Q1 2023 Rogers Corporation Earnings Call
[music].
Good afternoon, My name is Joe and I will be your conference operator today.
At this time I would like to welcome everyone to the Rogers Corporation Q1, 2023 earnings Conference call.
I'll now turn the call over to your host Mr. Steve Haymore director of Investor Relations. Mr. Haymore, you may begin.
Good afternoon, everyone and welcome to the Rogers Corporation first quarter 'twenty to 'twenty three earnings conference call.
The slides for today's call can be found on the investors section of our website along with the news release that was issued earlier today.
Please turn to slide two.
Before we begin I would like to note that statements in this conference call that are not strictly historical are forward looking statements within the meaning of the private securities.
Litigation Reform Act of 1095 and.
And should be considered as subject to the many uncertainties that exist in rogers' operations and environment.
These uncertainties include economic conditions market demands and competitive factors.
Such factors could cause actual results to differ materially from those in any forward looking statement made today.
Please turn to slide three the.
The discussions during this conference call will also reference certain financial measures that were not prepared in accordance with generally accepted accounting principles.
A reconciliation of those non-GAAP financial measures.
The most directly comparable GAAP financial measures can be found in the slide deck for today's call.
Turning to slide four with me today is Colin <unk>, President and CEO , and Ron <unk> Senior Vice President and CFO .
I will now turn the call over to Colin.
Thanks, Steve Good afternoon, everyone and thank you for joining us before I discuss the results for the quarter I'll touch on the progress we are making related to our key priorities, which we outlined at our recent analyst and Investor day I'll begin on slide five.
As highlighted last month, our plan is to achieve breakthrough growth and profitability as we restore accelerate and elevate our performance. This includes driving immediate improvements in our near term profitability, taking actions to strengthen the organization and maximizing the opportunities in our sales funnel and innovation pipeline to drive growth.
<unk>.
We continue to make good progress in all of these areas specific to our restore efforts as we discussed on the Q4 conference call in February we have taken a number of actions to improve our cost structure, including implementing a 7% reduction in Rogers global workforce.
Divesting a noncore natural rubber product line.
Driving manufacturing and yield improvements and optimizing our limited circuit materials manufacturing footprint.
As part of our continuing footprint optimization efforts, we have decided to exit a smaller manufacturing location in Asia.
This decision is expected to improve utilization levels and further reduce operating cost.
This action is in addition to the decision to sell the price road facility, which we communicated previously.
We are beginning to see the results of these recent actions in our P&L.
Tom will provide detail around the one time charges associated with these decisions when he reviews, our Q1 results. Additionally.
Additionally, we continue to bolster the organization with new talent as announced we recently hired Mike Webb as senior Vice President and Chief administrative officer, and Jessica Morton as Vice President General Counsel and corporate Secretary. We are delighted to have Mike congested could joined Rogers in both bring significant experience and expertise to the.
Company.
We also expect to soon announce the hiring of a new Chief Technology Officer and will share more information on this topic at a later date.
Turning to the accelerate phase as we emphasized at our Investor day last month, we see compelling growth opportunities across our markets driven by secular trends in Evs, a das aerospace and defense <unk> smartphones and renewable energy, we have strong positions in these markets and with our differentiated technology.
We're intently focused on capitalizing on these market tailwind to reach the 7% to 10% top line CAGR included in our 2025 targets.
Also supporting this growth outlook or some significant program wins, which will ramp up over the next three years, particularly in the EV space, we continued to gain traction with our customers and I will discuss some notable design wins in a moment.
Third in the elevate phase our goal is to sustain a double digit revenue growth rate and a 40% gross margin to maintain faster top line growth in this period beyond 2025, we are focusing on growing our sales opportunity funnel and converting more opportunities into design wins.
In addition, commercializing the new technology, and our innovation pipeline is a top priority to support our growth in the future.
We are excited about the path ahead, and we are taking the necessary actions today to be able to achieve these longer term targets.
Turning to slide six I'll next provide some highlights from the quarter beginning with several recent design wins first in the das market, we leveraged our trusted reputation and applications expertise to secure a win with a strategic OEM in Asia.
Our advanced circuit materials will be utilized in a front facing radar system that enables adaptive cruise control for level, two and above autonomous driving.
Production of the unit began this quarter and sales associated with this multimillion dollar design wins are expected to extend over the next five years.
Also in the Aes business, we secured multiple new design wins for our advanced ceramic substrates in Q1 in the EV market. Our technology was selected to enable efficient energy conversion and in EV Oems charging network our.
Our solutions were also selected in the renewable energy market to be utilized in solar inverters to help maximize energy conversion.
Sales associated with both design wins are expected to extend over the next three years.
In our Ams business. We also had a notable design win in the EV market in Europe , Our silicone technology was selected by a major OEM as a battery pack environmental sealing solution.
The duration of this project is expected to extend more than five years with multimillion dollar annual sales potential.
We are encouraged by our continued progress and securing new design wins, resulting from leveraging our innovation capabilities and applications expertise.
Turning to Q1 financials sales increased by 9% to $244 million led by improved results in the Adas renewable energy and general industrial markets.
Hey, Das market sales continued to improve following challenges in 2022 were COVID-19 related restrictions in China disrupted our customers' operations. We are encouraged by the improvement and continue to see high growth potential over the next several years driven by the increased penetration rate of Adas systems and increasing levels.
Vehicle autonomy.
Sales in the renewable energy market increased rapidly in the first quarter based on strong demand for our power conversion and power interconnect solutions. This market also has strong long term potential with new installations as solar and wind power continued to grow rapidly.
And the general industrial market Q1 sales improved after declining in the fourth quarter. We are encouraged by the improvement although we remain cautious on the outlook for general industrial sales given the uncertain macroeconomic environment. Our general industrial revenues are diversified across many markets, but in some cases can be impacted by the overall economy.
Gnomic landscape.
Sales in the portable electronics market declined further in the first quarter. The disruptions that we saw to our customers' operations in the fourth quarter were resolved by Q1, however, and consumer demand remained weak.
We expect sales in the second half of the year to improve based on consumer seasonal buying patterns in the assumption that the supply disruptions and Covid lockdowns in China that impacted portable electronics in 2022 will not repeat in 2023.
Sales in the EV market were lower in the first quarter. The decline was due to both very strong Q4 sales and timing and the fact that some of our rolling power interconnect customers production ramp schedules have pushed out the.
Overall outlook for the EV market remains robust and we continue to work on maximizing plant output across several of our product lines to meet the demand.
Turning to gross margin, we made progress in Q1, reaching 32, 7% an increase of approximately 90 basis points from the prior quarter and above the high end of our guidance range.
This is a step forward as we continue to drive our profitability improvement actions as we've stated we are targeting 34% gross margin in the second quarter with further improvement in the second half of the year.
Rob will cover our first quarter results in more detail.
In summary, our first quarter results were a good first step in the right direction. There is uncertainty in some of our markets and the macro economic environment continues to be very dynamic. However, we are executing aggressively on the things we can control and are making progress getting back to historic levels of profitability.
Next I'll reiterate our compelling investment thesis, which I introduced at our Investor Day, Please turn to slide seven.
So why Rogers first we are focused on growth as highlighted earlier, we have exposure to strong secular trends in the EV and other high growth market segments. In addition, we have a solid base with our core business, which generates strong cash flows to fund faster growing opportunities.
Second we have a history of innovation leadership, we have a proven track record of developing and commercializing our unique materials solutions, we have leverage decades of experience in power electronics, RF materials and advanced Latin America to solve today's challenges and electric vehicles renewable energy automotive radar advanced.
Defense Communications and <unk> smartphones.
Third we have a repeatable customer engagement model that provides a strong competitive advantage over the years and decades, we have built trusted relationships with key Oems and engage with them at an engineer to engineer level to understand the complex challenges they are trying to overcome.
We then leverage our innovation capabilities and deep applications expertise to provide unique solutions to solve their unmet needs.
Lastly, we believe that as we execute on our strategy. This will provide a significant value generating opportunity for all our shareholders based on the 2025 targets. We introduced in March we are anticipating sales of one two to $1 3 billion gross margins of 38% to 40%.
And adjusted earnings in the range of $8 50 to $9 50 per share.
We have outlined a path to achieve these compelling goals and we remain focused on executing our strategy with that I will turn it over to Rob to discuss our Q1 financial performance in detail.
Thank you Paul and good afternoon, everyone I will review, our first quarter 2023 to sell some detail and later discuss our guidance for the second quarter.
Let me begin on slide eight as Colin mentioned our results for the first quarter were a positive talk through the year.
Q1 sales of 244 million and gross margin of 32, 7% both exceeded the high end of our guidance range.
On a GAAP basis, we had a net loss of <unk> 19 per share for the quarter. This was mainly due to the $11 9 million of restructuring severance and impairment costs and $7 6 million of non routine shareholder advisory costs.
However on an adjusted basis Q1 earnings were 87 per share also exceeding the high end of our guidance range.
I will discuss the restructuring and other non-GAAP items in more detail later in the presentation.
Our Q1 results are a step in the right direction and we remain focused on realizing the full benefits of the.
Our cost and productivity improvement actions, we have announced which which we expect will continue to drive additional financial improvements.
Turning to slide nine Q1, net sales of 244, Midland improved 9% versus the prior quarter. Most of the improvement was from higher volume, but we also benefited from favorable foreign currency fluctuations of $6 million.
On a reportable segment basis, we had sequential improvements in both Es and EMS business units <unk> sales increased eight 4% to $135 9 million. The higher revenues resulted from a strong double digit sales growth in Adas and renewable energy markets.
And improved industrial sales sale.
Sales in the wireless infrastructure market was lower versus Q4 <unk>.
Foreign currency fluctuations benefited EPS by $4 1 million versus Q4.
<unk> sales increased by nine 1% to $102 2 million led by double digit sales growth in general industrial and aerospace and defense markets.
As Colin mentioned portable electronics sales.
<unk> declined as end consumer demand was weak.
Foreign currency fluctuations benefited EMS sales by $1 8 million versus Q4.
We saw a decline in overall EV television sales in Q1. Following very strong Q4 sales also as noted earlier there is a timing element involved as some of our power interconnect customers production ramp up schedules have been pushed out further.
Turning to slide 10, our gross margin for the first quarter was $79 $7 million or 32, 7% of sales.
This was a 90 basis points improvement versus the prior quarter and 20 basis points above the top end of our Q1 guidance range.
The increase in gross margin resulted from higher volume, which was partially offset by unfavorable product mix.
Improved factory utilization and lower logistics cost also contributed to the higher gross margin.
The cost actions, we undertook in Q4 and Q1 began to have a positive effect on margins in Q1, and we expect even greater impact in Q2.
Turning to slide 11, I'll next discuss the change in operating income versus prior quarter.
In aggregate Q1 operating profit decreased approximately $83 million versus Q4.
This was primarily due to the receipt of a onetime $142 million termination fee net of expenses from the terminated Dupont merger in the fourth quarter of 2022.
This termination fee more than offset the restructuring and impairment charges related to the price road facility in the rubber business that were incurred in that quarter.
On a GAAP basis, we recorded a slight operating loss of $4 3 million in Q1.
After adjusting for restructuring severance and impairment charges of $11 9 million non routine shareholder advisory cost of $7 6 million and other items. Our adjusted Q1 operating profit was $25 5 million.
Adjusted operating margin of 10, 5% improved 120 basis points from Q4.
Continuing to slide 12, ending cash at 31 March was approximately $194 million a decrease from.
$236 million at the end of 2020 to the.
The decrease in cash was primarily related to a $25 million discretionary repayment of debt on our revolving credit facility and capital expenditure in the quarter.
Also in the quarter, we amended the terms of our revolving credit facility to extend the maturity date to March 2028, while maintaining the same primary borrowing limits and a slightly higher expansion feature.
Capital expenditures were $16 4 million in the first quarter.
We maintain our full year capital expenditure forecast at $6 $65 million to $75 million.
As emphasized.
At our recent Investor day, we will focus on maximizing throughput of existing production lines before investing in new capacity.
Next on slide 13, I will discuss our guidance for the second quarter.
First net sales are expected to range between $2 $35 million to $45 million similar to Q1 results.
We expect some near term challenges in the macro environment to Tempur sales growth in Q2, particularly in the industrial and portable electronic markets.
Despite the relatively flat volume versus the first quarter. We expect continued improvements in gross margin from the cost improvement actions implemented as a result, we expect gross margin to be in the range of 33, 5% to 34, 5% for Q2.
Earnings per share is expected to range from 65 to 85.
Our adjusted EPS range is expected to be between $95 15.
Our GAAP EPS range includes approximately $3 million of after tax accelerated depreciation and severance expenses related to our previously announced actions.
This is in addition to the $2 5 million of after tax acquisition intangible amortization expenses.
We continue to expect our full year tax rate to be around 23%.
We are committed to our profitability improvement goal and as we execute our cost improvement actions. We are focused on achieving 34% gross margin in Q2, and making additional improvements in the second half of the year.
I will now turn the call back to the operator for questions.
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session.
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Moment, while we poll for questions.
And our first question comes from the line of Daniel Moore with CJS Securities. Please proceed.
Thank you good afternoon, Collin and Rob Thanks for taking the questions.
Let me start with just kind of talk about your expectations for the cadence of EV HEV related revenue for Q2 and into the second half.
I appreciate the color on the push out of the production ramp of that one customer.
Any additional color by in terms of your visibility and maybe talk a little bit further by product line would be great. Thanks.
Hi, Dan I'll start with that and then maybe Rob might have something to add so.
What I would say in general going into Q2 is that we feel like we continue to do well with design wins in the EV space and our momentum continues.
Recall that Q4 22 was a very strong quarter. So for Q1 'twenty three it's somewhat of a difficult comparison.
And as we as we said in our comments there was some timing element as some rollings power interconnect customers production ramp schedules were pushed out and we're seeing some lumpy demand.
But one point I want to bring out is at Rogers, we're happy to have sales into many diversified end segments, which can help without lumpy demand and help pull up <unk>.
Results in other areas when there is that type of situation, but as we go forward, we feel like the EV space will be robust, it's a great place to be.
And we've got technology that participates across many different places in the EV automobile or light vehicle.
All three business units. So we feel very good in the long term.
Just trying to navigate through some of these macro environmental challenges, which seem to be impacting most companies. These days.
Very helpful color I appreciate it.
In terms of the design wins, you gave great color.
Sure.
Beyond that just in terms of the sort of three focus areas within EV HEV.
Where are you seeing the most opportunity in terms of that funnel for additional potential new design wins as we look out over the next.
Four to eight quarters.
Sure. So again, it's it's very balanced I feel across our main product lines. So we see a lot of growth and excitement in our <unk> business, which is our.
Ceramic substrate material that is going into power modules that go into inverters and those types of technologies. So the design wins in that space remained strong.
Rollings power interconnect business is also doing well in terms of where we participate in EV and also I should say clean energy projects as well same for the <unk> business I might add and then finally in our last American materials business.
We're still growing with design wins in a couple of key areas for us.
Used as battery separator pads and certain form factors of batteries, such as pouch and decreasingly.
And prismatic.
You also have a good base of business around battery sealing technology with our silicone products and then in terms of cooling plate pads and things of that nature. We also have program wins. So I would say, we're really participating across large chunks of the EV automobile and light vehicles as I said with all of our product.
Lines and the cadence is very good in all of those three areas.
I'll sneak one more and then jump back in queue, but in terms of the gross margin guidance consistent.
Obviously, but if you think about low end and high end of the range, where some of the factors that would drive that would drive.
Toward either end.
It just absorption on volume and revenue thanks again.
Thank you.
So Dan I'll take that.
We have said before the actions we control.
We will get us to the 34% and what will get us to the higher end of that range is if you have a better mix in our in our revenue that'll help us get closer to the top end of that range.
Very good thank you.
Our next question comes from the line of Craig Ellis with B Riley Securities. Please proceed.
Yes, thanks for taking the questions guys and congratulations on the execution a call and I'll start with a more qualitative than quantitative question.
<unk> kicked off your prepared comments one of things you noted is the progress in the restore face. So there's clearly good things happening with cost improvement margins in the organization, but the question is this from where we are today. What do you think the biggest opportunities are between here and year end in euro.
Store phase.
Thanks, Craig and good to hear from you. So I think what we talked about is.
We've already talked about as some of the bigger opportunities. So EV HEV remains to be our significant growth segment, where we see the market growing north of 25% and that continues there are some economic headwinds, but it's certainly a macro trend that we think will continue for many years, but we're also getting good traction and our biggest opportunities.
A market perspective are remain that clean energy, such as solar and wind.
Das continues to be a great staple for our growth and then for portable electronics.
It has been weak this first quarter, but then as we look to the seasonality pickup of portable electronics in the third and fourth quarter as we get into end of year end holiday buying and then later on in the first quarter Chinese new year, we see a pickup there. So it's still we are.
Still watching it closely and even though the overall handset market might not grow that quickly we still have good positions in <unk> phones, which grow faster than the typical handset and also foldable phones, which are also gaining traction faster than your standard handsets. So that's where we see the most opportunities I think from a market perspective.
Got it and if I were to focus instead on some of the company controllable things you mentioned, some pretty senior executives, but.
One of the things that was cleared analyst day is there is also an operational.
Our organization building out.
How do you feel about the way the.
The ops organization is building out in some of the some of the efficiency and operational gains youre seeing there.
So I would say I feel very confident so Larry Smith, who we introduced at Investor Day is a seasoned operator coming from some significant manufacturing companies. He brings in 30 years of experience.
Global experience and I can already see the difference in terms of the changes he is making around.
Inserting improvements that are helping operational execution.
Really focusing on the right metrics and driving a cultural change because we think there is some still a ways to go but we can already see progress in terms of all the things. We said we were working on around yield scrap improvement and quality. So this will be a big thing for us over the next 12 months, but we feel very confident with Larry.
And the team he is bringing in behind them, so that as an opportunity as well and that'll be a piece of a big piece of what we can control over the next I'd say 12 months to 18 months.
Got it and I'll use that as a segue to ask a question or two on.
On gross margins clear message on where we are in the second quarter on what gets us to the high end of the range. If we flip forward to the back half of the year in the 35% target.
The specific factors that take us from 34% to 35%.
Later this year.
So continued operational excellence.
Programs that.
We touched upon.
<unk>.
In building out the ops team.
Staying focused on making sure that the improvements we have made stick the cost actions have already been taken.
And the seasonality that we talked about earlier.
Greg on the portable electronics that drives better mix for us showing up in the second half.
Now the mixed box is about 50 basis points I would say.
To get us to 35%.
Got it and then if you could just provide some color on opex and not looking for specific guidance, but maybe just.
The contour of what we can expect it looks like below $50 here in the second quarter operating expense as we go through the back half of the year what are the Gibson takes there.
So opex tends to be heavier for us in the first half.
We are running about 22% in the first half.
Overall for the year I would think we will get back to 'twenty between 'twenty, one and 'twenty, one 5% closer to the 21% number so the second half of the year.
It tends to be lower on Opex.
That's helpful. Thanks, guys I'll hop back in the queue.
Thanks, Craig.
As a reminder, if you would like to ask a question. Please press star one on yourself on key pad.
Our next question comes again from the line of Daniel Moore with CJS Securities. Please proceed.
Thanks again.
A lot of good color, obviously, just a line item, we don't spend a lot of time focusing on in terms of just the jv's how are those performing and what are your expectations in terms of contributions as you look out for the balance of the year.
What's a more normalized level of contribution over time. Thanks.
Thanks, Dan I'll start and maybe Rob can finish so the jv's continue to.
The function as we anticipate.
I have been involved heavily in those JV since theyre, mostly involved with the EMS business and our partner <unk> in China, We have two jv's one for business in Japan, and then the other four business in China. So we focus on sort of the key end markets that Rogers itself focuses on we've got good cooperation it's a manufacture.
During JV and I would say things run smoothly, there and in terms of financial performance. They are coming in as anticipated, but maybe rob might want to add more.
It's not a it's not a large part of our P&L, but it's one we do focus on that site.
It is below our operating profit what we get from them, but to just to add to what Colin said that this year there have been impacted like us.
With the slowdown in China, and we are carefully watching how second half shows up to the first half JV performance kind of aligns well with our <unk> Division.
And we have not seen the huge lift from Q4 yet.
Sorry about that I was on mute understood very helpful. And then any specifics quantification about.
The additional small manufacturing facility that you are looking to to shutter in Asia, just in terms of impact as far as shutdown costs, but what.
Run rate cost savings might look like.
Yes. So there is not a big cost. There then it's it's actually shifting.
<unk> products to our larger facility in in in Asia, and close by in the region in Suzhou.
So most of the costs associated will be with impairment of.
Equipment.
And fixed assets mostly.
Let's not much huge restructuring involved with that.
Seven understood.
Okay. Thanks again for the color.
Our next question comes again from the line of Craig Ellis with B Riley Securities. Please proceed.
Yes, thanks for taking the follow up question I believe it was in the <unk>.
In the investor deck that one of the things that <unk> noticed that there is some.
Leasing and logistics costs and I wanted to use that as an opportunity just to check in on the broader operating environment, how are things going with and put availability and cost logistics.
And any issues there and just operationally how would you characterize today's environment versus what you might have seen six months or nine months ago and initial look ahead.
Any notable positives or negatives that we should be aware of as we look.
Through 2023.
Greg maybe I'll take that to start with so and.
In general if you wanted to compare where things are today versus logistics challenges our supply chain challenges I would say things have improved in general when you think about last year and some of the challenges that arose from the Covid shutdowns that really stopped a lot of the operations in China those have have certain.
<unk> East and we see in general a bit of a pickup in terms of raw material availability, but there is still pockets where people are still not able to.
Supply and then when we look at our downstream customers. So there's a lot of stuff in the press around.
Production being held up in some cases due to lack of semiconductor chips.
What our OEM came out with the other day and so we still see a bit of that and choppiness in terms of.
Perhaps not a one off but in general.
Supply chain disruptions, but maybe less so than it used to be so it's still there, but it feels like it's continuing to clean up I think the bigger question. That's raised is the overall macro environment in terms of consumer inflation consumer confidence. If you look at the PMI indices, both in the U S and in Europe . They are both below 50.
Indicating a contraction so we're closely watching those and taking the steps that we can control to make sure we remain competitive and keep our costs under control.
Yes, and on that last point Collyn.
Looking at the business.
Globally, but more on the top line rather than on the manufacturing side, but I know they are closely related case, you want to manufacture close to your customer.
Are you seeing any notable trends that would be diversion tissue locate your Asia region versus the U S versus share up anything standout either accelerating or decelerating.
Decelerating.
I would say at this point nothing is changed.
Changing significantly from our current expectations of growth in the region. I mean, you can see some growth in China of around a more positive GDP, but there is still talk strongly in other regions around potential recessions and everything you read every single day wonders if today's the day when it would start so we still see a lot of uncertainty in.
All three regions and I don't think we're alone in observing that.
Absolutely not no question its an unusually uncertain environment.
Post my last question to Rob.
It's great to see operating cash flow.
It's a positive this quarter year on year.
As we look through the year.
What should we think about.
The businesses ability to continue to improve working capital level of things to drive.
Operating cash flow and free cash flow expansion.
So the biggest impact will come from gross margin improvements, Greg and al.
As we see our gross margin improve.
We'll see.
<unk> impact on our cash flow as well.
Our cash Capex is now in the $65 million to $75 million range, and we have some opportunity to make improvements in working capital, which we are working on it is tied somewhat to being cautious on how much inventory levels. We should carry given that we're not fully out of the supply chain situation.
But having said that there is some improvements we can make in working capital to impact cash flow, but again, the biggest impact will come from our ongoing gross margin improvements in this top line recovers.
Fair message size. Thank you.
Thank you.
Thank you.
Ladies and gentlemen, there are no further questions at this time and this will conclude today's conference you may disconnect your lines and have a great rest of your day.