Rogers Corp (ROG) 2016 Q3 法說會逐字稿

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation 2016 third-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 third-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 get to the slide deck, I want to let everyone know that Bill has decided to retire at the end of this year. Many of you speak with Bill regularly and are well aware of his acumen with Rogers' financials and our overall business, as well as his understanding of the markets and what is important to our investors. Thank you, Bill, for all you've done for Rogers. Please join me in wishing Bill the best as he leaves Rogers to enjoy his retirement.

Now, please turn to slide four. In Q3 2016, Rogers achieved net sales of $165.3 million, exceeding our previously announced guidance. This is an increase of 3.1% over Q3 2015, which included $5.2 million of revenue from the divested polyimide and thermoset laminate business. Excluding the effect of the divested assets, Rogers' net sales increased 6.3% over Q3 2015.

Performance during the quarter was driven by strong gains in EMS and PES business segments while sales in ACS decreased slightly. Third quarter operating margin decreased 50 basis points to 14$. Our continuing efficiency initiatives were offset by higher SG&A spend related to strategic activities and incentive compensation accruals.

Gross margin, which is not reflected on the slide, was 37.5%, an increase of 30 basis points over Q3 2015. This performance reflects our ongoing commitment to operational improvements. Q3 adjusted EPS was $0.85, exceeding guidance and $0.21 above the midpoint of the range. Adjusted EBITDA was $34.1 million or 20.6% of net sales for the quarter.

During the quarter, we experienced continued demand for e-mobility applications as well as positive growth in general industrial, clean energy, and portable electronics. In general, we are pleased with the trends in a number of the markets where Rogers has significant share.

Turning to slide five, I would like to briefly review our growth strategy. As a reminder, we take a market driven approach, leveraging our deep understanding of the link between our markets and technology to develop solutions that fill unmet needs for our customers. In the area of innovation leadership, we are pleased with the advancements we are making in innovation -- in our innovation centers as well as in the operating units where our R&D teams are focused on next-generation solutions.

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 drive ongoing profit improvement, we have a number of projects underway within our operational excellence initiatives. I was pleased to attend the recent grand opening of the Rollings Power Distribution Bus Bar Line at our Rogers Hungary Facility. This builds on the success we've achieved at this site since we initiated the Curamik final inspection there in 2013. This model has worked well for us. Hungary is a good place for our business offering a cost efficient skilled workforce.

On slide six, we believe the longer-term outlook and corresponding growth expectations for our key markets remain positive over the next two to three years. Global requirements are driving demand for applications in Rogers three key megatrend categories of internet connectivity, clean energy, and safety and protection, which consistently account for the majority of our net sales. We remain confident that we are focused on the right global growth markets.

Moving to the challenges section of the slide, I would like to spend a moment discussing our view of the wireless telecom sector as it relates to Rogers. While there are some short-term challenges, we also see substantial opportunities as we move forward. In the third quarter, for example, our sales grew in the transceivers power amp segment due to a better balanced supply chain inventory situation versus Q3 2015.

While a number of recently published reports by telecom equipment OEMs indicated that their sales varied significantly, Rogers broad participation among telecom equipment suppliers enabled us to benefit from the ongoing demand. Looking forward in this market, according to industry consultants, the massive MIMO deployment to support 4.5G enhancements in China during 2017 may increase the demand for transceivers power amps, thereby reducing the overall effect of swallowing CapEx spend in this area.

Today, we are already seeing opportunities for Rogers in 4.5G and 5G technologies where we are experiencing increased design-in activity for our high performance circuit materials. We believe this design activity will accelerate demand going forward.

Turning to Slide 7. ACS delivered net sales of $65.5 million during Q3 2016, which is a decrease of 1% from Q3 2015. Adjusted operating margin was 12.3%. Our Q3 ACS results were driven by demand in applications for high frequency circuit materials used in automotive safety and other high reliability applications. Growth in ACS was more than offset by lower demand in aerospace and defense applications and wireless telecom.

Within wireless telecom, our strong performance in transceiver power amps was significantly offset by weaker demand in our 4G LTE antenna materials, primarily as a result of a delay in the India 4G spectrum auction, which is now complete, design changes by a specific antenna OEM that impacted circuit material usage versus previous designs, and the impact of price considerations offered by Rogers for longer term buy-in stability.

We do expect to see improvement in the near term as India starts to deploy more base stations and as Rogers continues to penetrate the global antenna market more broadly.

Turning to slide eight, in Q3, EMS achieved all-time record quarterly net sales of $54.4 million, an increase of 16.3% from Q3 2015. Adjusted operating margin was 21.2%. During the quarter, EMS results were driven by an increase in demand for portable electronics, e-mobility, and general industrial applications, which more than offset lower demand for mass transit and consumer applications. The continued penetration of the back pad solution for portable electronics and government subsidies for e-mobility solutions contributed to EMS's success during the quarter.

We are pleased with the rebound we have seen in EMS over the past two quarters. Our strategy to drive growth through geographic expansion has been evident as European and Asia regions delivered revenue increases in Q3. We saw particularly strength in China where government mandates and consumer demand are driving adoption of e-mobility applications. EMS' R&D efforts are helping us expand our portfolio of opportunities. For example, as more smartphone designs transition to OLED displays, we have been working with our customers to develop back pad products specifically designed to meet their more demanding requirements, creating new opportunities for EMS.

In Q3, we were pleased with the renewed strength in the portable electronic market. We are cautious going into Q4 due to the cyclical nature of the EMS business and the suspension of production of certain cellphone models at a major OEM.

Turning to slide nine, PES net sales were $39.8 million, an increase of 8.8% over Q3 2015. PES adjusted operating margin was 8.9%. Third quarter results were favorably impacted by increased demand in e-mobility, energy efficient motor drives, certain renewable energy and vehicle electrification applications. These increased were partially offset by much lower demand in rail, energy, and mining applications.

For the PES business, we maintain a positive outlook for the mid and long-term. We saw during Q3, government mandates and climate change agreements are contributing to increased 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 Q3 results in greater detail, as well as additional financial highlights. Janice?

Thank you, Bruce, and good morning, everyone.

Overall, we were encouraged with our Q3 2016 financial results despite difficult conditions in some of the market share we participate in. As you'll see in our numbers, we continue to gain momentum on our performance initiatives.

Adjusted earnings per share of $0.95 was above our guidance estimate. Q3 2016 revenue of $165.3 million exceeded guidance level in Q3 2015. The increase over last year was primarily a result of strong EMS and PES volumes, partially offset by the non-core asset divestiture.

Improved gross margin of 37.5%, up 30 basis points compared with Q3 2015 as a result of increased demand, better operational performance, and improved margin profile associated with the non-core asset divestiture just noted. Continued strong cash generation ending the quarter with cash of $173.5 million on the balance sheet and $94.2 million of cash provided by operating activities for the nine months ended September 30, 2016.

Net income at $16.1 million was approximately 28% higher than Q3 2015. Now, if you'll turn to slide 11, I will review our third-quarter results in more detail, followed by our fourth quarter guidance forecast. Q3 2016 revenue, as previously noted, was $165.3 million, which exceeded guidance in Q3 2015, primarily as a result of increased volumes in the EMS and PES businesses, partially offset by the Q4 2015 noncore asset divestiture.

Adjusted operating margin was down 140 basis points from 16.6% in Q3 2015 to 15.2% in Q3 2016, primarily from higher SG&A, due to 2016 strategic business investments as well as a $3.6 million year-over-year increase in incentive compensation resulting from the current year accrual combined with a reversal of Q3 2015 accruals.

Adjusted EBITDA of $34.1 million improved $1.6 million or approximately 4.9% compared to the third quarter of 2015, as a result of improved volumes, performance, and currency related gains, partially offset by higher SG&A.

Net income of $16.1 million in the third quarter of 2016 was up $3.6 million or 190 basis points as a percent of sales. Adjusted earnings per share of $0.95 in the third quarter of 2016 exceeded Q3 2015 by $0.06 and higher by $0.21 or approximately 28% above the midpoint of our guidance.

Now, please turn to slide 12 for the review of our quarterly revenue. Revenue was up 3.1% on a year-over-year basis. Volume and other was up $11.6 million or 7.2%. Our EMS business has strong third quarter revenue due to demand in portable electronics and automotive applications, along with our PES business having strong performance in e-mobility applications. Our megatrends account for approximately 67% of our quarterly revenue and we continue to see growth in these important markets.

In Q3 2016, clean energy and safety protection were up 14% as compared with Q3 2015 with internet connectivity, was ahead of Q3 2015 by 1%. Q3 2016 revenue decline related to the divested sales volume was $5.2 million or 3.2%. The third quarter effect of currency exchange rates unfavorably impacted revenue by 0.9% or $1.5 million primarily due to fluctuations in the (inaudible).

Looking at our Q3 2016 adjusted operating income on slide 13, third-quarter results declined 140 basis points, or $1.5 million, compared to the third quarter of 2015. Positive volume and other of $0.7 million was offset by a $3.8 million higher SG&A as a result of our strategic business investments as well as a Q3 2015 reversal related to incentive compensation accruals. Improved yields, along with favorable overhead and purchasing performance, including savings resulting from lower copper pricing, were the main factors contributing to the Q3 2016 positive performance of $1.6 million.

While Q3 2016 volume and other benefited from improved volume within the EMS and PES business, in addition to favorable product mix in our other business segment related to the Q4 2015 non-core asset divestiture. This was partially offset by an unfavorable mix in the ACQUISITIONS segment and unfavorable volume pricing for certain customers.

Now let's look at our adjusted EBITDA on slide 14. Adjusted EBITDA of $34.1 million increased by $1.6 million in Q3 2016 as compared to the third quarter of 2015, improved as a percent of revenue to 20.6%. This increase was driven primarily by many of the same reasons just noted during our discussion of adjusted operating income, such as improved EMS and PES volumes, improved mix in our other business segment, improved operation and purchasing performance, partially offset by increased SG&A expense, unfavorable mix in our ACS business segment, and unfavorable volume pricing with certain customers.

In addition, currency related gains also contributed to the increase in adjusted EBITDA. Turning to Slide 15, we exceeded our Q3 2016 guidance range for our adjusted earnings per share as well as exceeded our Q3 2015 adjusted earnings per share of $0.89 by 6.7% or $0.06, resulting in $0.95 adjusted earnings per share for Q3 2016. As you can see on the slide, the $0.06 increase was primarily due to $0.03 of favorable volume in other, $0.06 favorable performance, $0.14 unfavorable SG&A expense, and $0.09 of favorable miscellaneous expense primarily result in the revaluation of foreign currency denominated new company loans and $0.02 favorable of share dilution.

If you turn to slide 16, you see our Q3 2016 segment revenue. Since Bruce already reviewed this earlier, I'll briefly touch upon some of the highlights. EMS and PES segment revenues increased 16.3% and 8.8% respectively while ACS revenues declined 1%. More specifically, our ACS segment revenue declined in the third quarter of 2016, primarily a result of lower demand in aerospace, defense, and wireless telecom application, partially offset by increased demand in automated -- automotive safety and high reliability applications.

Our EMS segment revenue improved in the third quarter of 2016 primarily due to strong growth in the portable electronics and automotive application, partially offset by declines in the consumer and mass transit applications.

Finally, our PES segment experienced strong demand in our e-mobility and variable frequency drive, which more than offset declines in rail, energy, and mining applications.

Looking at slide 17, you will see our segment adjusted operating income. First, ACS adjusted operating income was $8.1 million, down $5.3 million from Q3 2015, or 800 basis points as a percent of revenue. This decrease was primarily due to the unfavorable impact of product and customer mix and volume pricing with certain customers as compared to Q3 2015, the unfavorable impact of additional corporate selling, general, and administrative expense allocations, in total being partially offset by favorable overhead performance due to focused cost containment efforts.

Next, EMS adjusted operating income was $1.5 million, up $2.3 million from Q3 2015 or 160 basis points as a percent of revenue. This increase was primarily due to favorable impact of volume increases in the portable electronics, automotive, and industrial applications, favorable performance as a result of purchase savings. Partially offsetting this is the unfavorable impact of our product mix, unfavorable freight due to capacity constraints in certain regions, and the impact of additional corporate selling, general, and administrative expense allocations.

Lastly, PES adjusted operating income of $3.6 million, up $1.6 million from Q3 2015 or 330 basis points as a percent of revenue. This increase was primarily due to favorable impact on volume increases in e-mobility and variable frequency drive applications, improved productivity as a result of our operational excellence initiatives, and partially offsetting these favorable items are reduced pricing as a result of certain customer volume commitments.

Given the ongoing economic uncertainties in some of our markets we participate in, we remain focused on executing manufacturing and cost savings initiatives to counter weaknesses in select product categories and end markets.

Now, turning to slide 18, you can see we ended September with a strong cash position of $173.5 million. Rogers had solid operational cash flow of $94.2 million through September 2016, representing an improvement of $48.6 million compared with year to date September 2015, or over a 100% improvement. Included in our operational cash flow is $12.3 million of positive cash flow due to managed working capital improvements.

On the chart, you will also note that we have $102.6 million of debt repayment for the year of which $100 million was a result of the successful repatriation of foreign earnings we talked about during our Q2 call. We also have invested $14.9 million in capital expenditures in the first nine months of the year, or approximately 3% of revenue.

In addition, we continue to execute on our share repurchase program with $8 million in repurchases year to date and $4 million in Q3 2016, bringing the aggregate total to $48 million since the program was announced in Q3 2015. Overall, we have repurchased just over 868,000 shares since we started the program.

Lastly, included in other is the effect of adjusting non-cash items included in our adjusted EBITDA as well as proceeds from the exercise of stock options issued during a period that was in place up until the first quarter of 2012.

Taking a look at our Q4 2016 guidance on slide 19, revenues are estimated to be in the range of $155 million to $165 million, with net earnings in the range of $0.61 to $0.71 per diluted share and a range of $0.76 to $0.86 per diluted share on an adjusted earnings per share basis. At the midpoint, our Q4 2016 revenue guidance represents revenue increases of 4.6% over Q4 2015. This revenue guidance includes anticipated unfavorable currency fluctuations of 0.7% and another 2.6% unfavorable impact resulting from the Q4 2015 divestiture of a non-core product line.

Guidance for earnings per share hit the midpoint at $0.66 per diluted share, which reflects an increase of $0.29 per diluted share compared to the earnings per share in Q4 2015. On an adjusted basis, guidance has a midpoint of $0.81 per diluted share, which is a $0.01 increase from Q4 2015. This increase is primarily due to higher volumes and improved operational performance, partially offset by higher SG&A from strategic businesses and a set of compensation accruals.

Also, for the full year Rogers expects capital expenditures to be in the range of $20 million to $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 repatriation of our prior year's foreign earnings.

In summary, we believe we remain well positioned to enhance shareholder value by being strategically positioned and capitalize on growth in our megatrend markets, actively pursuing accretive acquisitions, and continue our focus on operational performance initiatives and through our commitment to invest in technology.

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

Thank you, Janice. Before we move to Q&A, I would like to highlight some of today's comments. We believe Rogers is uniquely positioned to benefit from many significant market driven growth opportunities. The rapid adoption of advanced driver assistance systems, or ADAS, and the fast emerging technologies of 4.5G and 5G in the telecom space will continue to bolster advanced connectivity solutions business performance.

The growth in power electronics solutions business is driven by our ability to provide enabling technologies that address the challenges of e-mobility from [X Buy] Wire to EV/HEV applications as well as technologies for energy saving motor control systems. And our last American material solutions business is growing again as we demonstrate the advantages of our polymer technologies in providing sealing and cushioning solutions for e-mobility, general industrial, and portable electronics applications.

This concludes our prepared remarks and we'll now open the line for Q&A. Chris?

(Operator Instructions) And our first question is from Dan Moore with CJS Securities. Your line is open.

Good morning. Thanks. It's actually Chris for Dan. Maybe could we just start with the ACS operating income and margins. Obviously, down year-over-year. Can you talk a little bit more about the specifics and then from there kind of how that translates looking forward?

Yes, just so that we kind of set the parameters really on ACS, although it deceased that you see on the operating profit. When we take out the adjustment for [Arland] because we are allocated a higher portion of the corporate allocations because they have the asset, and we adjusted for the SG&A, which they -- the corporate S&GA for our strategic business initiative, really the margin only deteriorated a few points to just over 17%.

So when you see the decline, it's not quite as drastic as you see on there when you adjust and normalize the two numbers.

Got you. You had mentioned within there, there was some price considerations offered. Can you talk a little bit more specific on the pricing side?

Yes, the pricing side is just about $1 million for really one of our strategic customers that they gave us a committed volume, which was significant and so that we thought with the contribution margin differential on the volume, it was actually advantageous for the -- for us to actually get the price down to get that guaranteed volume.

Got you. And then specific to -- on the wireless side, you talked to us a little bit but can you talk about kind of expectations for growth in Q4 and moving into 2017?

Right, and as I mentioned, Chris, in the prepared statements, we had seen -- we were affected by the option -- the delay in the option of the Spectrum in India. We now see that -- that's been completed. We now see that coming into focus so we think we'll see some gains from that as we move through the rest of the year.

As we look ahead into 2017, the buildup of -- or the movement to 4.5G is something that we're starting to see and actually even design wins that are focused on 5G. I'm going to ask Bob Daigle, our CTO, to expand a little bit more on what we see going forward in the technology space here.

So I think a couple of points to add to what Bruce mentioned. I think on the 4.5G front, I think what we're very encouraged by you may recall when the transition from 3G to 4G occurred, there was advanced 3G but it really didn't involve any infrastructure. It was just an upgrade to software and what we've been able to determine with the 4G upgrade, as you go to massive MIMO in the -- what's being called Advanced Pro with Release 13 and 14 of the standard, that requires new hardware. So we're expecting to see some nice demand for the transceivers as you start to build out the networks for what people are referring to as 4.5G.

The other thing that's a really interesting and favorable dynamic is what you're reading and hearing about in terms of the early stages of 5G. Because most of the press out there -- what the true 5G handhelds are really -- you're talking probably 2019, 2020 before we see a mass rollout. But what a lot of the carriers are focused on right now is deploying what's being referred to as 5G for fixed point -- what's called fixed point wireless. And in simple terms, what they're basically saying you've got enough capability, enough bandwidth, with 5G to support television streaming.

So you could picture a lot of regions of the U.S. You really don't have competitive situations between the cable guys providing television service. It tends to be monopolies and a lot of what you're reading about right now for early stages of 5G is really technology that allows the wireless guys to play in the television world. And to us that's an encouraging -- that's very encouraging in that it's really a new application area. It tends to prove out the technology for 5G early on without having to basically hand off calls from cell site to cell site because it's fixed point. But it creates some early momentum, which we're encouraged by.

Got it. Very helpful. Thanks guys.

The next question is from Sean Hannan with Needham and Company. Your line is open.

Yes, good morning folks. Thanks for taking my question. Can you hear me?

Yes, Sean.

Great. Just wanted to circle back on that pricing topic. Just want to make sure that we're in a scenario where some of these types of concessions and agreements in order to secure kind of a (inaudible) revenue stream that we're avoiding going down a slippery slope here. If we can get some commentary around that, that would be great. Thanks.

We definitely are very disciplined in that approach on price balance. We look at it and we actually ensure that we are actually getting higher earnings for any kind of price (inaudible), getting higher volumes associated with it. So we do not just take price balance. We are not a commodity type business where we are going to entertain just maintain the business. So we look at it and ensure that we're getting the volume we think with the capacity and right size our capacities and balance our facilities around the world with this price balance.

So there's more than just the price balance. We actually look at where we can manufacture the product also. So there's many things that we look at.

That's right and very specific area that we have this situation. So it is not broad. I wouldn't want to lead anybody to think that there's a broad situation here on pricing. It's a very specific focused initiative.

Okay, great. And then in terms of the commentary to the EMS, there's some caution I think with the production stocks at BlackBerry. How much of that is in your guidance here? How should we think about this? Thanks.

Really, in EMS, we participate across essentially all of the handheld smartphone suppliers and there was one in particular that had a problem with one of their models. They've pulled it from the stores and that we think will have some minor effect on us moving forward and that's the cautionary note that we said for Q4. But again, this is very specific to that one manufacturer. We see continued opportunities in this area, particularly in the back pad area and I mentioned in the prepared statements around OLED. As that display technology becomes more popular, we're seeing opportunities for that back pads that we've developed specifically for that application.

So there's some minor issues, perhaps, in Q4 here as that one OEM of smartphones deals with their problems. But we see that rebounding whether they get their business back or one of the other folks who makes handhelds takes that share. We're, as I mentioned earlier, essentially in all of these handhelds.

Great. Thanks, Bruce, for helping to classify it's the other guy. So the next question here for the moment, the M&A environment. So it's obviously crucial to some of your growth strategy. It's been a little bit of time since your last sizable transaction. Can you talk a little bit about the M&A environment for your folks as well as your appetite at this point? Thanks.

So our appetite is still strong. We still see this as part of our growth strategy moving forward, the synergistic M&A. Bob Daigle has been doing a lot of work on this. I?m going to ask Bob to expand upon that.

So we've been very focused and have actually significantly increased the activity around trying to get a larger pipeline in place. Because you always run into the issue of you may be interested in something but the question is it for sale and can you get the deal closed. Arland was an excellent transaction for us in terms of overlapping very nicely, bringing new capabilities to two of our key businesses. And that's really our focal point right now.

We see some very nice opportunities, frankly, in terms of adding capabilities and either gaps in capabilities or close adjacencies for our businesses. And our focus right now is really on getting a large -- that large pipeline in place so that we can improve our cadence here in terms of executing on transactions successfully.

Thanks so much, folks. I'll hope back in the queue.

The next question is from Craig Ellis with B. Riley. Your line is open.

Thanks for taking my question and congratulations on the execution in the quarter. I wanted to start just with a clarification on the upside in the third quarter. Where specifically was the strength versus the midpoint of the guidance versus your expectation?

For the third quarter or the fourth quarter?

For the third quarter.

The third quarter, I mean really the reason why we excelled so much is EMS was really strong in the portable electronics market and that's really what drove our sales and our guidance up and our results compared to that. So we're very happy about that. It is a pickup in the third quarter. The fourth quarter obviously sales are a little bit down because of seasonality of the portable electronics on it. So you'll see the fourth quarter going down from that, but EMS was definitely a great improvement story for us in the third quarter.

Bob Daigle. I can just add a little bit to that. I think the two major areas of strength for EMS -- we referred to one when Bruce talked about the back pad applications, which over the past year, we've kind of -- we've been talking about the fact that we've been getting some nice design activity. And that showed up very strongly in the third quarter.

The other area that frankly came in really strong and we are very happy with was the activities in China in the HEV/EV battery area. We do an awful lot of work with many -- most of the global players in the electronic vehicle market and we saw some very, very nice activity in China in particular in the EV area that was very helpful to revenues for EMS.

It's very interesting and one of the market dynamics that we're observing in China specifically with the focus that the government has on reducing CO2 emissions, particularly in the first tier cities, the Beijings, the Shanghais, there's lotteries for people to buy cars and to buy an internal combustion engine car, the lottery -- you will be one out of 700 people that will be awarded that license for that care. Whereas in an ATV/EV automobile, it's much, much easier.

So what we're seeing is a significant uptick in activities around designs and actual commercialization of EV/HEVs in China.

That's very helpful color. To follow-up on the back pad opportunity, Bob, when we do the work different parts of the supply chain, whether it be the display manufacturers or companies that serve them, we seem to get back to an opportunity in 2020 that would suggest 75% smartphone penetration for OLED versus what's around 20% today. So the question is not so much whether that?s the right or the wrong forecast but within a smartphone market that's got form factor differentiation, small versus larger, and significant customer differentiation, as Rogers looks ahead, how do you look at the opportunity? Is there a good opportunity for Rogers across small and large screen sizes? And is there anything that would preclude you from participating with any of the major OEMs, whether they be Chinese, Korean, or the U.S.?

I think if we step back and think about what's the attractive aspect of OLED for us, it comes down to whether you're talking about a larger or smaller screen OLED display. They tend to be relatively fragile compared to the LCD module. So you end up in a situation where protecting that OLED screen -- when somebody is going to drop their phone and then not shatter the front of the device, you need higher performing basically impact protection. And that plays very much to our strength. That's been our -- an area which we've generally done extremely well. When you've got more extreme demands for a particular display or other technology in these devices, we do well.

I mean you've had OLED displays out there. A couple people have asked me and television screens and you're not likely to see back pads in television screens because you're not supposed to drop your television. And if it breaks, you expect it to break but in a handheld situation, people get awfully upset when they've got a device they paid $500 for and drop it on the ground and it breaks.

So we think it's a great opportunity. So definitely a nice technology tailwind that we should be able to capitalize on.

Thanks for that. Janice, looking at the outlook, is it fair to say that on the gross margin line, the tailwinds would be efficiency and utilization initiatives; the headwind would be volume sequentially? How does that shake out on a quarter-on-quarter basis for that line item?

Well, between Q3 and Q4, I mean obviously we -- exactly what you're saying. I mean we do see the mix in the shift and we see -- especially when we talk about OLED and the back pads, that has a high -- very improvement in our margin and some of the other 5G will improve. So you'll see the volume improving and you'll see the mix going higher because of that.

So we see the margin improvement in addition to our performance initiatives and our operational excellence will also drive some of the performance. And all of that is really incorporated in our guidance.

And I'll just add on the operational excellence side and so forth, there's -- we're accelerating our efforts there and so we should -- as we move through certainly in this quarter, in Q4, and move into 2017, there's more to be had there certainly.

Okay. Last question and then I'll hop back in the queue. Bruce, I believe it was in your comments where in discussing the antenna opportunity, you mentioned that you'd like to attack that opportunity more broadly. Can you just go into more detail about what's possible there for the company?

Sure. This is really geographic penetration. Where we play today, we play with some specific antenna accounts and they are specific in geographical location. We've been broadening our participation with our capabilities from Arland -- from the Arland acquisition much more broadly. So we're already starting to see design wins with other antenna manufacturers that we think will bear fruit, particularly as we see expansion in the 4.5G massive MIMO in places like China.

We do have good, strong representation in India at this point and we're seeing a pick up for us in China with some of our newer customer base there.

Sounds promising. Thanks everyone.

(Operator Instructions) The next question is from Joan Tong with Sidoti and Company. Your line is open.

Hi, how are you guys doing? Good, just a couple questions. Just going back to the ACS segment and Bob, you mentioned the 4.5G new hardware demand and also 5G new design activities. Is there any particular geographic region that you are seeing those type of strength and that new design activity? Or is it pretty much across the board around the globe?

I'd characterize all the major telecom equipment OEMs are very busy developing hardware for the 4.5G advanced pro, for example, in 5G. So I think it's across the board, Joan. I think everybody sees that at it's the future. I think if you look at the cost -- and I should have mentioned that earlier. I think one of the things that we're also very encouraged by is the fact that a lot of the -- some of the frequencies are going up quite a bit, some of the spectrum, for example, for 5G that they're looking at for fixed point is 28 gigahertz. Why? Because it's really cheap bandwidth and if you look at it as a cost per megabit per subscriber, per customer, it's a very cost effective way to provide high bandwidth to customers.

So I think everyone looks at this and says this is the future. This is what the industry needs to provide the performance customers are looking at in their handhelds and everybody is working on it, and we're working with everybody.

Okay, that's good. And then just another follow-up on the OLED opportunity, the back pad. On the portable electronic side of things, I'm just wondering did -- in your pipeline, maybe you can't really share the information, but obviously somebody else already mentioned form factor and different portable devices. Should we think about this as not just a smartphone end market and you actually in your pipeline you are actually talking to some of those OEMs on the mobile computing side as well, i.e. laptops and tablets.

So there's potentially some opportunities in the larger devices and usually it gets a little bit trickier, Joan, because we've been through this before and some equipment providers will maybe want something a little bit more robust. But I always like to think about it like people also generally don't expect to be able to toss their laptop around and have it hold up. So if you throw your laptop on the floor and it breaks, it's kind of like well, I shouldn't have done that. If you drop your handset waist high and it drops on the floor, it better not break.

So I think there will be more of a mixed bag, frankly, I think, in terms. I think there's some opportunities but it's not clear to us yet whether it's going to be as substantial in the larger devices. We'll have to wait and see.

Okay. All right, that's fair. And then I'm not sure if you guys have mentioned anything on the ADAS side, and obviously, the shipment unit, again, it's flat to -- it's not exactly very robust. So it's still a content play for you guys. I just want to see if that's still your view and what you're thinking over the next couple of years and on the -- as just the driver sensor business.

Sure, and let me just speak a minute or two about the automotive radar. And what that really means for Rogers is that this is a penetration play. While the number of units of cars manufactured may vary year-to-year, what we're seeing is it's really the penetration of these systems, the adaptive crews, blind spot detection. Now, we're seeing our systems -- our materials being used in self-driving cars and again, the industry views this growth rate of somewhere between 25% and 30% a year through 2021. And that's pretty much in line with what we're seeing on a quarterly basis as well is that 25% to 30% growth rate.

So as I mentioned, if we do see maybe a downturn in automotive sales, it might have some small affect per unit but it's really the story is the penetration in the cars that currently don't use these radar systems. And we're seeing that moving forward rapidly.

And maybe just to add something to that. I think it's penetration in terms of the number of vehicles that are starting to incorporate these safety-sensing systems. But I think the other factor that's important for us is the number of sensors per vehicle continues to rise. It wasn't long ago, where the only thing you had were two sensors for a blind spot lane change assist and then you ended up with adaptive cruise pre-collision and breaking. Now, you're seeing a couple of more sensors for transverse where if you're backing out of a parking spot or out of your driveway, it's looking sideways to see if something is coming at you to warn you.

So you're seeing this continued increase on the average number of sensors per vehicle that have these systems. And again, the regulatory, quasi-regulatory environment's very favorable, you've got I believe 20, 21 agreements with the Detroit automakers to have the pre-collision breaking systems as a standard. You've got an environment in Europe right now where if you want to get a five-star safety rating you have to have active systems. You can't just rely on protecting people in accidents, airbags, et cetera. You've got to prevent accidents and these sensors play a critical role in accomplishing that.

Got it. Thanks for the update. And then finally, just a quick update on some of those more commoditized or commodity end market. You mentioned mining and energy where some of the weak spot in the past couple of quarters. Have you seen anything stabilizing? Obviously, the sort of the view for next year, it's a little bit more favorable compared to a couple of quarters ago and just wanted to see if you have seen that as well.

In the rail and mining areas, we really haven't seen the upturn yet. So we're bouncing along at the rates that we've probably seen in the last two quarters or so and it would be difficult for us to forecast moving forward how this is going to -- where this is going because I think it's very dependent on commodity pricing, oil pricing, and so forth that will drive new investments there, the movement of goods on rails, and so on.

So part of it's tied certainly to the oil prices and so forth. Part of it's tied to general economic activity and with global GDP relatively low compared to what it's been over the last five to seven years, our expectation is until things really start moving, we probably won't see too much change there.

All right, thank you guys.

The next question is from Sean Hannan with Needham and Company. Your line is open.

Thanks. Just a little bit more of an administrative question for Janice. Can you talk a little bit about the SG&A number that we had come through within the quarter, what to expect as that moving forward from here? Thanks.

Yes, as we talked about, we had some strategic initiatives. So we had a little bit higher expenses coming through in the Q3 and our number came in at about $32 million, as you'll see as we file our Q. We anticipate the fourth quarter to be roughly about the same and then it will go down in 2017. As we talked about, we had strategic initiatives that will air one time and will finish out throughout the year of this year. We do have some cost initiatives that we did to take down our SG&A. So on a run rate basis, you'll see that improve in 2017.

And then of course, when you compare it to last year, we had that bonus where we reversed the accrual in Q3 of 2015 where we've been accruing in 2016. So those are the three primary reasons of differential from last year and also the steady states on three of the four. But then going forward, you'll see some of our rate improvement.

Okay. And then last question here for me. When we think about some of the bigger trends that are going to affect ACS and provide a little bit more of a tailwind, when do we hit that inflection point in terms of getting back to a little bit better year-over-year cost? Is that something that based on, say, some of the optimism through India, through 4.5G, China, et cetera, do we start to get to that by the first quarter of next year/ or how should we think about that change? Thanks.

In Q4, you'll see a little bit of a pickup as we're seeing some things change, especially with -- when we talk about the 4.5G and some other things that are coming in with the antenna business. So we see a little bit but we should see some improvement in 2017. So you'll see that hopefully coming back stronger in 2017, especially with the auto market and the buy-ins increasing year-over-year. That will be a big portion of it and then we see the power amps and antenna business. I anticipate that improving a little bit.

Exactly, and I think the big driver for growth next year as we look out would be the ADAS side of things for ACS. And I would characterize it as stability in the telecom sector.

Okay. Thanks. And then as a follow-up on this, the ADAS comment, what are you assuming in terms of volumes within the market? Obviously, this is a content -- primarily a content story, but we have the benefit of good volume. I think that's certainly becoming a bit more neutralized recently. So just want to understand what's in your assumptions.

So Sean, I think we share the belief that the auto industry is likely to be sluggish, whether you're talking about peak auto or just stabilize and even if it's down a little bit. But I think the important point, just to reiterate what Bruce said earlier is that our ADAS story, our volume is driven by penetration. It's driven by the fact that more - a higher percentage of the vehicles every year are incorporating these safety sensors and that the average number of sensors per vehicle continues to increase.

So frankly, the auto volume barring a major decline, is more of the noise for us. When you're talking about mid-20% kind of growth rates, which are mostly a penetration story, a few percent plus or minus an auto volume doesn't necessarily move the needle much here. I think it's lost in the noise, frankly.

Okay. Great. Thanks for all the feedback, folks.

The next question is from Julie Li with Drexel Hamilton. Your line is open.

Thank you very much. First of all, congratulations on the solid quarter results.

Thank you, Julie.

My question is the PES business, we saw some pickup of EV and HEV sales this quarter but rail business slowed down. Can you share updated view on this end markets?

So again, the rail is tied to commodities and movement of goods on those rail systems and while there is ongoing building of locomotives and high speed rail, it is at a much, much slower pace than what we have seen over the last two to three years. And as I mentioned earlier in the call, we don't necessarily see that rebounding significantly moving forward. What we're seeing is I think as you mentioned it in the PES business, significant upsides on the EV/HEV side of things, both I would say both on the Curamik side of the business as well as the bus bar side of the business.

So we're seeing essentially a movement or a transition in that business around e-mobility and certainly the strength on the variable frequency drives as well.

Is there material operating margin difference between each line in PES?

Yes, we don't normally break out balance -- break out product line within the business units, but yes there are differentials and obviously, the higher technology ones obviously would have the higher margins but we don't break that down (inaudible).

Thank you. And my last question is merger and acquisitions. You've talked about you are spending the pipeline and I'm wondering is there a specific product line that you are looking at when you seek out acquisitions opportunities?

So our stated intent is looking across all of our product lines and identifying opportunities that match well with the capabilities of Rogers. It might be an extension of a material. It might be an extension into a different market and some enablement there that an acquisition would give us. But we're looking across all of our business units to identify these adjacencies and these opportunities. So that -- and that's helping us have a broader aperture of opportunities because of that.

Thank you. That's very helpful. I will jump back in the queue.

There are no further questions at this time. We'll turn the call back to Mr. Hoechner for any closing remarks.

First, I'd like to thank everyone on the call today for their interest and questions. I think very good conversation and we thank everyone for their support of the company. So have a good day.

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