Q2 2020 Rogers Corp Earnings Call

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Good morning administration, and I will do you recall French operator today at this time I would like to welcome everyone to be Rogers Corporation Q2, Twentytwenty earnings call. After the speaker's remarks, there will be considering session. If you would like to ask your question not by the time. Please press star one on you want.

Telephone keypad, if you were bunch removed himself from queue 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 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 to.

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 and Rogers operations and environment.

These uncertainties include economic conditions market demand 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 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 web site.

Turning to slide three with me today is Bruce Hoechner, President and CEO.

Mike Ludwig Senior Vice President and CFO, and Bob Daigle, Senior Vice President and CEO.

I will now turn the call over to Bruce.

Thanks, Steve Good afternoon, everyone and thank you for joining us today.

As expected the covert 19 pandemic, let the 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 on our ongoing response to the cobot 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 covert 19.

Our factory teams continued 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 worker range Miss 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, and OEM customer with at risk of missing a critical milestone in the development.

There are new E V 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 discussed 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're very encouraged by the progress we're making on our cost improvement road map. 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 HCS business increased from stronger defense demand and higher wireless infrastructure sales, which were driven by fiveg deployments in China. The strength in these markets was offset by the significant impacts of cobot 19.

Endemic 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 we 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 kind of activity continued 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 e., the HCV and Ada Es markets.

It has become increasingly clear that the momentum behind vehicle electrification is accelerating despite the near term challenges brought on by Cobot 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 Pts segment, we are well positioned to take advantage of the 35% plus cagar expected in this market over the next five years Rogers, leaving substrate technology for power semiconductor packaging is used across the spectrum of mild hybrids plug in hybrids.

In 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 each.

As a general reference point, although our content opportunity per vehicle can vary based on vehicle type and power levels are substrate content ranges from $5 in a 48 volt mild hybrid to around $40 and 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 entrance to the easy market and see this as another avenue of growth.

In our EPM AST business, we continue to be encouraged by our strong pipeline of design activity and wins with leading automakers and battery suppliers.

Our content opportunity spends most electric vehicle types and battery technologies, with especially strong opportunity in battery pressure pads vibration dampening pads and battery pack sealing solutions provide additional content opportunities.

Similar to our Pts 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 Hgvs any these can be greater than $30 per vehicle.

In AC S., 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 advance mobility as opportunities that are extremely well suited to Roger 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 we'll continue to invest in our capabilities to take advantage of the growth opportunities ahead and advanced mobility.

Please turn to slide seven.

Our advanced conductivity 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 fourg deployments are creating challenges and limiting visibility.

While this creates uncertainty industry experts continued to point to the potential for global Fiveg deployments in excess of 1 million base stations per year for the next few years beginning in 2021, although the longer term fiveg market outlook is positive trade and competitive factors continue to moderate.

This opportunity for us.

We expect that we will have minimal share with Wal way also we're seeing some other Oems adopt lower content and tenant designs that are less technically demanding fiveg content of high frequency circuit materials varies based on OEM design and ranges from approximately 100 to.

Hundred dollars per base station for the combined antenna and power amps 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 Covance 19 in 2020, However, we see a good growth opportunity in Fiveg handsets, which utilize our elastomeric solutions sales of Fiveg 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 Fiveg handsets are creating greater content opportunity for Rogers advanced materials in the range of 10% to 15% versus Fourg phones high performance tablets, which 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.

HCS net sales for the second quarter were $71 million, an increase of 10% sequentially strong growth from the defense market and higher Fiveg wireless wireless deployments in China were partially offset by an expected field decline in Adas demand.

Due to automotive factory shutdowns.

Looking ahead to Q3, we expect sales into defense market to remain strong due to that previously mentioned design wins in the eight gas market current expectations point to a potential rebounded demand late in Q3, but it remains uncertain when auto sales may return to pre pandemic level.

Yes.

In wireless infrastructure, we anticipate a decline in Q3 sales from expected lower base station builds and de contenting.

Recent data from Chinese officials indicates that more than half of the planned 2020 Fiveg installations were completed by the end of June.

The effect of trade tensions lower Fiveg base station content and the ongoing decline in Fourg 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 high single digit rate going forward.

In a gas 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.

PE EPS 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 coded 19 market demand for electric vehicles continues to be strong, but we did see a decline in Q2 sales from E V factory shutdowns.

We saw a 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 and improvement in E V HCV market demand as manufacturing disruptions have now subsided.

Recent sales of electric vehicles in Europe have also been increasing as kovac 19 restrictions continue to be lifted.

Offsetting offsetting the expected growth in HIV sales is a lower outlook for mass transit demand due to ongoing effects from Cove at 19.

Improvements in PS 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're pleased with the improvements but remain focused on additional opportunities identified in our ongoing cost improvement roadmap.

Please turn to slide 10.

Q2, MMS net sales were $72 million, a sequential decrease of 14% primarily due to the economic impact of Cobot 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 easy a TV 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 easily achieved the battery applications to increase portable electronics is expected to grow in Q3 from both normal seasonal patterns and increased sales of Fiveg 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, ill summarize the key messages before passing the call over to Mike.

First we took actions to protect our employees health and wellbeing, while also continuing to meet our customer needs.

Second we managed through a dynamic quarter to deliver solid Q2 results as evidenced by our gross margin and earnings improvement, we maintain focus on our cost improvement roadmap and took timely actions in response to the current environment, we generated 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're focused on accelerating our plans to take advantage of this significant opportunities in advanced mobility and pursuing opportunities in Fiveg 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.

Thank you Bruce and good afternoon, everyone in the slides ahead I'll review, our second quarter results, followed by our third quarter guidance.

Turning to slide 13 second quarter revenues as previously noted were $191.2 million, 4% lower than Q1, but within our guidance range of 190 million to $205 million.

Weak demand and most automotive applications consumer applications, including portable electronics and general industrial applications were responsible for the lower revenues in Q2.

Strong demand in the second quarter for materials, serving the defense market as well as the anticipated increase in materials for Fiveg base station deployments, mainly in China mitigated the revenue decline in the quarter.

Our gross margin for the second quarter was 36.6% an increase of 360 basis points compared to the Q1 margin and well above the top end of our guidance range of 32.5% to 33.5%.

In the quarter, we experienced a more favorable product mix as a higher margin HCS revenues represented a higher percentage of total revenues.

In addition, our focus on operational excellence, including improved manufacturing yields material cost savings and matching our revenues with our demand profile is reflected in the higher gross margin.

Lastly, we benefited from a China trade legislation decision in the second quarter, which will reimburse Rogers for increased tariffs paid in past quarters.

This tariff refund of $3.3 million.

Which we did not anticipate more than offsets the $3 million for cobot 19 related expenses incurred in the second quarter.

GAAP operating income for Q2 of $21.1 million included $3.9 million of accelerated amortization for certain intangible assets acquired in the DSP acquisition in 2017.

As a DSP demand has significantly decreased we determined that certain of the acquired intangible assets have an economic life that will expire at the end of 2020.

Accelerated amortization for these intangibles will be $11.7 million in both Q3 in Q4.

The incremental amortization of $27.4 million through December 30, Onest 2020.

We will be excluded from our adjusted results consistent with all amortization for intangible assets acquired in acquisitions.

Adjusted operating income for Q2, 2020 was $29.5 million or 15.4% of revenues a meaningful increase from Q1 of $22.6 million and 11.3% of revenues.

The increase in the second quarter was driven by the improved gross margin as discussed earlier as well as significantly lower operating expenses driven both by cost saving activities to mitigate the decrease in revenues and lower travel related expenses, resulting from the pandemic.

GAAP net income for the second quarter of $14.5 million is $1.2 million higher compared to Q1.

The effective tax rate for the second quarter of 30.6% was significantly higher than the first quarter effective tax rate of 20.6% due primarily to an increase and the reserve for uncertain tax positions in the quarter, resulting from routine audits in foreign jurisdictions.

GAAP EPS for the second quarter was 78 cents per fully diluted share at the top end of our guidance range of 58 cents to 78 cents.

On an adjusted basis, the company delivered EPS of $1.13 cents per fully diluted share in the second quarter above the top end of our guidance range of 80 cents to one dollar per share.

Turning to slide 14, our Q2 revenues of $191.2 million decreased $7.6 million compared to the first quarter of 2020.

As Bruce mentioned.

CMS revenues decreased 14%.

Yes revenues decreased 3%, while HCS revenues increased 10% sequentially.

Currency exchange rates unfavorably impacted second quarter revenues by $1.1 million compared to the first quarter.

The sequential HCS revenue increase resulted primarily from a 28% increase in wireless infrastructure revenues and a 27% increase in aerospace and defense revenues.

The increase in Fiveg was anticipated as China resumed its fiveg rollout late in Q1 and continued into the second quarter.

The fiveg demand increase Pete mid quarter and slowed at the end of the quarter consistent with the ended the first wave of deployments in 2020.

The increase in aerospace and defense application revenues came mostly from defense as we continued to deliver on existing program and capture new programs.

As expected Ada Es revenues were down significantly compared to Q1 as our customers built inventory in the first quarter and automakers shutdowns lasted well into the second quarter.

We expect demand for Adas applications to remain weak in the third quarter, even as the auto industry starts to recover as our customers need to work off inventory purchased in the first half.

Revenues in our Dms segment decreased in Q2 compared to Q1 in all applications with the loan bright spot being easy HGV battery, Pat applications, which grew 38%.

We continue to be encouraged by our engagement in the development and design process and adoption of our materials into new design wins with battery makers for significant Oems.

Revenues for portable electronics, which comprise approximately 25% of the segment revenues declined 7% in the quarter.

Due to consumer demand softness for handheld devices exacerbated by the Corona virus pandemic.

As we exited Q2, we started to see some budding demand for handheld is driven by Fiveg handsets and increased content and certain fiveg phones.

Revenues for general industrial applications, covering many diverse markets comprise over 45% of the segment revenues.

These revenues declined 16% sequentially due to lower demand in areas, such as oil and gas in general manufacturing and industrial applications.

Bbs revenues decreased in the second quarter compared to Q1 due to weak demand in our automotive applications for the vehicle electrification and EGD applications, including power semiconductor substrates as well as laminated bus bars for power distribution.

Vehicle electrification applications decreased 35% in Q2 due to soft consumer demand for autumn and automaker shutdowns as discussed earlier.

The semiconductor substrate revenues for Avi HCV, which account for approximately 25% of the segment revenues decreased 12% compared to the first quarter and the laminated busbar revenues for Aviate, Tvs, which account for less than 10% of the segment revenues decreased 65% sequentially.

Both of these sequential declines were primarily due to the production shut down of the significant dv OEM in the quarter, resulting from the Corona virus threat.

Revenues for power semiconductor substrates for general industrial applications, which comprise over 30% of the segment revenues.

We're up close to 6% compared to Q1.

The spot orders of laser coolers and certain customers for industrial power applications drove the increase but in general these applications remain relatively weak in the quarter.

Turning to slide 15, our gross margin for the second quarter was $70 million or 36.6% of revenues.

The increase in gross margin percentage was due to a favorable product mix and improved manufacturing execution efforts as mentioned earlier.

In the quarter. The company spent approximately $3 million associated with the Corona virus pandemic in accrued a benefit of $3.3 million for a refund of increased tariff costs in China.

The tariff benefit is not expected to repeat in Q3, and the Corona virus pandemic costs are expected to be minimal in the third quarter.

Gross margins increased significantly for AC EPS in the second quarter as product mix cost reduction efforts and the accrual of the tariff refund benefited the margin.

The higher wireless product revenues, specifically for power Amp applications resulted in a more favorable product mix.

The CMS gross margin was down compared to the first quarter due to lower volumes, resulting in lower absorption of fixed overhead and an increase in inventory reserves for slow moving products, resulting from the lower demand levels.

In the second quarter, we continued to execute on the EPS recovery plan and saw a good results in the improved gross margin.

We remain encouraged by continued signs of progress made in the quarter for manufacturing yield continued material cost reduction and optimizing the resources for the demand levels.

The second quarter progress resulted in a 400 basis point improvement in gross margin for PS in the second quarter.

Over the past three quarters through focus on operational execution, we've improved the PS gross margin by over 800 basis points.

We are encouraged and confident we will capture an incremental 200 to 400 basis points of improvements in the business subject however to increased volumes.

We continue to focus on operational execution as a key component of gross margin expansion.

As evidence of the improvement the company has made over the past year in the second quarter of 2019, the company generated a gross margin of 35.3% on revenues of $243 million.

In the second quarter of 2020, we generated a gross margin that is 130 basis points higher on $52 million less revenue.

The improvement is equivalent to approximately 450 basis points of gross margin conversion on equivalent product mix.

Slide 16 details the changes to adjusted net income for Q2 of $21.1 million compared to adjusted net income for Q1 of $17.2 million.

As discussed earlier, the adjusted operating income for Q2 of $29.5 million and 15.4% of revenues was meaningfully higher than Q1's adjusted operating income.

Adjusted operating expenses for Q2 of $40.4 million were 21.2% of revenues were $2.7 million lower than Q1 operating expenses were $43.1 million.

The lower expenses resulted from disciplined cost management to adjust for reduced revenues as well as reduced travel related expenses, resulting from the Corona virus pandemic threat.

As previously mentioned Rogers effective tax rate for the second quarter increased to 30.6% as a result of recording significantly higher reserves for uncertain tax positions accrued to address certain routine audit findings in foreign jurisdictions.

We now expect our effective tax rate for 2020 will be 26% higher than our previously communicated expected tax rate of 24% to 25%.

Turning to slide 17 in the second quarter. The company generated strong free cash flow of $39.3 million and ended the second quarter with the cash position of $298.7 million.

In the quarter, we generated $46.3 million from operating activities, including a $22.3 million reduction in working capital and repaid $50 million on our revolving credit facility.

We ended the second quarter with a net cash position defined as cash in equivalent balances in excess of the amounts owed under our revolving credit facility of $75.7 million.

In Q2, the company spent $7 million on capital expenditures.

We spent $18.2 million year to date through June.

We communicated a capex spending range of $40 million to $45 million for 2020 and expect to come in at the lower end of the range, while continuing to invest to fund growth opportunities in easy HGV applications.

We paid down an additional $125 million on a revolving credit facility on July 29.

The pay down resulted in an outstanding balance on our revolver of $98 million.

The company ended the second quarter with a strong balance sheet is well positioned to withstand the current economic challenges and we'll look to invest and opportunities to accelerate growth out of the downturn.

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Taking a look at our Q3 2020 guidance on slide 18, we see both opportunities and challenges.

The opportunities include continued strength in defense for HCS.

The portable electronics market preparing to launch Fiveg handsets benefiting benefiting MMS.

Renewed strength in power semiconductors, and laminated bus bars for easy and HGV applications in PE EPS with the resumption of manufacturing at a significant OEM and continued progress in the HCV battery Pat applications and MMS.

The challenges in Q3 included demand slowed down in wireless infrastructure revenues as Bruce discussed in his remarks.

In addition, we anticipate application selling into the traditional automotive market will be down sequentially in the third quarter, even as signs of a broader automotive recovery become evident as many of our customers will work down inventory levels.

Lastly, we have not seen many signs of a general industrial recover it recovery early in the third quarter and expect revenues from these applications to be flat compared to the second quarter.

Our revenue guidance is provided with the assumption that our supply chain will continue to supply critical materials, and we will continue to produce and deliver products for our customers with minimal disruptions from the Corona virus pandemic.

Therefore revenues for Q3 are estimated to be in the range of 175 million to $190 million.

We continue to monitor and flex our spending for manufacturing infrastructure, SGN, a and capital expenditures to address the anticipated demand levels.

Likewise, we continue our pursuit of operational excellence inefficiency.

Even with these actions and unfavorable product mix and lower volumes will negatively impact our gross margins in Q3.

As a result, we're guiding gross margin in the range of 35% to 36%.

We guide GAAP Q3 earnings in the range of 19 cents to 39 cents per fully diluted share.

On an adjusted basis, we guide fully diluted earnings in the range of 90 cents to $1.10 cents per share for the third quarter.

I'll now turn the call back over to the operator for questions.

Excellent those Tom as a reminder, if you would like to asking questions. Please press Star then the number one on your telephone coupon new pause for just a moment to compile the June they roster.

Your first question comes from the line of Daniel Moore from CJS Securities New lines open.

First Mike Good afternoon, thanks for taking the time the questions.

Let me start with.

The maybe elaborate a little on the opportunity for your silicon nitride substrates held that opportunity is evolving who the kind of key players and silicon carbide producers are that you're selling into and I think you described to 35% CAGR over the next five years.

You talk a little bit about the cadence that you expect and when we should start to see those revenues ramp.

So as as we talked about in the prepared remarks. This is an area of great opportunity for us the silica our silicon.

Nitride substrates, we believe our leading in the industry for Silicon carbide chip Matt.

Accounting and what we're seeing is a lot of design activity, particularly in that with the European Oems and <unk> of a number of new.

Models being released.

In the coming model year of full NVS, Bob maybe you could expand a little bit more on the outlook that we see.

For the TV growth Yeah, Yeah happy to do that was so yes that Dan so.

I think it's it's pretty well.

Understood in the industry, who the crew the big players are in terms of.

Silicon carbide ships.

In most cases those.

Semiconductors are packaged bye bye.

Module makers, so you'll find that the the silicon carbide chips are sold to.

Tom.

Module makers that that will purchase our substrate and use of the package. The chips were were pretty much working with everybody yet and its a.

It's a pretty diverse.

Or there's a fair number of players at that level that make modules and they're all.

People, we work with on on a regular basis. So so this is.

This is a pretty broad industry opportunity for us that really is going to be driven more so I think the way to think about its more so the.

The proliferation of electric vehicles, because what you will what you'll read and hear about it that the vast majority.

Automakers that are going down the path.

Producing co electric vehicles and the end to high good to great degree also plug in hybrids.

Our moving towards the wideband gap semiconductors, because they they basically.

Offer much higher efficiency.

Which translates into a.

Longer range for the vehicle with the same size battery or a lower cost battery for the same range I think the trend right now its.

Broad adoption I think if you're going to try to get to get your arms around kind of what the growth opportunities are it really comes down to those those higher end vehicles CE the plug in hybrids at least at least in the in the next few years, but you'll also hear that over time.

Because the cost of the light Dan guest semiconductors are coming down that over time that becomes a much broader market opportunity that.

Really across a much broader spectrum of electric vehicles, but also in applications such as.

Renewable energy and some of the high end industrial motor drives.

Fitters fair to assume it fits in the 21 model year that we see some level of a ramp into if not the back half is this year than next year.

Yes, I think the pipeline.

Have you vehicles.

Of the new platforms, new platforms at least what I'm, what I'm hearing and seeing tend to tend to be.

Using the wideband gap semiconductors.

Got it.

Helpful and then switching gears to.

Yes, maybe just talk about what makes your pouch cells special who you're competing with.

And at any throughout some numbers there Bruce but in terms of content per vehicle across the higher end fees, what type of growth in revenue opportunities reasonable over the next few years.

So Bob I'll, let say first part of that.

Rick.

On performance technology.

Yes sure.

Yes so.

And it's primarily been in the.

In the pulp there's the three technologies for battery packaging better that are pretty comment today you have.

You have what are called how sell in and they are similar in size often to think of it as a.

The size of.

He's printer paper.

Ben and they basically stack those opt in and enclosure, there's little there's the aluminum heat and that basically make contact with the pouches and.

And that's important because you need to manage you need to pull out heat.

Now when you think about a large stack up in the battery closure.

Got you run into challenges and those challenges tend to be when lithium ion batteries discharge charging this charge the bill growing shrink.

Let's say swell buying it can be 15%.

Also over time.

Battery pouches age they tend to get a little bit center. So as you might imagine since relied Vincent reliability is a key factor in over let's say 15 year life unique you need a.

Color pressure pad or compression pad that maintains a constant force between the.

And make contact between outsell and these these heat Sens and then then you get into the yes. So what we provide and again I think we've talked about this before is our core on material is the premier material and has been for decades in terms of whats called compression set which I think of it this way.

Basically it always comes back to the same dimensions. So over the life of the battery. It's important that you have a low compression set product that that since the constant force.

The other thing they look for is really since volume as his money in a car you knew and also effects capacity. Obviously, so if you want to have a high high energy density battery you need pad that do all that ill provide a constant pressure in the right range. Okay.

Less than pressure across a whole range and last forever and you need to do that as soon as you, possibly can and then as lighter weight as you, possibly can and Thats, where our technology comes in where we have developed.

Technology that does that John.

Letters, we believe better than competitive products and I believe our customers see that as well.

You know and.

Has allowed us frankly, a very very up.

Strong position in that space, because we can we solve that problem for for our OEM customers.

Hope that help then yeah and content $30, north and north of there and higher end DVS.

Yes right.

Yes, and then and Thats specific we were talking about pressure pads in that case, there's vibration dampening pads battery packs sealing solutions and so forth that also would be added in there or additional.

Yes.

Perfect class for me just wireless infrastructure.

It sounds like the average.

Content to sticking a little bit lower once again towards the lower end of that under 200 range, who are some of the Oems that are GAAP, maybe following law way down the path to a slightly less complex and lower design.

Type solution.

As we talked about in the prepared remarks, the Decontenting is continuing its continued.

Pretty much across all the Oems in different ways in different.

Focus areas.

I would say that we've been able to.

Stable in our in our position with.

Other Oems.

The as we move forward and as we look at you know we talked about Q3.

The concern that we have on the outlook is really the ongoing impact of added controls that are being put on walkaway.

With with regard to test.

TSMC.

Or I'm, sorry, with the chips available at TSMC out of Taiwan, and how that might impact the ability of while way to continue to manufacture at least present designs of Fiveg base stations. So we see that also impacting as we move forward into Q3.

Okay, and possibly into Q4.

So more of a less content or less sharing content with wawa versus others significantly de contenting is at the right way to think about it.

Yes, so that you have the while way situation on share and then others looking at Decontenting.

Okay. All right that's helpful I'll follow up and jump back in queue with any follow ups. Thanks.

Thanks, Dan.

Your next question comes from the line of.

Craig Ellis from New early FBR Your line is open.

Thanks for taking the question and guys. Thanks for all that detail.

Bruce I just wanted to follow up on some of the point she made about some of the.

Broader trends that exists now in wireless infrastructure, and and really understand what it meant for your and and the board's few on on how you allocate R&D.

Marketing.

And manufacturing assets towards that opportunity.

And and if that impact is all the headwinds that we're seeing causing you to calibrate resources away and what that means longer term for how we think about wireless infrastructure as a sub segment within they see us.

So.

From that perspective of the market outlook for us with regard to wireless we still is still see this as a good part of the us business.

There are future opportunities that we're looking at I think we've talked about in the past with advanced antenna materials lowered the orbit satellite receivers.

Hi, speed digital and so forth. So that work continues the R&D and the work with customers continues on that front.

Specifically in telecom Fourg and Fiveg, we've outlined the headwinds that we see there and we see this is the wireless business for us basically being a low to flat growth outlook moving forward with with all the reasons that weve outlook.

And.

But we do still see significant opportunity for us in the HCS business in defense and I highlighted that in the call.

25% growth.

Quarter to quarter year on year is substantial and we see that continuing because of the long term nature of the wins that we've had so and that and of course defense employs a lot of the historical capabilities that we've had in high frequency and that we just see that continuing.

So from the standpoint of allocating capital and so forth from a manufacturing perspective, we see advanced mobility, we talked about the growth in the current business in the silicon nitride substrates.

We're we continued to make investments there to ensure that we have proper capabilities and capacity. In addition, we also are ensuring that we have capacity ready when when its needed for the battery pressure pads and separators and so forth that we talked about so on the MSS business.

So we again continue to to evolve and reallocate our focus where we see the biggest growth opportunities in at this point the bigger growth opportunity for the corporation is in advance mobility.

That's helpful Bruce and one more for you before I hand, it to Mike for questions.

And follow up question assist wall.

Roger certainly has many.

Global customers that that really touch all points of the world. It also is.

You need can then has.

Meaningful manufacturing footprint and many geographies such as China. The U.S. in Europe, I'm wondering with that footprint can you give us a sense.

Any differences that you are seeing economically as we come out of a cobot environment. What are you seeing in Japan versus Europe versus the U.S. with customer demand that may be a little bit more micro than some of your global suppliers that span the globe.

It's interesting I from from our perspective, and I see it and how our factories are operating and our staff in the various regions in China. For example, Suzo our entire team is now pretty much back in the office operating visiting customers on on an as needed basis.

And we see things opening backup.

I would say relatively extensively in the China, China market Europe is behind China in that opening and the US right now is because of what we've seen over the last month or two.

With the.

The spiking in infection rates I think is basically an unknown moving forward and how that how it's going to happen, but we are seeing some.

Return to normalcy, let's say from a commercial perspective in Asia, and it's moving towards Germany, and I should say Europe as well that things are starting to get back to more normalcy.

Yes, that's encouraging.

Two for you Mike first in your prepared remarks, you mentioned that that there was 202 hundred 400 basis points of upside.

Gross margin, but subject to volume I wasn't clear if that was a PDF statement core effect was our corporate average statement.

Yeah that was a that was the a P.S. statement right I still believe that on the company side I think we still have.

Even from a performance standpoint, Craig I think we'd mentioned in the last call somewhere ballpark of 200 to 300 basis points opportunity with continued improvement certainly we captured a significant piece of that in the second quarter, but I still believe that from a corporate standpoint, I still think we.

A couple of hundred basis points.

You know with continued yields material cost reductions and whatnot and then on top of that it's going to be more about some more about volume and leveraging the volume, but this specific comment of 200 to 400.

It's really a PE specific statement.

Got it.

And then lastly in the prepared remarks, there was referenced to inventory, but that was picked up in one Q that's held downstream thats impacting the business near term.

What's the company's few for where that's most significant and how long does it take that can burn off said differently wallets to react uncertain demand environment. One of your operating more normally absent those inventory headwinds.

Right. So we saw that probably see the inventory headwinds in two areas both conventional automotive from our Ada Es business and a little bit in our in general industrial business I would say that.

What we think it may be more significant in the a dash and automotive and believe that even though we're seeing some I think some some early signs of recovery in the conventional auto market. We still think as we talked about in the prepared remarks, it's going to probably be late third quarter before we start seeing some.

Some pickup in the and the conventional auto business from our perspective.

Person, Mike. Thank you very much I'll hop back in Q.

Correct.

Okay.

Once again as anybody would like to asking question. Please press star own well number one on your telephone coupon.

Once again with anybody with those two asking question each both strong well number one onwards on the phone coupon.

There are no further questions have been selling multiple multiple presenting some closing remarks.

Thank you.

I want to thank everyone for joining us on today's call and I want to remind everyone to please be safe.

And social distance and have a good evening everyone.

That concludes today's conference call. Thank you everybody says we won't have a wonderful movement you may notice.

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Good morning administration, and I will be Oracle French operator today at this time I would like to walk it'll be one GB Rogers Corporation Q2, Twentytwenty earnings call. After the speaker's remarks, there will be a few NHL sure. If you about drugs to be courtroom up upon please press star one all your telephone keypad.

If you about your mood yourself from Q, perhaps the Don King.

I'll now turn the call over to your host Mr., Steve you more 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, <unk> 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 to.

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 to the many uncertainties that exist and Rogers operations and environment.

These uncertainties include economic conditions market demand 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 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 Hoechner, President and CEO, Mike Ludwig Senior Vice President and CFO, and Bob Daigle, Senior Vice President and CEO I will now turn the call over to Bruce.

Thanks, Steve Good afternoon, everyone and thank you for joining us today.

As expected the covert 19, and then it went 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 on our ongoing response to the Kobe.

Non can 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 covert 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 with at risk of missing a critical milestone in the development.

There are new E V technology. After returning from a force 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 al next discusses 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 <unk> dollar 13 per fair exceeded our guidance gross margin.

Gains were driven by strong operational execution and favorable product mix as Mike will discuss in more detail. We're very encouraged by the progress we're 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 time reactions 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 HCS business increased from stronger defense demand and higher wireless infrastructure sales, which were driven by fiveg deployments in China. The strength in these markets was offset by the significant impacts of cobot 19.

And then 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 we 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 kind of activity continued to comprise nearly 50% of total revenue.

Both focus areas continue to be important to Rogers, but we're seeing an evolution and 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 easy HCV and Ada Es markets.

It has become increasingly clear that the momentum behind vehicle electrification is accelerating despite the near term challenges brought on by covert 19.

Recent statements from a number of European Asian, and U.S. 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 advance mobility.

First in the P.S. segment, we are well positioned to take advantage of the 35% plus cagar expected in this market over the next five years Rogers, leaving substrate technology for power semiconductor packaging is used across the spectrum of mild hybrids plug in hybrid.

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 easy.

As a general reference point, although our content opportunity per vehicle can vary based on vehicle type and power levels are substrate content Rangers from $5 in a 48 volt mild hybrid to around $40 and a full electric vehicle.

Power Interconnects, providing 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 entrance to the easy market and see this as another avenue of growth.

In our M.S. business, we continue to be encouraged by our strong pipeline of design activity and wins with leading automakers and battery suppliers.

Our content opportunity spends most electric vehicle types and battery technologies witnessed specially strong opportunity in battery pressure pads vibration dampening pets and battery pack sealing solutions provide additional content opportunities.

Similar to our Pts business, our content opportunity can vary based on battery size battery type and other factors. However, as an example, rogers content opportunity in battery pressure pads for plug in AG. These any these can be greater than $30 per vehicle.

In AC S., we have a leading position in the Ada Es market, where there is significant long term growth opportunity.

Although the near term outlook for auto sales is challenging only around 35% of vehicles manufacture today contain adas features.

As these safety features increasingly become more standard in new vehicles.

The market is expected to grow at an 18% bigger 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 advance mobility as opportunities that are extremely well suited to Roger 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 we'll continue to invest in our capabilities to take advantage of the growth opportunities ahead and advanced mobility.

Please turn to slide seven.

Our advanced conductivity 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 fourg deployments are creating challenges and limiting visibility.

While this creates uncertainty industry experts continue to point to the potential for global Fiveg deployments in excess of 1 million base stations per year for the next few years beginning in 2021, although the longer term fiveg market outlook is positive trade and competitive factors continue to moderate.

This opportunity for us.

We expect that we will have minimal share with walk away also we're seeing some other Oems adopt lower content and tenant designs that are less technically demanding fiveg content of high frequency circuit materials varies based on OEM design and ranges from approximately 100 to too.

Hundred dollars per base station for the combined antenna and power amps 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 cobot 19 in 2020, However, we see a good growth opportunity in Fiveg handsets, which utilize our elastomeric solutions sales of Fiveg phones are expected to grow to around 15%.

Total units this year, and then increase to roughly 30% of the market in 2021.

Design changes incorporated in Fiveg handsets are creating greater content opportunity for Rogers advanced materials in the range of 10% to 15% versus Fourg phones high performance tablets, which 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.

Hey C. S. Net sales for the second quarter were $71 million, an increase of 10% sequentially strong growth from the defense market and higher Fiveg wireless wireless deployments in China were partially offset by an expected decline in Ada Es demand.

Due to automotive factory shutdowns.

Looking ahead to Q3, we expect sales into defense market to remain strong due to the previously mentioned design wins in the Ada Es market current expectations point to a potential rebounded demand late in Q3, but it remains uncertain with auto sales may return to pre pandemic level.

Yes.

In wireless infrastructure, we anticipate a decline in Q3 sales from expected lower base station builds and de contenting.

Recent data from Chinese officials indicates that more than half of the planned 2020 Fiveg installations were completed by the end of June.

The effect of trade tensions lower Fiveg base station content and the ongoing decline in Fourg 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 multi year projects. This is supporting the outlook for a double digit growth rate in 2020, and a high single digit rate going forward.

In a guess, 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.

T S. 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 code at 19 market demand for electric vehicles continues to be strong, but we did see a decline in Q2 sales from E V factory shutdowns.

We saw a 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 TV HCV market demand as manufacturing disruptions have now subsided.

Recent sales of electric vehicles in Europe has also been increasing as kovac 19 restrictions continue to be lifted.

Offset it offsetting the expected growth in HIV sales is a lower outlook for mass transit demand due to ongoing effects from covert 19.

Improvements in P.S. 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're pleased with the improvements but remain focused on additional opportunities identified.

And our ongoing cost improvement roadmap.

Please turn to slide 10.

Q2, M.S. net sales were $72 million, a sequential decrease of 14% primarily due to the economic impact of cobot 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 easy a TV 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 E V. A JV battery applications to increase portable electronics is expected to grow in Q3 from both normal seasonal patterns and increased sales of Fiveg 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 wellbeing, while also continuing to meet our customer needs.

Second 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 Roadmaps and took timely actions in response to the current environment, we generate 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 Fiveg technologies in advanced conductivity.

By leveraging our strong product portfolio and investing in innovation and growth markets. We're positioning the company for the long term.

Now I'll turn it over to Mike to discuss our Q2 results in more detail.

Thank you Bruce and good afternoon, everyone in the slides ahead I'll review, our second quarter results, followed by our third quarter guidance.

Turning to slide 13 second quarter revenues as previously noted were $191.2 million, 4% lower than Q1, but within our guidance range of 190 million to $205 million.

Weak demand and most automotive applications consumer applications, including portable electronics and general industrial applications were responsible for the lower revenues in Q2.

Strong demand in the second quarter from material, serving the defense market as well as anticipated increase in materials for Fiveg base station deployments, mainly in China mitigated the revenue decline in the quarter.

Our gross margin for the second quarter was 36.6% an increase of 360 basis points compared to the Q1 margin and well above the top end of our guidance range of 32.5% to 33.5%.

In the quarter, we experienced a more favorable product mix as a higher margin HCS revenues represented a higher percentage of total revenues.

In addition, our focus on operational excellence, including improved manufacturing yields material cost savings and matching our revenues with our demand profile is reflected in the higher gross margin.

Lastly, we benefited from a China trade legislation decision in the second quarter, which will reimburse Rogers for increased tariffs paid in past quarters. This tariff refund of $3.3 million.

Which we did not anticipate more than offsets the $3 million for cobot 19 related expenses incurred in the second quarter.

GAAP operating income for Q2 of $21.1 million included $3.9 million of accelerated amortization for certain intangible assets acquired in the DSP acquisition in 2017.

As a DSP demand has significantly decreased we determined that certain of the acquired intangible assets.

An economic life that will expire at the end of 2020.

Accelerated amortization for these intangibles will be $11.7 million in both Q3 in Q4.

The incremental amortization of $27.4 million through December 30, Onest Twentytwenty will be excluded from our adjusted results consistent with all amortization for intangible assets acquired in acquisitions.

Adjusted operating income for Q2, 2020 was $29.5 million or 15.4% of revenues in meaningful increase from Q1 of $22.6 million and 11.3% of revenues.

The increase in the second quarter was driven by the improved gross margin as discussed earlier as well as significantly lower operating expenses driven both by cost saving activities to mitigate the decrease in revenues and lower travel related expenses, resulting from the pandemic.

GAAP net income for the second quarter of $14.5 million is $1.2 million higher compared to Q1.

The effective tax rate for the second quarter of 30.6% was significantly higher than the first quarter effective tax rate of 20.6% due primarily to an increase and the reserve for uncertain tax positions in the quarter, resulting from routine audits in foreign jurisdictions.

GAAP EPS for the second quarter was 78 cents per fully diluted share at the top end of our guidance range of 58 cents to 78 cents.

On an adjusted basis, the company delivered EPS of $1.13 cents per fully diluted share in the second quarter.

Above the top end of our guidance range of 80 cents to one dollar per share.

Turning to slide 14, our Q2 revenues of $191.2 million decreased $7.6 million compared to the first quarter of 2020.

As Bruce mentioned.

CMS revenues decreased 14%.

Yes revenues decreased 3%, while HCS revenues increased 10% sequentially.

Currency exchange rates unfavorably impacted second quarter revenues by $1.1 million compared to the first quarter.

The sequential Hfcs revenue increase resulted primarily from a 28% increase in wireless infrastructure revenues and a 27% increase in aerospace and defense revenues.

The increase in Fiveg was anticipated as China resumed its fiveg rollout late in Q1 and continued into the second quarter.

The fiveg demand increase Pete mid quarter and slowed at the end of the quarter consistent with the ended the first wave of deployments in 2020.

The increase in aerospace and defense application revenues came mostly from defense as we continue to deliver on existing program and capture new programs.

As expected Ada Es revenues were down significantly compared to Q1 as our customers built inventory in the first quarter and automakers shutdown lasted well into the second quarter.

We expect demand for Adas applications to remain weak in the third quarter, even as the auto industry starts to recover as our customers need to work off inventory purchased in the first half.

Revenues in our Dms segment decreased in Q2 compared to Q1, and all applications with the loan bright spot being easy HGV battery, Pat applications, which grew 38%.

We continue to be encouraged by our engagement and the development and design process and adoption of our materials into new design wins with battery makers for significant Oems.

Revenues for portable electronics, which comprise approximately 25% of the segment revenues declined 7% in the quarter.

As a consumer demand softness for handheld devices exacerbated by the Corona virus pandemic.

As we exited Q2, we started to see some budding demand for handheld is driven by Fiveg handsets and increased content and certain fiveg phones.

Revenues for general industrial applications, covering many diverse markets comprise over 45% of the segment revenues.

These revenues declined 16% sequentially due to lower demand in areas, such as oil and gas in general manufacturing and industrial applications.

Bbs revenues decreased in the second quarter compared to Q1 due to weak demand in our automotive applications, while the vehicle electrification and easy AGV applications, including power semiconductor substrates as well as laminated bus bars for power distribution.

Vehicle electrification applications decreased 35% in Q2 due to soft consumer demand for autumn and automakers shutdowns as discussed earlier.

The semiconductor substrate revenues for HIV, AGV, which account for approximately 25% of the segment revenues decreased 12% compared to the first quarter and the laminated busbar revenues for Aviate, GBS, which account for less than 10% of the segment revenues decreased 65% sequentially.

Both of these sequential declines were primarily due to the production shut down of a significant easy OEM in the quarter, resulting from the Corona virus threat.

Revenues for power semiconductor substrates for general industrial applications, which comprise over 30% of the segment revenues.

We're up close to 6% compared to Q1.

Spot orders of laser coolers and certain customers for industrial power applications drove the increase but in general these applications remain relatively weak in the quarter.

Turning to slide 15, our gross margin for the second quarter was $70 million or 36.6% revenues.

The increase in gross margin percentage was due to a favorable product mix and improved manufacturing as execution efforts as mentioned earlier.

In the quarter. The company spent approximately $3 million associated with the Corona virus pandemic in accrued a benefit of $3.3 million for a refund of increase tariff costs in China.

The tariff benefit is not expected to repeat in Q3, and the Corona virus pandemic costs are expected to be minimal in the third quarter.

Gross margins increased significantly for Asia, So the second quarter as product mix cost reduction efforts and the accrual of the tariff refund benefited the margin.

The higher wireless product revenues, specifically for power Amp applications resulted in the more favorable product mix.

The amassed gross margin was down compared to the first quarter due to lower volumes, resulting in lower absorption of fixed overhead and an increase in inventory reserves for slow moving products, resulting from the lower demand levels.

In the second quarter, we continued to execute on the PBS recovery plan and saw the good results and the improved gross margin.

We remain encouraged by continued signs of progress made in the quarter for manufacturing yield.

Continued material cost reduction and optimizing the resources for the demand levels.

The second quarter progress resulted in a 400 basis point improvement in gross margin for PS in the second quarter.

Over the past three quarters through focus on operational execution, we've improved the PS gross margin by over 800 basis points.

We are encouraged and confident we will capture an incremental 200 to 400 basis points of improvements in the business subject however to increased volumes.

We continue to focus on operational execution as a key component of gross margin expansion as evidenced of the improvement. The company has made over the past year in the second quarter of 2019, the company generated a gross margin of 35.3% on revenues of 243 million dollar.

Yes.

In the second quarter of 2020, we generated a gross margin that is 130 basis points higher on $52 million less revenue.

The improvement is equivalent to approximately 450 basis points of gross margin conversion on equivalent product mix.

Slide 16 details of changes to adjusted net income for Q2 of $21.1 million compared to adjusted net income for Q1 of $17.2 million.

As discussed earlier, the adjusted operating income for Q2 of $29.5 million and 15.4% of revenues was meaningfully higher than Q1's adjusted operating income.

Adjusted operating expenses for Q2 of $40.4 million were 21.2% of revenues were $2.7 million lower than Q1 operating expenses were $43.1 million.

The lower expenses resulted from disciplined cost management to adjust for reduced revenues as well as reduced travel related expenses, resulting from the Corona virus pandemic threat.

As previously mentioned Rogers effective tax rate for the second quarter increased to 30.6% as a result of recording significantly higher reserves for uncertain tax positions accrued to address certain routine audit findings in foreign jurisdictions.

We now expect our effective tax rate for 2020 will be 26% higher than our previously communicated expected tax rate of 24% to 25%.

Turning to slide 17 in the second quarter. The company generated strong free cash flow of $39.3 million and ended the second quarter with a cash position of $298.7 million.

In the quarter, we generated $46.3 million from operating activities, including a $22.3 million reduction in working capital and repaid $50 million on our revolving credit facility.

We ended the second quarter with a net cash position defined as cash and equivalent balances in excess of the amounts owed under our revolving credit facility of $75.7 million.

In Q2, the company spent $7 million on capital expenditures.

We spent $18.2 million year to date through June.

We communicated a capex spending range of $40 million to $45 million for 2020 and expect to come in at the lower end of the range, while continuing to invest to fund growth opportunities and easy HCV applications.

We paid down an additional $125 million under revolving credit facility on July 29.

The Paydown resulted in an outstanding balance on our revolver of $98 million.

The company ended the second quarter with a strong balance sheet is well positioned to withstand the current economic challenges and we'll look to invest in opportunities to accelerate growth out of the downturn.

Taking a look at our Q3 2020 guidance on slide 18, we see both opportunities and challenges.

The opportunities include continued strength in defense for AC asked.

The portable electronics market preparing to launch Fiveg handsets benefiting benefiting MMS.

Renewed strength in power semiconductors, and laminated bus bars for easy and HCV applications in PS with resumption of manufacturing at a significant OEM and continued progress in the HCV battery Pat applications in Fms.

The challenges in Q3 included demand slowdown in wireless infrastructure revenues as Bruce discussed in his remarks.

In addition, we anticipate application selling into the traditional automotive market will be down sequentially in the third quarter, even as signs of a broader automotive recovery become evident as many of our customers will work down inventory levels.

Lastly, we have not seen many signs of a general industrial recover it recovery early in the third quarter and expect revenues from these applications to be flat compared to the second quarter.

Our revenue guidance has provided with the assumption that our supply chain will continue to supply critical materials, and we will continue to produce and deliver products for our customers with minimal disruptions from the Corona virus pandemic.

Therefore revenues for Q3 are estimated to be in the range of 175 million to $190 million.

We continue to monitor and flex our spending for manufacturing infrastructure, SGN, a and capital expenditures to address the anticipated demand levels.

Likewise, we continue our pursuit of operational excellence inefficiency.

Even with these actions and unfavorable product mix and lower volumes will negatively impact our gross margins in Q3.

As a result, we're guiding gross margin in the range of 35% to 36%.

We guide GAAP Q3 earnings in the range of 19 cents to 39 cents per fully diluted share.

On an adjusted basis, we guide fully diluted earnings and the range of 90 cents to $1.10 cents per share for the third quarter.

I will now turn the call back over to the operator for questions.

Excellent at this time as a reminder, if you would like to asking question. Please press Star then the number one on your telephone keep US we will pause for just a moment you can barbecue in their roster.

Your first question comes from a line of Daniel Moore from CJS Securities. Your line is open.

First Mike Good afternoon, thanks for taking the time the questions.

Start with the maybe elaborate a little on the opportunity for your silicon nitride substrates, how's that opportunity is evolving who the kind of key players and silicon carbide producers are that you're selling into and I think you describe it to 35% CAGR over the next five years can you talk a little bit about the cadence that you expect and when we.

Should start to see those revenues ramp.

So as as we talked about in the prepared remarks. This is an area of a great opportunity for us the silica our silicon.

Nitride substrates, we believe our leading in the industry for Silicon carbide chip mounting and what we're seeing is a lot of design activity, particularly in that with the European Oems and <unk> of a number of new models being released.

In the coming a model year of full NVS, Bob maybe you could expand a little bit more on the outlook that we see a for the TV growth yeah, Yeah happy to do that was so yes that Dan So I.

I think it's pretty well.

Understood in the industry, the who the could the big players are in terms of.

Silicon carbide chips.

In most cases, those semiconductors are packaged by a job.

Module makers, so you'll find that the silicon carbide chips are sold to.

Module makers that that will purchase our substrate and use of the package. The chips were were pretty much working with everybody yet and it's a.

It's a pretty diverse.

Or there's a fair number players at that level that make modules and they're all Uh huh.

People, we work with on a on a regular basis. So so this is a.

This is a pretty broad industry opportunity for us that really is going to be driven more so I think the way to think about is more so the.

The proliferation of electric vehicles, because what you will what you'll read and hear about it that the the vast majority of auto makers that are going down the path of producing co electric vehicles and the end to hide it too great degree also plug in hybrids.

Our moving towards the wide bandgap semiconductors, because they they basically offer much higher efficiency.

Translates into a longer range for the vehicle with the same size battery or a lower cost battery for the same range I I think the trend right now its.

Broad adoption I think if you're going to try to get get your arms around kind of what the growth opportunities are it really comes down to those those higher end vehicles. The E. B the plug in hybrids at least at least in the in the next.

Two years, but you'll also hear that over time.

The cost of these like Nat gas semiconductors are coming down but over time, it becomes a much broader market opportunity that really across a much broader spectrum of electric vehicles, but also an application such as a renewable energy and some of the high end industrial motor drives.

Ceteris fair to assume it fits in the 21 model year that we see some level of a ramp into if not the back half of this year than next year.

Yes, I think the pipeline.

You vehicles.

Of the new platforms, when you eat platforms at least what I'm, what I'm hearing and seeing and to tend to be.

Using the wideband gap semiconductors.

Got it.

Helpful and then switching gears to.

M.S., maybe just talk about what makes your pouch cells special who you're competing with.

And at any throughout some numbers there Bruce but in terms of content per vehicle across the higher end fees, what type of growth in revenue opportunities reasonable over the next few years.

So Bob I'll, let's take the first part of that.

Rick on the on the performance technology.

Yes sure.

Yes so.

And you know, it's primarily been in the in the pulp there's the three technologies for battery packaging that are that are pretty common today you have.

What are called how cells and there. They are similar in size often to think of it as a the size of a.

Printer paper.

Thin and they basically stack those up and an enclosure theres little theres up the aluminum heat and that basically make contact with the pouches.

And that's important because you need to manage you need to pull out heat.

Now when you think about a a large stack up in a battery and closure.

Got you run into challenges and those challenges tend to be when lithium ion batteries discharge charging this charge will grow in shrink yeah, let's say swell by it can be 15%.

Also over time.

Battery pouches age they tend to get a little bit center. So as you might imagine since relied Vincent reliability is a key factor and you know over let's say 15 year life, you need you need a color pressure pad or compression pad that maintains a constant force between.

The.

To make contact between pouch cells and east heat Sens.

And then then you get into the Ah, Yes, so what we provide and again I think we've talked about this before it is our car on material is the premier material and has been for decades in terms of whats called compression set which I think of it. This way basically it always comes back to the same dimensions. So over the life of the battery.

It's important that you have a low compression that product.

That since the constant force.

The other thing they look for is really since volume as his money in a car you knew it also affects capacity. Obviously, so if you want to have a high high energy density battery unique pad that can do all that.

I'll provide a constant pressure in the right range consistent pressure across a whole range.

And last forever and you need to do that as soon as you, possibly can and then as lighter weight as you, possibly can and that's where our technology comes as you know we've developed.

Technology that does that job better we believe better than competitive products and I believe our customers see that as well.

You know and has allowed us frankly to a very very.

Strong position in that space, because we can we solve that problem for or our OEM customers.

Hope that help them, yeah, and content $30, north and north of there and higher end DVS.

Yes right.

Yes, and then and Thats specific we were talking about a pressure pads in that case, there's vibration dampening pads battery pack sealing solutions and so forth that also would be added in there or additional content.

Perfect last for me just wireless infrastructure.

It sounds like the average content to sticking a little bit lower once again towards the lower end of that under 200 range, who are some of the Oems that are GAAP, maybe following law way down the path to a slightly less complex and lower design.

Type solution.

As we talk about in the prepared remarks Decontenting is continuing its continued a pretty much across all the Oems in different ways in different.

Focus areas I I would say that we've been able to.

The stable in our and our position with the other Oems or the as we move forward and as we look at you know we talked about Q3.

A concern that we have on the outlook is really the ongoing impact of added controls that are being put on walkaway.

With the with regard to test.

TSMC.

Or I'm, sorry, with the chips available at TSMC out of a Taiwan and how that might impact the ability of law way to continue to manufacture.

These present designs of Fiveg base stations. So we see that also impacting as we move forward into Q3 and possibly into Q4.

So more of a less content or less sharing content with wawa versus others have significantly de contenting is at the right when think about it.

Yeah. So that's you have the walkaway situation on care and then others looking at Decontenting.

Okay. All right that's helpful I'll follow up and jump back in queue with any follow ups. Thanks.

Thanks, Dan.

Your next question comes from the line of.

Craig Ellis from New early FBR Your line is open.

Thanks for taking the question and guys. Thanks for all the detail Bruce I just wanted to follow up on some of the point you made about some of the.

Broader trends that exists now in wireless infrastructure, and and really understand what it meant for your and and the board's few on on how you allocate R&D.

Marketing.

And manufacturing assets towards that opportunity and and if that impact is so all the headwinds that we're seeing causing you to calibrate resources away and what that means longer term for how we think about wireless infrastructure as a sub segments within ace yes.

So.

From that perspective of the market outlook for us with regard to wireless we still is still see this as a good part of the us business.

There are future opportunities that we're looking at I think we've talked about in the past with advanced antenna materials lower at the orbit satellite receivers a high speed digital and so forth. So that work continues the R&D and the work with customers continues on that front.

Specifically in telecom Fourg and Fiveg, we've outlined the headwinds that we see there and we see this the wireless business for us basically being a low to flat growth outlook moving forward with with all the reasons that we've outlined.

And but we do still see significant opportunity for us in the AC Es business in defense and I highlighted that in the call a 25% growth a quarter to quarter year on year is substantial and we see that continuing because of the long term nature.

The wins that we've had so and that and of course defense employs a lot of the historical capabilities that we've had in high frequency and that we just see that continuing.

So.

From the standpoint of allocating capital and so forth from a manufacturing perspective, we see a advanced mobility, we talked about the growth in the credit business in the silicon nitride substrates.

We're we continue to make investments there to ensure that we have proper capabilities and capacity. In addition, we also are ensuring that we have capacity ready when when its needed for the battery a pressure pads and separators and so forth that we talked about so on the MSP business.

So we again continue to to evolve and reallocate our focus where we see the biggest growth opportunities in at this point the bigger growth opportunity for the corporation isn't Vance mobility.

That's helpful Bruce and one more for you before I hand, it to Mike for a question.

And the follow up question assist while Roger certainly has many global customers that that really touch all points.

The World. It also is unique in that has a meaningful manufacturing footprint and many geographies such as China. The Western Europe I'm wondering what that footprint can you give us a sense of any differences that you are seeing economically as we come out of the cobot environment.

What are you seeing in Japan versus your up versus the U.S. with customer demand that may be a little bit more micro than some of your global suppliers that span the globe.

It's interesting I from from our perspective, and I see it and how our factories are operating and our staff in the various regions in China. For example, Suzo our entire team is now pretty much back in the office operating visiting customers on on an as needed base.

Yes, and we see things opening back up.

I would say relatively extensively in the China, China market.

Europe is behind China in that opening and the US right now is a because of what we've seen over the last month or two it with the.

The spiking in infection rates I think is basically a an unknown moving forward and how that how it's going to happen, but we are seeing some.

Return to normalcy, let's say from a commercial perspective in Asia, and it's moving towards Germany, and I should say Europe as well that things are starting to get back to more normalcy.

Yes, that's encouraging.

Two for you Mike first in your prepared remarks, you mentioned that that there was 202 hundred to 400 basis points of upside on gross margin, but subject to volume I wasn't clear if that was a PDF statement or if that was our corporate average statement.

That was a a that was a P.S. statement right I still believe that on the company side I think we still have a even from a performance standpoint, Craig I think we'd mentioned in the last call somewhere ballpark of 200 to 300 basis points opportunity with continued improvement in certain.

We we captured a significant piece of that in the second quarter, but I still believe that from a corporate standpoint, I still think we have a couple of hundred basis points.

You know with continued yields a material cost reductions and whatnot and then on top of that it's going to be more about some more about volume and leveraging the volume, but this specific comment of 200 to 400 was really a PE specific statement.

Got it.

Then lastly in the prepared remarks, the rest reference to inventory, but that was picked up in one Q that's held downstream thats impacting the business near term.

The company's few for where that's most significant and how long does it take that can burn off said differently, while it's a real uncertain demand environment. One of your operating more normally absent those inventory headwinds.

Right. So we saw that probably see the inventory headwinds in two areas both conventional automotive from our Ada Es business and a little bit in our in general industrial business I would say that Uh huh.

We think it may be more significant in the a das and automotive and believe that even though we're seeing some I think some some early signs of recovery in the conventional auto market. We still think as we talked about in the prepared remarks, it's going to probably be late third quarter before we start seeing some some pickup.

In the and the conventional auto business from our perspective.

Person, Mike. Thank you very much I'll hop back in Q.

[music].

Okay.

Once again as anybody would like to us in question teens posts stone well number one on your own telephone coupon.

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There are no further questions at this time will join the pull back to the presenting some closing remarks.

Thank you.

I want to thank everyone for joining us on today's call and I want to remind everyone to please.

Safe.

And social distance and have a good evening everyone.

That concludes today's conference call. Thank you everybody says one loan level one the policemen.