What type of SG&A assumptions and tax rate you embedded for the third-quarter guidance? Are those expenses that you call out going to be a continuous situation into third quarter? And also, what's the tax rate that you are looking for for third quarter?

Right. For the full year, we're at the 42% approximate tax rate. The third quarter will be down to the normalized level in the 30%s. This was all the taxes paid for the repatriation that actually came in July happened to be paid in June, so you are seeing a disconnect between payment of taxes and the cash moving all the way to the United States, so that should be coming back to normalized levels, so we shouldn't have an issue on that.

And then, on the SG&A?

(multiple speakers) the SG&A should be approximately the same a month that it's normalized. It should not -- all the expenses, a lot of it, came through in this quarter, especially for the tax repatriation, but we do have a few other initiatives for a strategic that's going to be hitting third quarter, but we have some initiatives to offset those.

Okay. Got it. Thank you.

Julie Li, Drexel Hamilton.

Thank you. Good morning, team. My first question is on ACS. I saw the operating margin in second quarter had a 210 basis-point decline compared to 2Q 2015. I'm wondering what's the cause behind this. Was this due to maybe lower volume or different pricing compared to second-quarter 2015? Thank you.

ACS really -- some is actually our allocation of our corporate headquarters. As you know, we allocate our corporate headquarters to the business units, and because ARLON, a lot of the assets went to ARLON and they get a higher percentage of the corporate allocations to them, so a disproportionate part of that really just is an adjustment for year over year. They had some -- a little bit of some pricing for volume containment, which was offset by the performance.

And to follow up, the headquarters move, what should we include in our model going forward how to allocate the expense and schedules of the headquarter moves?

Right. For the headquarter moves, really, when we look at it, it's really a strategic -- it's not a financial we're looking at for our strategic position of the Company and the Corporation out in Arizona, as Bruce articulated earlier, but we are going to have some costs go through.

Obviously, we are going to look at it and see if it's a non-GAAP kind of adjustment, so you won't see it'll be a one-time hit and then we'll move forward. So you shouldn't see this really affecting us. As we talked about earlier, we had a lot of SG&A initiatives, so we're hoping to offset all these costs, really, by SG&A initiatives and also from some tax incentives by the state and the local government.

So I'm assuming the headquarter moves won't have a material impact into the operation -- efficiency operation side of the business. Am I correct?

Correct. Yes, you are correct.

And my next question is on EMS. I think Bruce mentioned earlier the new construction category end market. Is this a new opportunity for EMS recovery or growth initiatives into the future and was this business more focused in Europe or domestic North America market? Can you share more color on that?

I think -- is the question related to the portable electronics, which we highlighted, or is it another sector that you were referring to?

I think it's a construction-related end market within EMS.

So, really, it may be more related to consumer market, and we did in the quarter have a slower quarter related primarily to work shoes and protective clothing and so forth around the -- more around the energy and mining sectors that affected that business.

Really what we are looking at is in terms of the growth opportunities for this business, our geographic growth both in Europe and in Asia overall, and also specifically the portable electronics, returned to growth. Other areas, such as automotive and so forth, we are seeing some growth there as well and we continue to get design wins and that continues to expand our presence there. We were up substantially in automotive and EMS in Q2, although that is a smaller portion, about 7% or so of total sales in EMS.

So, really, the growth that we're seeing is automotive, portable electronics, and geographic growth generally driven by general industrial in Europe and some in Asia.

Thank you. And my last question is on ACS, the satellite TV end market. I remember before the management thinking about a GDP type of growth in that small part of the business and you also mentioned in this quarter there was a decline in growth in that business. I'm wondering, can you share more color on that looking forward?

We think this is a relatively stable market for us. What we see, though, is variability quarter to quarter and the comparison quarter was a very strong quarter in 2015, due to some supply constraints from Q1 into that sector, so I think the comparison quarter was difficult.

But overall, it's a relatively steady business for us. It has some variability quarter to quarter and this is generally the second quarter for us, when you look back more than two or three years, is a lower quarter for the satellite dish business, as I mentioned with the exception of Q2 2015 where there was some pent-up demand that came through in that quarter.

Thank you, Bruce. I will jump back in the queue.

Juan Molta, B. Riley.

Guys, good morning. Thanks for the questions. First one, regarding pricing pressure, are there any areas where you are seeing a particular emphasis in pricing pressure?

You know, and I think we've talked about it in the past, it's basically specific customers; it's not a sector. And it's very much volume related, so we sit down and work closely with essentially two customers in two different areas and work on attractive pricing for higher volumes, and that's how we've been dealing with it.

But let me just reinforce that across almost all of the rest of our business, pricing is not an issue. We've been able to have stable pricing across many, many of the markets and segments, and the issue is mostly related or significantly related to this issue of volume and price at two major accounts.

Okay. Thanks. That's helpful. On the guidance, the drivers behind the Q3 guidance, is it continued trends on all the topics you've talked about that you saw in Q2 or are you seeing any material changes there, perhaps softening in an area or any changes as we go into Q3?

No, and I think exactly as you stated this is sort of a continuation of what we've seen towards the end here of Q2 with the pushout of demand on the 4G LTE, both antenna and base stations into 2017, and the continued industrial side of the business in EMS relatively flat in North America, so that's how we're viewing Q3.

There's a lot of uncertainty, I would say, in visibility moving forward just on the world scale of the economics, and so we're being cautious as we look forward into Q3, based on those uncertainties.

Very good. Do you have on hand what actual wireless growth in ACS was for the quarter, that number? Either year over year or sequentially?

Yes, it was 4% quarter on quarter -- 2015 versus 2016.

4% year-over-year in wireless? Or sequentially?

No, year over year (multiple speakers)

Year over year, plus 4%. Okay. Very good. And any updates you can provide on acquisitions and the efforts there, because you are building cash continuously?

As you know, this is a strategic area for us. We continue to evaluate opportunities. Our capital allocation approach, our priority is synergistic M&A, and so we look -- we continue to be active in that area. I think, as Janice referred to it, we've brought back cash that, quote, was trapped in other regions as part of our strategic focus and our capital allocation approach.

Okay. And then one final one and I'll get back in the queue as well, regarding automotive with the news out there of potential slowing in volumes of auto sales, that should not affect any of your automotive initiatives because they are more penetration technology, correct?

That is correct. That's a very good point to make. Particularly in the ADAS side of things, that continues to expand. Even if there is a slowdown, it is really a penetration approach.

And similar in a sense over in EMS, it's a much smaller part of that business, but these are design wins where there are needs in the marketplace, so we are displacing other technologies or other materials that are used in gasketing and so forth. So it is -- while certainly total numbers of units will be affected, we are still penetrating with our technologies in both cases.

Okay. Thank you very much.

Daniel Moore, CJS Securities.

Thank you again for the questions. In terms of SG&A, can you quantify the spending for the framework around repatriating cash, number one, and, number two, for the market analysis in Q2?

The cost -- we used expert service to bring back cash and we brought back in July over $100 million from offshore, and the effective tax rate was quite low. The total consultant was just under $1 million, I believe, approximately.

And in terms of the market analysis that you touched on or called out?

It's approximately about $1 million also.

Each of those are discretely about $1 million?

Correct.

So when you talk about Q3 being normal, if we adjust for both of those, is that the best way to think about Q3 relative to Q2 in terms of G&A?

Correct, yes.

That's helpful. And that answers the next question on repatriating. How much cash is still left offshore?

When we repatriated back, we had -- about half of our cash was still offshore, but we anticipated bringing that back also in the future, as we did, and we have the effective structure now to be able to move the cash.

Got it. So you've moved over -- well over half of the cash that was offshore back onshore in this quarter?

Yes, we moved just over $100 million in cash back to the US from offshore.

Got it. Okay. And I think lastly would be given the very strong cash generation in the quarter, you are up to $4.00 a share almost in net cash. You've got $66 million left on the authorization. When are you actually available to start to repurchase shares and how should we think about capital allocation going forward?

We can repurchase -- we had up to $100 million of it and we spent $44 million and actually acquired back 797,000 shares already and we're always active in looking at it, and it depends on the capital structure and, as we talked about, the M&A and the priorities. So, we are available to acquire up to the $100 million that was authorized by our Board.

Okay. Thanks for taking the questions.

Dana Walker, Kalmar Investments.

Good morning. Could you talk about how much of the handheld-device market is applicable to the back pad solution?

As we look at this market, it is a growing market because the issue of ripple in a number of these handheld devices is there. Our estimates are in the range of probably $50 million of market opportunity over -- on an annual basis as we look forward.

So it's hard to quantify because it's very specific to specific designs.

The other opportunity that we see moving forward is the OLED opportunity. As we see designs change on these smartphones to include OLED displays, there is a specific need there for impact detection, even greater than what is needed today. So we see that adding to the market opportunity.

So, $50 million is a good round number on an annual basis of the market opportunity. I would also caution, though, that we don't have the $50 million as Rogers. There is obviously competitors out there in different technologies and different designs that the handheld manufacturers use to alleviate the problems, but for sure on OLED we see that as an emerging opportunity over the next year or two.

How far are you into the back-pad penetration and how many different OEs are utilizing that solution?

The numbers are different -- ranging from the majors to smaller handheld device manufacturers in China, so the penetration is very hard to know at this point, but we continue to see our design wins accelerating in that area.

Janice, I believe you said in the prior call that there was going to be more stock comp in the Q2 number. Can you itemize that, because until we see the Q, it's somewhat hard to ferret out?

I'm just checking.

And while she's looking for that, Bruce, perhaps, or Bob, you mentioned that HEV accounts for about 7% of EMS. How much of the PCS business does HEV demand account for?

Dana, that's about 15% for the PES business.

And maybe this number was disclosed -- there was an avalanche of statistics, but your HEV-related business grew at what pace in Q2 and year to date?

Q2 in PES year to date was flat, essentially, and I would reference back to some of my comments in the prepared remarks around slowness with one major EV/HEV manufacturer in Q2 that we think will recover in Q3 and Q4.

And getting back to your question on the stock comp, it's just under $4 million that hit us in Q2, which was approximately about $2 million higher than normal quarters.

So it was $4 million in Q2, it was $2 million, then normal, so you would expect how much stock comp for the full year?

It's approximately $10 million.

Okay. Thank you.

Juan Molta, B. Riley.

Hi, guys. Just a couple more; thank you for taking them. The first one is as we look at your revenue guidance and we adjust out the divestiture impact and the foreign-exchange impact you are accounting for, you are actually guiding for volumes up since it seems like the pricing pressure is very, very selective across the Company, correct?

Yes.

Yes.

Okay, so things look pretty good. And then, my second question is regarding the industrials growth in Europe. Can you talk about what key products you are gaining share in, what applications, just general penetration on that end in Europe?

This is in the EMS business and specifically in similar types of applications that we would have in North America, so enclosures for electrical equipment, appliances, and also lighting, industrial lighting, outdoor lighting, and it's a mixture of both silicones and the urethane foams as well.

Okay. Thank you very much.

And we have no further questions at this time. I will turn the call back over to the presenters.

Thank you, Chris, and thank you, everyone, for joining us on today's call. Have a good day.

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