Rogers Corporation

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.

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.

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.