Rogers Corporation

Good day. My name is Holly, and I'll be your conference operator today. At this time, we would like to welcome you to the Rogers Corporation Quarter 3 2020 Earnings Conference Call. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star, then one on your telephone keypad. To withdraw your question, please press the pound key. I'll now turn the call over to your host, Mr. Steve Haymore, Director of Investor Relations. Sir, you may begin the conference.

Thank you, Holly. Good afternoon, everyone, and welcome to the Rogers Corporation third 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. 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 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'll now turn the call over to Bruce.

Thanks, Steve. Good afternoon, everyone, and thank you for joining us today. Please turn to slide four. Rogers delivered solid third quarter results led by growth in key strategic markets and strong operational execution. Q3 net sales were $202 million. Gross margin was 37.4%. Earnings were 37 cents per share and adjusted earnings were $1.45 per share. Net sales, gross margin, and adjusted EPS all improved sequentially and exceeded our previously announced guidance ranges. Strong demand in the EVHEV ADAS portable electronics and Defense Markets drove the higher than expected sales. EVHEV sales grew double digits sequentially, driven by strong demand for battery pad and ceramic substrate applications. ADAS sales experienced a sharp recovery in Q3, but the broader automotive market remained below pre-pandemic levels. The substantial growth in sales for the portable electronics market resulted from improved seasonal demand bolstered by a fast ramp in 5G smartphones. Defense market sales increased at a rapid pace in Q3, adding to the impressive year-to-date performance. We have a long history of success in this market, and recent design wins and new product introductions are adding to our growth. Sales in the wireless infrastructure market were lower in Q3 as supply chain challenges resulting from trade restrictions slowed the 5G rollout in China. We have yet to see broad recovery in the general industrial and mass transit markets. Visibility to the timing of a recovery in these markets remains less clear. Rogers continued to achieve strong results with our operational excellence initiatives, which helped drive our improved gross margin performance. The higher gross margin and effective management of expenditures and working capital resulted in strong free cash flow of $48 million. We are pleased with our Q3 results and our year-to-date performance in the face of challenging market conditions. Our strong results highlight the benefits of both our diversified market and operational excellence strategies. Turning to slide five, I'll next discuss the outlook for some of our key markets. Beginning with advanced mobility, Rogers differentiated materials technology is a key performance enabler for this market. The long-term outlook for the EV-HEV market continues to be robust, with industry experts projecting a compound annual growth rate of approximately 35% over the next five years. The trends driving this outlook include continued investment by automakers in EV and HEV technologies, regulatory measures, and increasing consumer demand. Recent strong sales in Europe highlight the continued resiliency in this emerging segment of the automotive market. Year-to-date European sales are at record levels and third parties expect that full year 2020 sales will be three times higher and 2019. As I'll discuss, Rogers is well positioned to capitalize on growth across the full spectrum of EVs and HEVs. We also have a leading position in the ADAS market where our high frequency circuit materials are distinguished by our performance and reliability. Over the next five years, this market is expected to grow at a CAGR of between 15 and 20%. Driving this growth is higher penetration rates of ADAS units, which are increasingly becoming standard safety features on new vehicle models. Also, as vehicle autonomy gradually increases over time, the average number of radar sensors per vehicle is expected to grow. In advanced connectivity, we are optimistic about the growth prospects in the portable electronics market led by 5G smartphone sales. Third-party estimates point to modest growth in the total smartphone market over the next five years, with a CAGR of about 4%. However, the 5G portion of that market is expected to grow at a much faster 35% CAGR. This is significant for Rogers as advanced features incorporated in 5G handsets have created a greater content opportunity. The higher content ranges from 10% to 15% in mid-range devices, up to 30% more content for certain premium products. With our high performing materials and reputation for reliability, we are well positioned to capitalize on this growth. We are encouraged by the positive long-term outlook for growth in advanced defense systems. Defense spending is increasingly shifting to technology programs Such as missile defense and radar systems which drive increasing demand for Rogers advanced circuit materials. Our long history of providing high reliability solutions for demanding applications and our differentiated engineering capabilities puts us in a strong position to continue our success in this market. We also continue to leverage our innovation centers to develop new technologies that support advanced communications, radar, and guidance systems. As mentioned, we are gaining traction with recent product introductions and we remain focused on developing future advanced materials solutions. Please turn to slide six. All three of our business units are focused on the significant growth opportunities we see ahead in advanced mobility, which includes the EVHEV and ADAS markets. Today, I'll focus on our advanced mobility solutions specific to EVHEV, beginning with EMS. EVHEV battery performance, reliability, and safety are of great importance to automakers and their customers. Leveraging our expertise in polyurethane materials, we have developed high performance solutions that enable improved battery reliability for full electric and hybrid electric vehicles. Battery compression pads for plug-in HEVs and EVs are the largest opportunity in this market, where content can be greater than $30 per vehicle. We have numerous design wins and a strong pipeline of additional opportunities with leading OEMs and battery manufacturers. Moving to PES, we have a strong market position in high performance ceramic substrates, which are used across the full spectrum of EVs and HEVs. As a reference point, the contact opportunity for our substrates ranges from $5 in a 48 volt mild hybrid to around $40 in a full electric vehicle. Increasingly, EV and HEV designs are incorporating wide bandgap semiconductors, which require high-performance packaging. This advanced technology provides substantial efficiency improvements, which results in increased vehicle range and lower-cost batteries, while reducing the size of the inverters. Rogers is well-positioned to capitalize on this growing trend. Our new generation of silicon nitride substrates helps to maximize the performance of silicon carbide devices in demanding EV applications. Power interconnects provide an additional content opportunity in EV HEV, and like our substrate solutions, the dollar content can range broadly. Power interconnects are critical components in EVs, and they ensure the safety and reliability of the vehicle. We are encouraged by design wins we have secured with several leading entrants to the EV market. Please turn to slide seven. Roger's growth strategy is built on four pillars, which include being a market-driven organization, delivering innovation leadership, utilizing synergistic M&A, and driving operational excellence. I'd like to highlight our operational excellence strategy, which we apply to our manufacturing activities and all parts of our business. Beginning with our manufacturing operations, we have gained significant traction in recent quarters, which has resulted in sustainable improvements to our gross margin. At the core of our success is our standardized and scalable operating system that leverages lean manufacturing to drive performance improvements in the areas of safety, quality, cost and flexibility across all our global sites and supply chains. Some of the guiding principles of our system include establishing a proactive safety culture with 100% employee engagement, driving operational excellence through a lean manufacturing culture that embraces continuous improvement, and optimizing our global manufacturing footprint to maximize capital utilization while best serving our global customer base. Each of these elements has a strategy behind it to drive scalable, systematic and measurable improvements while delivering increased value to our customers. Here are some examples of the results that we are seeing from applying this standardized system. First, we have seen substantial improvements in yields, scrap rate and on-time deliveries in all three of our business units compared to the prior year. This has benefited our financial performance and improved customer satisfaction. Second, Our system has provided a structure to make decisions about optimizing our global factory footprint. As announced, we are making adjustments to certain manufacturing facilities in Europe and Asia. These actions will significantly benefit the company by better aligning capacity with end market demand, improving factory utilization, and increasing our cost competitiveness. In addition to our manufacturing improvement efforts, we are engaged in an enterprise-wide continuous improvement initiative focused on optimizing all business processes. This will drive further operating expense efficiency as we leverage our commercial and administrative infrastructure and complement our manufacturing improvement efforts. Recapping the key messages from today's call. We are pleased with the solid results for the quarter resulting from our diversified market strength and the consistent execution of our operational improvement initiatives. We are encouraged by the strength in many of our key strategic markets, even as a recovery is not yet evident in other areas. I especially want to thank our employees for their dedication and contributions throughout this challenging year. Now, I'll turn the call over to Mike to discuss our Q3 results in more detail.