Q1 2021 Rogers Corp Earnings Call
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The other said many of additional participants can do for them to be in the way momentarily. We appreciate your patience of Etsy. Please remain on the line.
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Good day my name is Cody and I'll be your conference operator today at this time I'd like to welcome everyone to the Rogers Corporation first quarter 2021 earnings call at the.
The end of today's prepared remarks, there'll be an opportunity to ask questions. If you'd like to ask a question at that time. Please enter the queue by pressing star and then one for their instructions will be given at that time.
I'll turn the call over to your host Mr. Steve Haymore director of Investor Relations, Sir you may begin.
Thank you Cody and good afternoon, everyone and welcome to the Rogers Corporation first quarter 2021 earnings conference call the for.
Slides for today's call can be found on the investors section of our website along with the news release that was issued today.
Please turn to slide two.
Before we would 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 of subjects. The many uncertainties that exist in Rogers operations and environment. These.
The uncertainties include the economic conditions market demands and competitive factors.
Such factors could cause actual results to differ materially from those in any forward looking statements.
Also the discussions during this conference call May include certain financial measures that were not prepared in accordance with generally accepted accounting principles reckon.
The reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call, which is posted on the investors section of our website.
Turning to slide three with me today is Bruce Hooker, President and CEO, Mike Ludwig Senior Vice President and CFO, and Bob Daigle, Senior Vice President and CTO.
Also joining us on the call is Ron by import who as announced earlier today has been appointed Rogers CFO effective may 1st.
I'll now turn the call over to Bruce.
Thanks, Steve Good afternoon, everyone and thank you for joining US today, please turn to slide for Roger.
Rogers delivered another strong financial performance in Q1, driven by growth in advanced mobility markets are strengthening market recovery and continued operational excellence for.
First quarter net sales increased 9% to $229 million and exceeded the top end of our guidance gross margin improved to 39% as a result of our strong operational performance EPS also exceeded the high end of our guidance and we reported earnings of $1 60.
Six cents per share on a GAAP basis and record adjusted earnings of $1 92 per share.
The increase in Q1 sales was broad based and nearly all of our markets increased at double digit rate.
The impressive growth was enabled by both of our strategic focus on fast growing markets and the ongoing economic recovery.
We continue to realize the benefits of our multi year investments in innovative technologies to capitalize on the accelerating opportunities in advanced mobility markets.
Of the HEV and <unk> sales increased at double digit rates sequentially and grew more than 30 per cent compared to Q1 of 2020.
Sales of compression pads and related solutions for EV batteries were especially strong and more than doubled year over year.
Sales of our power semiconductor substrate solutions were also higher.
We anticipate further top line growth as these markets continue to accelerate.
As announced last quarter, we are investing aggressively in additional capacity for our advanced battery compression pad and ceramic substrate technologies to take advantage of this opportunity.
We are also investing in additional resources and capabilities to support this growth. We are at a growth inflection point and these investments will position Rogers to capitalize on the significant momentum in these markets and add to our strong market positions in the near term and longer term.
Sales in the defense market increased at an impressive rate in Q1 similar to the EV HEV any debt markets are focused strategy of new product introductions continue to drive design wins and growth.
We saw a resurgence in industrial demand in Q1 as sales grew sharply versus the prior quarter and return to pre pandemic levels. Our sales in industrial in the industrial market are closely tied to levels of capital investment, which continues to improve demand was strongest for application.
It is used in semiconductor equipment.
Other markets, such as clean energy and wireless infrastructure also showed strong improvements in Q1 with sales growing at double digit rates.
In the portable electronics market sales were seasonally lower in the first quarter and consistent with our expectations.
The impact of sales from the disruption to our U S facility was minimal as a result of selling our undamaged finished goods inventory.
We continue to work closely with our customers. During this time and we remain on track to resume production in the fourth quarter of this year.
Q1 sales were largely unaffected by global supply chain disruptions.
But we began seeing more impacts as we exited the quarter.
In the second quarter, the lack of availability of certain raw materials, primarily due to weather interruptions, along the U S. Gulf Coast will somewhat temper, our sales growth and gross margin.
However, we expect this headwind to moderate by the end of Q2.
Higher commodity costs reduced Q1 gross margin by our copper hedging strategy, largely offset the impact to earnings per share.
In Q2, we are continuing to offset the impact of higher commodity costs through hedging activities and commercial actions.
In summary, we had an excellent quarter delivering strong sales growth improved profitability and robust cash generation.
Continuing on to slide five I'll discuss the latest market outlook.
As mentioned, we are seeing broad strength across our market portfolio. This is driven by two major factors first we are benefiting from our strategic positioning in markets with long secular tailwind such as advanced mobility.
We are also seeing exceptional growth in this area, primarily driven by the accelerating adoption of Evs and <unk>.
Second the global economic recovery continues to gain momentum.
Expectation is that near term economic activity will continue to improve aided by stimulus measures and vaccine rollouts.
This should continue to support strong demand and we are maximizing output at existing manufacturing facilities in response.
Turning to the long term outlook for advanced mobility estimates continue to point to an extremely strong growth outlook for the EV HEV market reach.
The recent analysis from industry experts.
Points to an acceleration in EV HEV adoption in their updated report BCG now expects that by 2026, Evs and <unk> will account for more than half of global light vehicle sales for years earlier than previously expected.
Underscoring this trend is the ongoing investments and commitments by global automakers. Some examples in recent weeks include commitments from Volvo and Honda to phase out internal combustion engines and the announcements of sizeable investments in battery capacity for VW GM and others.
It's important to note the full electric vehicles are expected to be the fastest growing segment of this market with a CAGR of over 40%. This is significant for Rogers, because our content opportunity increases with higher degrees of electrification.
For example, our ceramic substrate content opportunity in a full EV ranges from around 25 to $40 compared to a content opportunity of approximately $5 and of 48 volt mild hybrid.
The same concept applies to our battery compression pad solutions used in plugging hev's any of these our content can be greater than $30 per vehicle and rises meaningfully as the battery size increases.
Other solutions, which are used across the entire EV HEV market includes vibration dampening pads and battery pack sealing solutions.
Also we have secured design wins with several promising entrance to the EV market with our power interconnect solutions.
Turning to a des we continue to see a very strong mid teens growth potential over the next five years, driven by increasing penetration rates and higher levels of vehicle autonomy.
Near term auto production faces some challenges for the limited supply of certain semiconductors, but the long term outlook remains robust.
We are encouraged by our progress in this market and we continue to expand our customer base with new design wins.
In addition to the opportunities in advanced mobility, we also see attractive growth potential in other markets such as renewable energy and defense. The renewable energy market is expected to grow at a 10% CAGR over the next five years, which we anticipate will continue to drive robust demand for our power.
For semiconductor substrates.
Please turn to slide six.
Rogers has a very rich heritage of innovation and a proven track record of develop of developing solutions that drive growth in markets with strong secular tailwind. We achieved these results by combining our deep expertise in material science with collaborative engineer to engineer customer relationships.
Our global innovation and R&D centers are key to maintaining our strong development pipeline. They are staffed with world class personnel, who identify develop and acquire the technology needed to enable the next generation of products through.
Through partnerships with universities and other research institutions, we can further expand our product development pipeline and an efficient and cost effective manner.
The progress we've made in our EV HEV business is a Prime example of how innovation drives growth at Rogers for example, our advanced battery pad and battery pack sealing solutions and Silicon nitride substrates were all developed through our innovation and R&D process in recent years.
These products for them the core of our solutions for the EV HEV market, which has now increased to more than 11% of total sales.
Our focus on innovation continues with a number of advanced solutions that are currently under development. Some of these some of the products in our development pipeline include next generation Silicon nitride substrates with improved thermal performance advanced battery compression pad solutions and high.
Performance of antennas for next generation auto radar.
Our ability to drive organic growth through innovation is a source of competitive advantage for Rogers and we will continue to be a core element of our strategy.
Turning to slide seven I'll recap of our key messages from today's call.
First we delivered strong Q1 results driven by our strategic focus on advanced mobility markets and by continuing our market recovery.
We also continued to drive operational improvements and higher sustainable growth gross margins.
The growth opportunities in advanced mobility markets, and especially the EV HEV space continued to accelerate driven by powerful long term secular tailwind.
This opportunity is extremely compelling and we are investing aggressively to capitalize on this growth.
Lastly, as announced in the press release earlier today, Ron My Implore US has been appointed to serve as the company's new CFO as a longtime Rogers employee and of seasoned senior Finance leader. It gives me great confidence to have ROM step into the CFO role Rob has over 30.
Years of corporate finance experience and has held senior finance leadership positions at Rogers, where he has had responsibility for the financial operations financial planning and analysis.
Isn't this transformation and treasury.
I would again like to thank Mike for his many impactful contributions and for being an indispensable business partner for me.
I appreciate it makes wise and insightful counsel, which is help Rogers navigate through some difficult situations and has helped make Rogers a stronger and more resilient company.
Mike will remain with the company during the transition period to help facilitate a seamless transition with the wrong. Please join me in wishing Mike a long healthy happy retirement, now I'll turn it over to Mike to discuss our Q1 results in more detail.
Thank you for the kind words, and well wishes Bruce your thoughts are truly appreciated I've enjoyed my time at Rogers immensely and I'm appreciative of the opportunity to have made a positive impact out of the results and culture of Rogers.
But my fortunate to work with the tremendous senior management team of supportive board and the hard working dedicated Rogers Global community.
Let's jump back to the results in the slides ahead I'll review, our first quarter 2021 results.
Turning to slide nine as Bruce mentioned Rogers delivered strong financial results in the first quarter revenues increased sequentially of both our E. M. S. N E S business segment as.
As communicated in our Q4 earnings call. The H E. S business segment is comprised of the former Acs and <unk> business segments.
We delivered gross margin that was 70 basis points higher than Q4 through increased volumes at operating efficiency, Despite a less favorable product mix and significantly higher commodity and freight costs.
In Q1, we delivered strong earnings through increased revenues improved gross margins and increased other income.
And our GAAP results, we recognized $1 $5 million in restructuring costs related to the footprint optimization activities communicated in our third quarter 2020 call and one $3 million for the loss, resulting from the fire at our Utah facility net of expected insurance proceeds.
Our effective tax rate for Q1 was 25, 2%.
Turning to slide 10, our Q1 revenues of 229 $43 million increased by $18 $6 million compared to the fourth quarter, reflecting broad strength across our product markets.
EES revenues increased 10% of 131 $9 million Ms revenues grew 6% to 91 $8 billion.
Currency exchange rates favorably impacted first quarter revenues by approximately one five per cent compared to Q4.
U S revenues grew sequentially due to strong demand in all three product lines RF solutions power semiconductor substrates empower interconnects.
Within the RF solutions, the aerospace and defense business accounted for 19% of the business segment revenues and grew 15% sequentially.
The Adas business accounted for 18% of the revenues and grew 12% of wireless infrastructure accounted for 17% of the revenues and grew 26%.
Defense applications continued to be of solid growth area for Rogers as customer programs continue to ramp.
Record Adas revenues continue to benefit from the rebound in automotive manufacturing and to date have not been adversely impacted by the semiconductor chip shortage.
Wireless infrastructure revenues experienced a nice sequential increase due to five key installations, both inside and outside of China.
Clean energy, which is comprised of the renewable energy revenues in both of the power semiconductor and the power interconnect business as.
As well as the variable frequency drive business in the power semiconductor business accounted for 16% other business and grew 15% sequentially.
The sequential increase of our variable frequency drive business was the first in several quarters. It is reflective of the general economic recovery.
We believe the renewable energy demand will be uneven in the short term as this business is comprised of project opportunities, but will have meaningful long term momentum.
EV HEV application revenues accounted for 12% of the segment revenues and increased 2% sequentially as the order timing temporary for the Q1 increase in ceramic substrate revenues.
EMS revenues grew sequentially, primarily due to significant increases of nearly all applications highlighted by 41 per cent increase of EV HEV applications, which accounted for 11% of the segment revenues and of 23 per cent increase in general industrial applications, which he can.
Out of for 44% of the segment revenues.
The EV HEV applications continue to gain momentum consistent with the accelerated demands of the EV HEV market.
And the increase in general industrial revenues continues the recovery trend that commenced in the fourth quarter and mirrors the general economic recovery.
As expected revenues for the portable electronics, which accounted for 22% of the segment revenues experienced a 31% sequential seasonal decline off of a very strong second half of 2020.
Revenues from our <unk> factory were down just slightly compared to Q4, despite the fire that occurred in mid February.
<unk>.
Turning to slide 11, our gross margin for the first quarter was $89 $5 million or 39% of revenues 70 basis points higher than Q4.
The increase in gross margin was due primarily to higher volume and improved manufacturing execution.
More than offsetting the unfavorable product mix and increased raw material and freight costs.
While both the Aes and EMS businesses had to overcome the aforementioned headwinds the Ada Es business was able to produce increased gross margin in all three product lines.
The EMS gross margin declined sequentially, even though manufacturing execution improved.
Although our gross margin percentage increased by 70 basis points sequentially. The significant increase in copper costs meaningfully dampened our gross margin percentage of the quarter.
To mitigate the higher cost of copper out of our profitability, we enter into copper hedging contracts the gains and losses on these contracts are recorded in other income expense the lower operating profit results.
In addition to hedging our copper purchases, we have taken commercial actions to mitigate the increased cost of commodity and other raw materials.
Also on slide 11, we detailed the changes to adjusted net income for Q1 of $36 million compared to adjusted net income for Q4 of $29 $7 million.
The adjusted operating income for Q1 of $43 $5 million 19 per cent of revenues with 60 basis points higher than Q4.
Adjusted operating expenses for Q1 of $46 million or 21% of revenues were 20 basis points higher than Q4 expenses.
The higher adjusted operating expenses were due to higher performance based compensation costs as well as higher benefit costs.
Other income expense was $1 $2 million favorable compared to Q4.
Included in.
Included in other income expense in Q1 are the realized gains on our copper hedging contracts, which offset the impact of higher copper cost included in the gross margin of the first quarter.
As discussed earlier Rogers effective tax rate for the first quarter was 25, 2% higher than our forecasted rate of 22% to 23%.
We now expect our effective tax rate for 2021 will be 23 to 24 per said due to the geographic mix of pretax income.
Turning to slide 12, the first in the first quarter of the company generated strong free cash flow of $33 million and ended the quarter with the cash position of $199 $1 million.
In the quarter, we generated $36 $5 million from operating activities net of an increase of $10 $8 billion in working capital and repaid $21 million of our credit facility.
We ended the first quarter with an outstanding balance on our credit facility of $4 million and the net cash position of $195 $1 million.
In Q1, the company spent $3 $6 million on capital expenditures.
Despite the low level of the expenditures in the first quarter. We continue to guide capital expenditures of 70 million to $80 million in 2021 with over 50 per cent of the expenditures to capture the accelerating advanced mobility market opportunities of both Aes and EMS business segments.
The guided expenditures exclude the capital necessary to restore the U S operation a significant portion, which we expect to be reimbursed by insurance proceeds.
I will now turn the call over to Rob to discuss the Q2 outlook.
I've had the pleasure of working closely with ROM. During my time at Rogers is an excellent choice to continue driving the company's growth and profitability forward.
Again, it has been my privilege to serve as Rogers CFO I would like to thank Bruce and the rest of the board of directors for the opportunity and the investment community for their support during my tenure at Rogers.
Thank you Mike It is a privilege to be named as CFO at Rogers and I'm extremely excited about the opportunity to serve in this capacity at such a pivotal time for the company I would like the thank Mike for his leadership and have appreciated the opportunity of you have had to work closely together.
Lastly, I look forward to becoming better acquainted with the members of our investment community.
Turning now to the second quarter guidance on slide 13.
Bruce discussed earlier, we see continued strength in many of our markets, particularly in advance of mobility General industrial defense and wireless infrastructure.
Based on the strong outlook, we are guiding our second quarter revenues to be in the range of $230 million for $240 million.
The effect of audio of this factory being off line and the lack of availability of certain raw materials will impact our second quarter growth.
Following several quarters of significant gross margin improvements, we expect Q2 to be flat sequentially before improving further in the second half of 2021.
To prepare for a strong second half, we will be stepping up our resources across the business in the second quarter.
Also in the quarter, we will continue to see challenges for mix raw material cost increases and supply constraints related to the Gulf Coast interruptions mentioned earlier.
We have taken commercial actions to mitigate the increase in raw material costs.
These actions will have a positive impact on our gross margin from the second quarter with the full impact benefiting the second half of 2021.
We expect to overcome the supply constraints by the end of the second quarter and see favorable impact from higher volume and better mix in the second half.
For the guide our gross margins to be in the range of $38 five to 39, 5%.
Insistent with our first quarter.
The company will recognize higher operating expenses in the second quarter from timing of certain expenses, including performance based compensation.
Costs incurred to support anticipated growth of the second half and to restore you'd as operations will also increase operating expenses in the quarter.
We are guiding GAAP Q2 earnings in the range of dollar 58, <unk> $2 73 per fully diluted share.
For the guide fully diluted adjusted earnings in the range of dollar of $82 95 per share for the second quarter.
I will now turn the call back for the operator for questions.
Yeah.
Okay.
Thank you if you'd like to ask a question. Please send my pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure that your mute function is turned off to let your signal to reach our equipment. Once again that is star one if you'd like to ask a question.
Our first question from Craig Ellis with B Riley Securities. Please go ahead.
Yeah. Thanks for taking the question congratulations on the first quarter execution welcome aboard Rob or welcome to the Ralph you've been on board for a long time and Mike. Thanks again for all your help so.
I'll start with the clarification question Rob on your.
Comments for the second quarter tide, Mike can you just help us understand the magnitude of the supply chain issues that are at play both debt revenues and gross margin can you quantify what those are on those two line items.
So the supply chain constraints of.
About a million dollar impact of if you've made both of the raw material.
The net net of price increases and the supply of supply constraints.
Contributed to about 75 per cent of for gross.
Gross margin.
The comparison to Q1.
So about a million all of those mostly from shortages of raw materials.
Okay. So that's what pretty small, but yeah got it okay and then the second question and I'll keep it in your court and then I'm going to flip over to Bruce for a couple.
You had talked about enjoying a benefit in the second half from higher volume and favorable mix on gross margin. So so the question on the volume point is where do you have better demand visibility in the second half.
Yeah and to what extent is it is it really the potentially the fourth quarter return of.
Of the <unk> business and better portable electronics participation, that's driving that higher volume or is it things that you are seeing in the other parts of the business, whether it be advanced mobility with its pieces, etc.
Yes, it's a combination of both the the reasons you mentioned Greg.
Second half tends to be as you know, particularly Q3 stronger for our portable electronics business and we are generally seeing an overall lift.
In many of them for our markets are general industrial.
EV continue through and even exceed in the second half that's why we're making some of our investments in Q2 to prepare for that.
Got it and then Bruce I'll flip it to you for more of an intermediate to longer term question, but it certainly seems like you engineer the portfolio of the team's got the business very well aligned for an array of strong growth drivers and in the company's committing 70 to 80 million of it and capital.
Spending to provide the capacity for growth the question is.
To what extent does that capacity start to come out of this year and to what extent is that really are of 2022 benefit.
And does it particularly beneficial to any of the the segments for the sub segments or will it be more broadly applicable for the portfolio.
So so at the kind of channels in over the course of towards the end of this year and then as we move into 2022. So we see certainly on the ceramic side some.
Some of the some increases in capacity coming on stream of of course of the recovery of you. This also brings back some some more capacity back on stream and the investments that we've already announced on the the poor on business.
Will come into effect in 2022, so so we've you know.
A lot of it some of it comes in the end towards the end of this year and then certainly as we move into 2022.
Got it.
Can you quantify what the magnitude of capacity that would give you beyond where you are today of if the business has the capacity. That's you know some degree of above current revenue levels, how much could the 70 to 80 million add beyond where you are.
It's the yeah. That's the that's a interesting question the the the way that we look at it this capacity as we look out over the next couple of years gets us in very good shape with the with the growth trajectories that we see so the the 30% 30%.
30% growth in EV HEV Ah in both sides of the house and both the ceramic side as well as on the plant on the Latin American side as well. So we think we're keeping in pace with the growth rates are.
I think we've also indicated as we move into 2022 and beyond we will carefully monitor the needs that we have these are high growth markets and where we.
We're very been very analytical and looking at and understanding.
When the next tranche of investment needs to happen to continue with the trajectory of the the market growth. So you know.
As we go through this year and into next year I would say the capex is going to be probably similar in 2022, given the the growth outlooks that we have so we're well tuned in here to keeping pace with these high growth.
That's very helpful. Thanks, so much Bruce.
Sure. Thanks, Craig.
Yeah.
Thank you so once again the star one if you'd like to ask a question of we'll hear next from Daniel Moore with CJS Securities.
Good afternoon, thanks for taking the questions and I'll Echo Mike. Thank you for all of your help in ROM looked very very much look forward of medium and working with you.
I'm, Mike just wanted to clarify thank you the the $1 million impact that is that's Q2, that's the impact that we would expect flow for Q2 or that's what we saw in Q1 from the supply chain challenges.
So that's the impact for Q2.
Okay. Okay. So it is pretty modest that's helpful.
And then maybe just talk about the broad recovery in industrial.
Is it gaining momentum from your perspective kind of sequentially over the first four months of the year and and the other particular end markets or geographies that you're seeing.
For faster.
So on the on the than the.
The industrial side, so we saw a broad based recovery quarter.
Order on quarter in our EMS business. So there's.
It's just the broad base there, but we're also we also saw it on the Keramic side of the house with motor controls, but also.
The.
The laser systems, and so forth power modules for laser.
That continues to rebound and again as we mentioned in the prepared notes the.
Capital investment in factories is driving.
The the resurgence.
Certainly in the motor control systems and then the.
During the lasers and so on.
Also as we mentioned in the chip manufacturing equipment. So we see this this was the first real.
Strong rebound that we've seen in the industrial side quarter on quarter and we see this continuing as we move into through the rest of the year.
Excellent and then we talked about it a little less these days, but wireless maybe just talk about the outlook there and more generally are there any areas of your business, where we should be thinking about each two volumes lower versus each one that would offset any of the.
Strength that you're seeing across really most facets of your business.
Yeah I'll take the second part of your question first I think we see sort of broad based impact of the economic recovery across many many of the markets that we've talked about and then laying on top of that we have the EV HEV dynamic that's propelling growth in those.
Hi, 30% to 40% kind of the numbers.
In terms of the wireless side.
There's been sort of I'd say of flatness in China, and the rollout there has it slowed a bit and globally, maybe slightly uptick outside of the outside of China, but that's not too meaningful because the bulk is we've always talked about really is inside of China, but it was it was a good.
On quarter growth for wireless.
This infrastructure, but.
Again as we've mentioned this is a relatively flat market for us given the puts and takes between <unk> and <unk> demand, but overall, we see this as a nice continued part of the business, but we don't see this as a real growth driver.
Perfect very helpful I'll jump back in.
Any follow ups. Thank you.
Thanks, Dan.
Thank you and once again Thats star one if you'd like to ask a question.
Excuse me, we have no additional questions in the queue at this time I'd like to turn the conference back over to Mr. Bruce Hoffman for any closing or additional remarks.
Well I want to thank everyone for for listening and attending today and and it's been a pleasure as I said working with Mike and I look forward to working more with pharmacy as we move ahead and take this country of company forward. So thank you have a good evening everyone.
Thank you and that does conclude today's conference. We do thank you all for your participation you may now disconnect.
Yeah.
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