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spk01: My name is Denae, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Q2 2023 Earnings Conference Call. I will now turn the call over to your host, Mr. Steve Hamel, Director of Investor Relations. Mr. Hamel, you may begin.
spk02: Good afternoon, everyone, and welcome to the Rogers Corporation second quarter 2023 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 earlier today. Please turn to slide two. Before we begin, I'd 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 the many uncertainties that exist in Roger's 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 made today. Please turn to slide three. The discussions during this conference call will also reference certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliations of those non-GAAP financial measures, the most directly comparable GAAP financial measures, can be found in the slide deck for today's call. Turning to slide four, with me today is Colin Gavea, President and CEO, and Ram Mayampourth, Senior Vice President and CFO. I will now turn the call over to Colin.
spk03: Thanks, Steve. Good afternoon to everyone, and thank you for joining us today. In Q2, we continued to make good progress towards the cost and profitability improvement targets that we outlined for this year. We achieved a 34.5% gross margin in Q2, which was at the high end of our guidance range for the quarter, and exceeded the 34% goal we set in Q4 of last year. Rogers delivered non-GAAP earnings that exceeded the midpoint of our Q2 guidance due to our operating performance and expense management, despite greater than expected market challenges. Overall, we are pleased with our solid performance and execution in Q2. Before discussing the second quarter results in more detail, I'll provide an update on the progress we are making related to our key priorities, which we outlined in our March Investor Day. I'll begin on slide five. As we shared at our Investor Day, we are executing on a three-phase plan to achieve breakthrough growth and profitability over the next several years. In the restore phase, our focus continues to be on driving improvements in our cost structure and returning to historical levels of profitability. In recent quarters, we announced a series of actions to improve margins and contain operating expenses. We are now seeing the results of these initiatives. Our 34.5% gross margin in Q2 is an improvement of 270 basis points compared to the fourth quarter of last year. In addition, we are closely managing operating expenses while still developing the capabilities to scale the organization for growth. Another vital aspect of the restore phase is bolstering the organization with certain critical skill sets. As we discussed on last quarter's earnings call, we have added significant talent to our executive team. The latest position to be filled is the chief technology officer role, and we are excited to announce we have a very experienced CTO joining Rogers later this month. In addition, We are strengthening other areas of the organization, such as supply chain, procurement, and business development, with recent and targeted new hires that will bring tremendous experience to Rogers. In the accelerate phase, key priorities include capitalizing on strong secular tailwinds, particularly in the EV space, to drive faster top line growth. We expect this growth to come from both existing design wins, which we anticipate ramping up over the next two years, and also from an even greater focus on commercial excellence to secure new wins. A vital component of the accelerate phase is to ensure we have manufacturing capabilities in place to capitalize on volume growth. I'll discuss more in a moment about our recently announced plans to add more capacity in our Keramic business. In addition, we are also preparing for this next stage of growth by developing the capabilities and business processes needed to enable the organization to scale. Lastly, in the elevate phase, we anticipate reaping the benefits of the efforts of the restore and accelerate phases to achieve higher levels of sales and profitability. Turning to slide six, I'll provide more details about our exciting Keramic capacity expansion. Our advanced Keramic substrates are market-leading technologies that provide highly efficient energy conversion solutions for fast-growing markets such as EVs and renewable energy. Our technology is critical to enabling the growth in silicon carbide power modules for these markets. Our unique substrate and cooling solutions extract heat more efficiently, which enables these expensive semiconductor devices to also operate more reliably and effectively. This provides significant benefits for our customers in the form of improved EV range and a lower total cost of ownership. Given the significant benefits that silicon carbide offers to EV manufacturers, It is not surprising to see the number of long-term multi-billion dollar agreements recently announced by key industry participants. To support the expansion plans of our customers and the anticipated significant market growth, we announced in May that we will be adding new keramic power substrate capacity in China. This is in addition to ongoing investments in Germany, both of which will further increase our capacity and capabilities to ensure supply for our global customers. The first phase of this manufacturing expansion is planned to be completed in 2025, and this new state-of-the-art factory will enable us to shorten lead times and deepen technical collaborations with customers. The location in China also reinforces our local-for-local strategy for both domestic and Western OEMs operating in Asia. The factory in China will be modeled off of our flagship production facility in Germany, which will continue to be instrumental to our success. Our Keramic business has been a trusted partner to leading power module suppliers for decades, and this capacity expansion further strengthens that position. We currently have sufficient capacity for our other products targeted to the EV market, and we will continue to evaluate expansion needs as we move forward. Next, on slide seven, I'll touch on the results of the quarter and then highlight some of our recent design wins. Q2 sales of $230.8 million decreased by 5% from the prior quarter and were below our guidance forecast. From an earnings perspective, we were able to offset the impact of the lower sales by executing on our cost and expense improvement initiatives. Our 34.5% gross margin was at the high end of our guidance range and adjusted EPS of $1.07 was also above the midpoint of our guidance. The decline in Q2 revenue was due to a challenging market environment, particularly in general industrial and consumer sales. Weakness in these markets was broad and spanned multiple product lines and regions. The declines in these markets were consistent with recent economic data points, which highlight the current downturn in global manufacturing activity and consumer spending. With parts of Europe now officially in a recession, a muted recovery in China following last year's COVID lockdowns, and the impacts of higher inflation and interest rates, there are many factors combining to make market conditions challenging. EV market sales decreased slightly in the second quarter, as rapid growth in some segments of our business were offset by OEM production challenges, which limited growth in other areas. In our ceramic product line, we achieved a second consecutive quarter of record sales, and our strong growth has been in line with the overall EV market. To meet the increasing demand, we continue to unlock as much capacity as possible from our factory in Germany and are moving forward quickly on the new factory in China. Similar to Q1, Rolink's power interconnect sales were tempered by lower demand from customers who have pushed out production ramp schedules due to manufacturing and supply chain challenges. We are seeing a similar dynamic in our EMS business where growth in sales of our battery cell pads were moderated by production ramp challenges at a large multinational OEM that will use our technology in their vehicles. We expect EMS EV market demand to increase in the second half of the year as the challenges are resolved. We did see growth in both the portable electronics and aerospace and defense markets in Q2. In portable electronics, we were encouraged to see a return to growth following several quarters of declines. Customer signals are pointing towards a further sales increase in Q3, driven by seasonal demand patterns. Although these indications are encouraging, it is uncertain how much improvement we will see in Q3, given the challenging economic environment. AMD sales also increased versus the prior quarter, primarily from our EMS business. The growth was driven by strong demand from commercial aerospace customers who are moving quickly to boost aircraft production rates. Next, I'll review some of our design wins from the past quarter. Beginning with EMS, we secured multiple design wins with Asian OEMs for upcoming foldable smartphones. Our urethane materials will provide the high reliability solutions needed for these new generation phones. These wins highlight how our advanced materials and customer collaboration enable us to stay on the leading edge of technology developments. We are happy to report that this design win We utilize polyurethane materials from our UDIS factory in South Korea, which resumed operations at the beginning of the year. In our AES business unit, we secured a design win in the A&D market with a major prime contractor. Our laminate circuit materials will be used in one of the world's most advanced air defense radar systems, which enables precision tracking of potential threats. Using our proven OEM engagement model, we worked closely with our customers to help meet their critical performance and cost targets. Volume on this program will begin to ramp in 2023 with a program life that is expected to extend for many years to come. Lastly, we had several new design wins in our Keramic business in the EV space. The largest of these wins was with a Tier 1 auto supplier who selected our substrate technology to be used in their next generation silicon carbide power module platform. This multi-million dollar design win is expected to span more than five years. On slide eight, I'll briefly highlight the recent ESG report supplement that we issued. Roger's commitment to corporate responsibility and sustainability is deeply embedded in our culture. We strive to demonstrate this commitment in both the way we operate and by enabling sustainable end markets such as electric vehicles and renewable energy. Some of the highlights of our report supplement include improved reporting quality with third-party verification of greenhouse gas emission inventories and extended reporting of employee health and safety metrics. Safety is one of our core cultural behaviors at Rogers. We have made good progress on improving our safety results in recent years. and we remain focused on continuous improvement in this area. We look forward to publishing a full ESG report in the first half of 2024 and building on our accomplishments as we continue our sustainability journey. Now, I'll turn it over to Ram to discuss our Q2 financial performance in detail.
spk00: Thank you, Colin, and good afternoon, everyone. In Q2, we saw continued global market volatility and slowing demand, This resulted in a lower revenue compared to Q1. However, we had good operational performance that enabled us to improve gross margin and EPS. We are committed to execute on actions to improve our near-term performance while remaining focused on the key strategic priorities which will enable Rogers to success in the years to come. I will now review our second quarter 2023 results in detail beginning on slide nine. Q2 sales of 231 million declined by 5% versus the prior quarter and were below our guidance range. Gross margin improved by 180 basis points versus Q1 to 34.5% and reached the high end of our guidance range. On a gap basis, we had earnings of 96 cents per share for the quarter, which exceeded the high end of our guidance range. On an adjusted basis, Q2 earnings were $0.07 per share, which surpassed the midpoint of our guidance range and increased over 20% from Q1. Our Q2 margins and EPS results continued our pattern of recent improvement. We are pleased with the progress thus far and remain committed to driving further profitability. Turning to slide 10, as we mentioned earlier, Q2 net sales were lower, mostly due to challenging market conditions. On a reportable segment basis, sales in both AES and EMS business units were lower. AES sales decreased by 4.2% to 130.2 million. Aerospace and defense and industrial sales were higher in Q2, although this was offset by lower EV, HEV, and ADAS sales. EMS sales decreased by 6.7% to 95.3 million, primarily from lower general industrial and consumer market sales. Revenue also decreased from the sale of the natural rubber business in Q1. As discussed earlier, these markets in particular have been impacted by the ongoing slowdown of global economic activity. This was partially offset by higher portable electronics and A&B sales, which improved from our Q1 levels. As stated earlier, EV-HEV sales in Q2 were moderated by production challenges at specific customers. This impacted our power interconnect and battery cell pad product lines. However, our ceramic substrate business continued to demonstrate strong growth in Q2. We are closely watching these evolving supply chain and manufacturing challenges and the impact and demand for these products. We remain focused on our long-term strategy and investment plans. Turning to slide 11, our gross margin for the second quarter was $79.6 million, or 34.5% of sales. This was 180 basis point improvement versus the prior quarter and at the top end of our Q2 guidance range. At the end of 2022, we communicated our commitment to improve our gross margin by 240 basis points and get to 34% by Q2 of 2023. We are happy to report that we have exceeded that target. The increase in gross margin since last year resulted from fixed cost reduction actions taken in Q4 2022 and Q1 2023, ongoing factory productivity improvements, and overall manufacturing and logistic cost reductions. Q2 operating profit increased to $28 million, or 12.1% of sales. The improvement was due to lower operating expenses, lower restructuring and impairment charges, and higher other income from insurance recoveries. Adjusted operating margin was 13.4%, improved by 290 basis points from the prior quarter. The increase in adjusted operating margin resulted from the improvement in gross margin and lower operating expenses versus Q1. OPEX decreased as a result of lower variable compensation cost, professional service fees, and other administrative costs. Continuing to slide 12, ending cash at June 30th was approximately $142 million, a decrease of $94 million from the end of 2022. and a 52 million decrease from the end of Q1 2023. The lower cash versus the prior quarter was primarily related to a 60 million discretionary repayment of debt on our revolving credit facility. Since the beginning of this year, we have paid down a total of 85 million on our revolver. Continuing to invest in our long-term strategic initiatives and debt management will remain at the top of our capital allocation priorities. we remained focused on maintaining the strength and flexibility of our balance sheet. Capital expenditures were approximately 12 million for the second quarter and 28 million year to date. We expect capital expenditures to be weighted towards the second half of the year and continue to guide in the range of 65 to $75 million for the year. Next on slide 13, I will discuss our guidance for the third quarter. First, Net sales are expected to range between 230 and 240 million, slightly above our Q2 results. We anticipate the challenging market conditions that we experienced in Q2 will persist into the third quarter. Portable electronic sales are projected to improve in Q3 based on normal seasonal patterns and is a primary reason for the higher sales in Q3. We are guiding gross margin to be in the range of 34% to 35%, for Q3 or consistent with our Q2 results at the midpoint of our guidance range. We anticipate the higher sales volume to be offset by change in product mix. Earnings per share is expected to range from $1.20 to $1.40 and adjusted EPS from $1.05 to $1.25. Our GAAP EPS range is higher than our adjusted EPS range due to expected net gains through the sale of two manufacturing facilities that should close in the third quarter. Both locations were included in the restructuring actions we announced previously. We project our full-year tax rate to be around 25%. Let me mention again our commitment to improve gross margins and overall profitability in the quarters ahead. We remain focused on executing our near- and long-term plans. I will now turn the call back to the operator for questions.
spk01: Thank you, Sal. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Start key. Please note that participants are limited to two questions at a time. You may rejoin the question queue once you are done. The last question that we have comes from Daniel Moore from CGS Securities. Please go ahead.
spk05: Thank you, Collin and Brahm. Good afternoon. Thanks for taking the questions.
spk03: Hi, Dan. Good afternoon.
spk05: Start with margin performance, quite impressive, especially in light of the revenue softness. When we think about some of the expense tightening that took place during the quarter in addition to the operating improvements, are some of those expense reductions temporary, some of them more permanent? In other words, when revenue does start to snap back, Are we potentially set up for an even faster ramp in operating leverage and margins, particularly on the gross margin line, or are there perhaps some expenses that may flow back in when revenue returns?
spk00: Hey, Dan, this is Ram. I'll take that. When we did our Q1 call, we said that the majority of the improvements we made will kick in more in Q2. We saw some improvements in Q1, but we did say that majority of it will kick in in Q2, and that's what you're seeing now. With regard to your question, most of the expense reductions are permanent. There is some variability with certain things that might be sales-related, but the major reductions we have made in spending are permanent.
spk05: Great. Very helpful, Ram. You know, within the EV space, I appreciate the color on some of the opportunities and the expansion of capacity in China, ceramic. Given that discussion, should we expect within your kind of core three technologies or product lines within EV, do you expect ceramic substrates to kind of lead the acceleration when it comes in 24, 25, maybe followed by, you know, compression pads and power interconnects, or do you see kind of equal growth and acceleration across all three potentially.
spk03: Hi, Dan, Colin. As we look ahead, you know, I would say that certainly Keramic has a very strong position and is growing rapidly. And we're very pleased with the last two quarters that have been records. But I would say that we've got strong positions across all of our product lines in EVHEV. So The program wins as we look ahead for compression pads and other gasketing wins are there, and we feel good about those. And we also have some strong program wins with roll links. So I think across our product lines, we feel like each will be a strong contributor to our growth. And the design wins that we have have really contributed to our decision to go forward to this ceramic expansion in China.
spk05: Great. Great to see the UTIS facility back up and running and obviously capacity filling back up. How should we think about, you know, growth into 24 in that piece of your business, given the new business win and potential for additional proliferation and flip phones, et cetera? You know, what's the pipeline of opportunity look like there?
spk03: So I would say, first of all, we're thrilled that our UDIS facility is up and running. I had the good fortune to visit it several months ago, and we've been back on stream since the beginning of the year. And the reason that fits so well within our strategy is it gives us a footprint in South Korea, which is critical for that part of the world in terms of specific OEMs. So we're actually happy in terms of where we are with our UDIS growth. Some of the program wins have come in even faster than we had thought. And it's mostly around our E-Zorba polyurethane technology. E-Zorba is our brand of the materials we produce in our UTIS facilities that work very well in flip phones and some of the newer technologies. So we've gotten back on our feet there and the program wins look good. And, you know, they'll be a very contributing factor to how we do in portable electronics going forward. We're really happy to have them back and up and running.
spk05: Okay. Last for me. is just maybe a question on seasonality. And Ram, I appreciate you pointing out sort of the delta between Q2 and Q3 being mainly the expected seasonal ramp in portable electronics. Historically going back, Q4 has typically been a little bit lighter in terms of revenue and profitability. Maybe talk to what your expectations look like from a seasonal perspective in the back half of the year.
spk00: So Dan, we don't guide Q4 as you know. But some of that pattern has been changed quite a bit with the COVID situation. And the normal seasonality and the big ramp-up we see in Q3 for portable electronics in particular sometimes stretches into Q4, too, building up to the Chinese New Year build. So those historic patterns are changed a bit. And outside that, we have continuing operational changes improvement and raw material procurement savings and other initiatives in the works, which we hope will continue to improve profitability beyond Q3.
spk05: Very helpful. I'll jump back with any follow-ups. Thank you.
spk03: Thanks, Dan.
spk01: Thank you. The next question we have comes from Craig Ellis from BRM Securities. Please go ahead.
spk04: Hi, this is Ethan Wydell calling in for Craig Ellis. Thanks for taking my questions. To start, I was hoping you could provide a little additional color on your capacity expansion in China. What can we expect in terms of increasing capacity and time to revs and how this influences your revenue ramp?
spk03: Yeah, I'll start and maybe Ram could help out here. So what I would say about our capacity expansion for Keramic technology is I'll first step back and mention that for the other technologies we sell into the EV, HEV space and other areas, we've already added capacity and we're in a good position to capture growth. But what we see in the ceramic substrate market is a lot of growth, particularly in China. So our model would be in China for China or local for local, as I said. And we've worked very closely with our teams and our downstream customers in terms of what the demand profile looks like. And with the design wins we have, it's made complete sense for us to have our next factory for ceramic technology in China, which won't take away from what we're doing in Germany. That's still our flagship facility and very important for us. But we see a lot of growth coming in China, and we need to be on the ground there locally to capture it. In terms of Timing will be up and running by the end of 2025. We're going to have a phased approach. So phase one will be 2025, but we'll put in the right capital so that we can expand it in several different phases as our demand continues to increase. So we won't miss out on the growth.
spk04: Thank you. That's really helpful. And segment-wise, can you speak to – Any of your sub-segment details in particular, if you're seeing any particular strengths more broadly, in what segments are you comfortable and in what segments are you think that we're at or near cyclical bottom and where do you continue to see risk? Thanks.
spk03: I would say the overall question of risk, maybe I'd start on just a macroeconomic level. We read the data. We've heard other companies reporting. We've talked to customers. And in general, you just have a lot of challenges out there from a macro environmental perspective. So both the US and China have PMI indices that are below 50, indicating the contraction. You've got pieces of Europe, countries such as Germany, in recession. We have high inflation. And I think there's some caution out there in terms of consumer spending. So the headwinds that are impacting the macro economy, I think are pretty much global from our perspective. And we're global in terms of our sales where we're about, you know, roughly third of third of third US, Asia, and Europe. So from a specific end market segment, you know, we have great position in EVHEV. And while things may be a little bit choppy there, because in some cases, downstream OEMs can't get the materials they need to ramp. And we've got to be patient and wait for that to happen. We feel very good about that. Same for renewable energy, which continues to be in good shape for us. And then for portable electronics, you get mixed reviews from the market. But in our case, I would say our customer mix and where we participate in higher-end phones is a strength for us there. So I would say those are some of the areas where we feel quite strong. We do see some general softness in our general industrial business, several different and market segments there. And we've had a bit of a soft quarter, I would say, in consumer products, where consumer spending is tamped down by the, I would say, high inflation. But one thing we like about our portfolio is we participate in many different end segments in many different geographies. So we feel like we have enough diversification when one area is down, we've got other areas that can help keep us moving forward.
spk04: Absolutely. Thank you very much.
spk03: No problem.
spk01: Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then 1 now. We'll pause a moment to see if we have any further questions. We have a follow-up question from Daniel Moore from CGS Securities.
spk05: Nope, sorry, let me just hop off mute there. Thanks for the follow-up. Just a capital allocation question. Obviously, you know, paid down a nice chunk of debt during the quarter, and the balance sheet remains rock solid, and your long-term targets imply, you know, free cash flow to reach, you know, $130 million, $150 million later in the period. What does the, you know, M&A pipeline look like? You know, are you thinking about along those lines are still really mainly just on the sort of 2023 phase of your plan right now. And what are your sort of primary expected uses of capital over the next sort of two, three years if you don't identify attractive acquisition targets?
spk00: I can start that, Dan, and I'm sure Colin will have points to add. So you're right, maintaining the strength and flexibility of our balance sheet is a key priority. Debt management goes along with that, is the reason why we have been focused on paying down debt and investing in our organic expansion. We extended the maturity of our credit facility by five more years, as you know, earlier this year. So maintaining that flexibility is very important. Inorganic growth is certainly a key part of our strategy, and it's important to us, and we are very focused on that. With the cash generation that we expect with the organic growth and profitability improvements, the priorities continue to be invest in ourselves, both in CapEx and also in building the capabilities. maintaining the balance sheet strength and organic growth, and then returning cash back to shareholders. So all those will be looked at as we expand our cash generation here.
spk05: Really helpful. And lastly, go ahead, please. Thanks, Colin.
spk03: Oh, it's Colin. I was just going to add around M&A that, you know, of the four prongs of our strategy, market-facing, innovation, operational excellence, M&A remains a key fourth pillar for us. And we have done, I think, a really good job reconstituting our M&A pipeline. And we have, I would say, some very interesting ideas. Nothing to share at this moment. But M&A has been a key piece of Rogers' strategy in the past. We have a good track record of acquiring and integrating businesses. And we don't look for that to change in the future. And if I can, just make one quick comment. I talked about our Keramic facility coming on end of 2019. I had meant to say end of 2024 for phase one and then up and running in 2025. So I just wanted to clarify that for everybody.
spk05: Terrific. And while you're at it, just ballpark what the cost of the new facility, at least phase one, would look like from a CapEx perspective.
spk00: So that's included in the projections that we have shared, Dan. including that we expect our projections, our capex investment to be in the 7% to 8% going forward. So for the first phase, I would think it's in the 30 to 35 million range.
spk05: Perfect. All right. Thank you again.
spk01: Thank you. Ladies and gentlemen, just a final reminder, if you would like to ask a question, Please press star and then 1 now. For the moment, let's see if we have any further questions. At this stage, there are no further questions. On behalf of Rogers Corporation, thank you for joining us today. You may now disconnect your lines.
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