Rogers Corporation

Good day. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Q2 2020 earnings call. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you would like to remove yourself from queue, press the pound key. I will now turn the call over to your host, Mr. Steve Haymore, Director of Investor Relations. Sir, you may begin your conference.

Thank you Jason. Good afternoon everyone and welcome to the Rogers Corporation second quarter 2020 earnings conference call. The slides for today's call can be found on the investor section of our website along with the news release that was issued today. Please turn to slide two. Before we begin, I would like to note that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in Rogers' operations and environment. These uncertainties include economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement. Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliations 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 investor section of our website. Turning to slide three with me today is Bruce Hockner, President and CEO, Mike Ludwig, Senior Vice President and CFO, and Bob Daigle, Senior Vice President and CTO. I will now turn the call over to Bruce.

Thanks, Steve. Good afternoon, everyone, and thank you for joining us today. As expected, the COVID-19 pandemic led to challenging market conditions in Q2. Despite these circumstances, strong execution during the quarter enabled Rogers to deliver solid financial results. Before discussing our results in more detail, I'll provide an update on our ongoing response to the COVID-19 pandemic. Please turn to slide four. As I highlighted during our last earnings call, our priorities are to manage through the current macroeconomic environment while building upon our strategic positions and strengths for Rogers' future success. From an operations standpoint, all of our manufacturing facilities continue to operate in Q2 as essential businesses and did not experience any significant disruptions related to COVID-19. Our factory teams continue to do an excellent job of managing the current situation and adapting to robust health and safety protocols. Our non-manufacturing employees have transitioned seamlessly to remote work arrangements. They are maintaining effective collaboration with their colleagues and with our customers where we continue to secure design wins and support customer needs. For example, an OEM customer was at risk of missing a critical milestone in the development of their new EV technology after returning from a forced shutdown. Rogers employees acted with a sense of urgency, engaging on design support, and delivering the critical components needed to keep the customer on schedule. This dedication, in addition to our balance sheet, market positions, and product portfolio, gives Rogers a strong foundation to overcome current market dynamics. Turning to slide five, I'll next discuss our financial results in more detail. Q2 net sales of $191 million were down 4% from the prior quarter and were within our guidance range. Second quarter gross margin of 36.6% and adjusted EPS of $1.13 per share exceeded our guidance. Gross margin gains were driven by strong operational execution and favorable product mix. As Mike will discuss in more detail, we are very encouraged by the progress we are making on our cost improvement roadmap. We have built considerable momentum and we will continue to drive this initiative forward as a top priority. The 23% increase in adjusted EPS from the prior quarter was due to the gross margin performance and our timely actions to manage operating expenses. As the current market challenges are expected to extend into the third quarter, we will continue to carefully manage manufacturing costs and operating expenses. We generated robust free cash flow of $39 million in the second quarter and our balance sheet remains strong, enabling us to navigate the current macro environment while also investing in our future growth. From a market perspective, the quarter finished largely as anticipated. Sales in our ACS business increased from stronger defense demand and higher wireless infrastructure sales, which were driven by 5G deployments in China. The strength in these markets was offset by the significant impacts of COVID-19 pandemic on most other markets, especially general industrial and automotive. One market we typically don't highlight, but it is certainly a strength, is aerospace and defense, where recent defense design wins drove sequential sales growth of more than 25%. I'll discuss more about the longer term opportunity in this market later. Also, as highlighted, advanced mobility and advanced connectivity continue to comprise nearly 50% of total revenue. Both focus areas continue to be important to Rogers, but we are seeing an evolution in the relative opportunity within each of these areas, which we'll look at in greater detail on the next two slides. Turning to slide six. All three of our business units are focused on opportunities in advanced mobility, which includes EV, HEV, and ADAS markets. It has become increasingly clear that the momentum behind vehicle electrification is accelerating despite the near-term challenges brought on by COVID-19. Recent statements from a number of European, Asian, and US automakers point to the rapid progression towards fleet electrification. On a broader scale, recently enacted government stimulus programs in Europe are providing an additional catalyst for electric vehicle growth. Given this outlook, we are intensifying our focus to prioritize capital investments and dedicate resources to the expanding opportunities in advanced mobility. First, in the PES segment, we are well positioned to take advantage of the 35% plus CAGR expected in this market over the next five years. Rogers' leading substrate technology for power semiconductor packaging is used across the spectrum of mild hybrids, plug-in hybrids, and full electric vehicles. We have a strong product portfolio to address the entire market, including our new silicon nitride substrates which enable us to participate in the growth of silicon carbide power modules for EVs. As a general reference point, although our content opportunity per vehicle can vary based on vehicle type and power levels, our substrate content ranges from $5 in a 48 volt mild hybrid to around $40 in a full electric vehicle. Power Interconnects provide an additional content opportunity for this market, and like our substrate solutions, the dollar content can range broadly. We have secured design wins with a number of promising entrants to the EV market and see this as another avenue of growth. In our EMS business, we continue to be encouraged by our strong pipeline of design activity and wins with leading automakers and battery suppliers. Our content opportunity spans most electric vehicle types and battery technologies with an especially strong opportunity in battery pressure pads. Vibration dampening pads and battery pack sealing solutions provide additional content opportunities. Similar to our PES business, our content opportunity can vary based on battery size, battery type, and other factors. However, as an example, Rogers Content Opportunity and battery pressure pads for plug-in HEVs and EVs can be greater than $30 per vehicle. In ACS, we have a leading position in the ADAS market where there is significant long-term growth opportunity. Although the near-term outlook for auto sales is challenging, only around 35% of vehicles manufactured today contain ADAS features. As these safety features increasingly become more standard in new vehicles, the market is expected to grow at an 18% CAGR over the next several years. Longer-term trends towards autonomous driving are also expected to increase the average number of sensors per vehicle. We see these markets in advanced mobility as opportunities that are extremely well-suited to Roger's strengths. which are developing solutions for applications that demand high performance and high reliability and providing expert engineering support. We are well positioned across each of these markets and will continue to invest in our capabilities to take advantage of the growth opportunities ahead in advanced mobility. Please turn to slide seven. Our advanced connectivity focus includes the wireless infrastructure and portable electronics markets along with other emerging opportunities. In wireless infrastructure, trade restrictions and political tensions as well as an ongoing decline in 4G deployments are creating challenges and limiting visibility. While this creates uncertainty, industry experts continue to point to the potential for global 5G deployments in excess of 1 million base stations per year for the next few years beginning in 2021. Although the longer term 5G market outlook is positive, trade and competitive factors continue to moderate this opportunity for us. We expect that we will have minimal share with Huawei. Also, we are seeing some other OEMs adopt lower content antenna designs that are less technically demanding 5G content of high frequency circuit materials varies based on OEM design and ranges from approximately $100 to $200 per base station for the combined antenna and power amp systems. The weighted average content opportunity is closer to the low end of that range as Chinese OEM customers have adopted lower content designs. Turning to portable electronics. The overall market has been impacted by the effects of COVID-19 in 2020. However, we see a good growth opportunity in 5G handsets, which utilize our elastomeric solutions. Sales of 5G phones are expected to grow to around 15% of total units this year, and then increase to roughly 30% of the market in 2021. Design changes incorporated in 5G handsets are creating greater content opportunity for Rogers advanced materials in the range of 10 to 15% versus 4G phones. High performance tablets, which contain our circuit materials, are a relatively smaller opportunity, but recent demand has been strong driven by remote working and education. In addition to the other opportunities discussed, we also continue to pursue growth opportunities for high frequency circuit materials used in low earth orbit internet service, next generation advanced antenna materials, and high speed data applications. Please turn to slide eight. ACS net sales for the second quarter were $71 million, an increase of 10% sequentially. Strong growth from the defense market and higher 5G wireless deployments in China were partially offset by an expected decline in ADAS demand due to automotive factory shutdowns. Looking ahead to Q3, we expect sales in the defense market to remain strong due to the previously mentioned design wins. In the ADAS market, current expectations point to a potential rebound in demand late in Q3, but it remains uncertain when auto sales may return to pre-pandemic levels. In wireless infrastructure, we anticipate a decline in Q3 sales from expected lower base station builds and decontenting. Recent data from Chinese officials indicates that more than half of the planned 2020 5G installations were completed by the end of June. The effects of trade tensions, lower 5G base station content, and the ongoing decline in 4G deployments are creating a great deal of uncertainty around our outlook for wireless infrastructure. As a result, we believe the growth opportunity in wireless infrastructure is substantially reduced going forward. In defense, we have seen a number of significant design wins for multiyear projects. This is supporting the outlook for a double-digit growth rate in 2020 and a high single-digit rate going forward. In ADAS, although there are near-term challenges, as discussed earlier, the medium to long-term growth projections for this market remain robust with a five-year CAGR of 16%. Please turn to slide nine. PES net sales in the second quarter were $45 million, a decrease of 3% as compared to Q1. The decline was due to lower sales in the traditional automotive market where demand was significantly reduced by COVID-19. Market demand for electric vehicles continues to be strong, but we did see a decline in Q2 sales from EV factory shutdowns. We saw moderate increases in industrial power and mass transit market sales primarily related to customer inventory management rather than stronger end market demand. Looking ahead to Q3, we anticipate an improvement in EV-HEV market demand as manufacturing disruptions have now subsided. Recent sales of electric vehicles in Europe have also been increasing as COVID-19 restrictions continue to be lifted. Offsetting the expected growth in EV sales is a lower outlook for mass transit demand due to ongoing effects from COVID-19. Improvements in PES operations contributed significantly to our Q2 gross margin performance. Continuing the trend from prior quarters, we again saw improvements in yields and reductions in material usage. We are pleased with the improvements but remain focused on additional opportunities identified in our ongoing cost improvement roadmap. Please turn to slide 10. Q2 EMS net sales were $72 million, a sequential decrease of 14%, primarily due to the economic impact of COVID-19. The largest decline was in our general industrial and consumer markets, including portable electronics. Sales of battery pads and battery pack sealing solutions for the EVHEV market was a bright spot in the quarter and was driven by stronger demand from Europe. For Q3, we expect demand for portable electronics and EVHEV battery applications to increase. Portable electronics is expected to grow in Q3 from both normal seasonal patterns and increased sales of 5G handsets. Sales in the general industrial market are anticipated to be similar to Q2 levels. While we are seeing some signs of recovery, current visibility remains limited. Our sales in this market are correlated with capital spending levels and given the current economic uncertainty, many companies are delaying investments. Please turn to slide 10. Lastly, I'll summarize the key messages before passing the call over to Mike. First, we took actions to protect our employees' health and well-being while also continuing to meet our customer needs. We managed through a dynamic quarter to deliver solid Q2 results. As evidenced by our gross margin and earnings improvement, we maintained focus on our cost improvement roadmap and took timely actions in response to the current environment. We generated strong free cash flow and our balance sheet remains healthy. Lastly, even as near-term visibility is limited, we have maintained a long-term view of the market opportunities. We are focused on accelerating our plans to take advantage of the significant opportunities in advanced mobility and pursuing opportunities in 5G technologies in advanced connectivity. By leveraging our strong product portfolio and investing in innovation and growth markets, we are positioning the company for the long term. Now I'll turn it over to Mike to discuss our Q2 results in more detail.