Q2 2023 Rogers Corporation Earnings Call
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Good afternoon my.
My name is Denise will be a conference operator today.
At this time I would like to welcome everyone to the Rogers Corporation Q2, 'twenty 'twenty earnings Conference call.
I will now turn the call over to your host Steve Campbell Director of Investor Relations. Mr. Haymore, you may begin.
Good afternoon, everyone and welcome to the Rogers Corporation second quarter 2023 earnings Conference call.
The slides for today's call can be found on the investors section of our website along with the news release that was issued earlier today.
Please turn to slide two.
Before we begin I'd like to note that statements in this conference call that are not strictly historical are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and should be considered as subject to 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 statements made today.
Please turn to slide three the discussions during this conference call will also reference certain financial measures that were not prepared in accordance with generally accepted accounting principles reconciliations of those non-GAAP financial measures. The most directly comparable GAAP financial measures can be found in the slide deck for today's call.
Turning to slide four with me today is Colin <unk>, President and CEO and Rob My import senior Vice President and CFO .
I will now turn the call over to Colin.
Thanks, Steve Good afternoon to everyone and thank you for joining us today in.
In Q2, we continued to make good progress towards the cost and profitability improvement targets that we outlined for this year.
We achieved a 34, 5% gross margin in Q2, which was at the high end of our guidance range for the quarter and exceeded the 34% goal. We set in Q4 of last year.
Rogers delivered non-GAAP earnings that exceeded the midpoint of our Q2 guidance due to our operating performance and expense management, despite greater than expected market challenges. Overall, we are pleased with our solid performance and execution in Q2 before discussing the second quarter results in more detail I'll provide an update on the progress we're making.
Related to our key priorities, which we outlined in our March Investor day.
I'll begin on slide five.
As we shared at our Investor Day, we are executing on a three phase plan to achieve breakthrough growth and profitability over the next several years in.
In the restore phase our focus continues to be on driving improvements in our cost structure and returning to historical levels of profitability in recent quarters, We announced a series of actions.
To improve margins and contain operating expenses. We are now seeing the results of these initiatives are 34, 5% gross margin in Q2 is an improvement of 270 basis points compared to the fourth quarter of last year. In addition, we are closely managing operating expenses, while still developing the capabilities to <unk>.
Scaled the organization for growth.
Another vital aspect of the restore phase is bolstering the organization with certain critical skill sets as we discussed on last quarter's earnings call. We have added significant talent to our executive team.
Our latest positioned to be filled as the chief technology officer role and we're excited to announce we have a very experienced CTO joining rogers' later this month.
In addition, we are strengthening other areas of the organization such as supply chain procurement and business development with recent and targeted new hires that will bring tremendous experience to Rogers.
And the accelerate phase key priorities include capitalizing on strong secular tailwind, particularly in the EV space to drive faster top line growth. We expect this growth to come from both existing design wins, which we anticipate ramping up over the next two years and also from an even greater focus on commercial excellence.
To secure new wins.
Little component of the accelerate phase is to ensure we have manufacturing capabilities in place to capitalize on volume growth I'll discuss more in a moment about our recently announced plans to add more capacity in our <unk> business.
In addition, we are also preparing for this next stage of growth by developing the capabilities and business processes needed to enable the organization to scale.
Lastly, in the elevate phase, we anticipate reaping the benefits of the efforts of the restore in accelerate phases to achieve higher levels of sales and profitability.
Turning to slide six I'll provide more details about our exciting <unk> capacity expansion.
Our advanced Keramic substrates are market, leading technologies that provide highly efficient energy conversion solutions for fast growing markets, such as Evs and renewable energy.
Our technology is critical to enabling the growth.
And silicon carbide power modules for these markets are unique substrate and cooling solutions extract heat more efficiently.
Which enables these expensive semiconductor devices to also operate more reliably and effectively this.
This provides significant benefits for our customers in the form of improved EV range and a lower total cost of ownership.
Given the significant benefits that silicon carbide offers to EV manufacturers. It is not surprising to see the number of long term multibillion dollar agreements recently announced by key industry participants.
To support the expansion plans of our customers and the anticipated significant market growth, we announced in may that we will be adding new keramic power substrate capacity in China.
This is in addition to ongoing investments in Germany, both of which will further increase our capacity and capabilities to ensure supply for our global customers.
The first phase of this manufacturing expansion is planned to be completed in 2025 and this new state of the art factory will enable us to shorten lead times and deepen technical collaborations with customers.
The location in China also reinforces our local for local strategy for both domestic and Western Oems operating in Asia.
Factory in China will be modeled off of our flagship production facility in Germany, which will continue to be instrumental to our success.
Our <unk> business has been a trusted partner to leading power module suppliers for decades, and this capacity expansion further strengthens that position.
We currently have sufficient capacity for our other products targeted to the EV market and we will continue to evaluate expansion needs as we move forward.
Next on slide seven I'll touch on the results of the quarter and then highlight some of our recent design wins.
Q2 sales of $238 million decreased by 5% from the prior quarter and were below our guidance forecast from an earnings perspective, we were able to offset the impact of the lower sales by executing on our cost and expense improvement initiatives are 34, 5% gross margin was at the high end of our guidance range.
And adjusted EPS of $1 seven was also above the midpoint of our guidance.
The decline in Q2 revenue was due to a challenging market environment, particularly in general industrial and consumer sales weakness in these markets was broad and span multiple product lines and regions. The declines in these markets were consistent with recent economic data points, which highlight the current downturn in global manufacturing activity and consumer spending.
With parts of Europe , now officially in a recession, a muted recovery in China. Following last year's Covid, Lockdowns and the impacts of higher inflation and interest rates. There are many factors combining to make market conditions challenging.
EV market sales decreased slightly in the second quarter as rapid growth in some segments of our business were offset by OEM production challenges, which limited growth in other areas.
In our <unk> product line, we achieved a second consecutive quarter of record sales and our strong growth has been in line with the overall EV market to meet the increasing demand we continue to unlock.
As much capacity as possible from our factory in Germany and are moving forward quickly on the new factory in China.
Similar to Q1 Rolling power interconnect sales were tempered by lower demand from customers, who are pushed out production ramp schedules due to manufacturing and supply chain challenges.
We are seeing.
A similar dynamic in our EMS business, where growth in sales of our battery cell pads were moderated by production ramp challenges at a large multinational OEM that will use our technology in their vehicles, we expect EMS EV market demand to increase in the second half of the year as the challenges are resolved.
We did see growth in both the portable electronics and aerospace and defense markets in Q2.
In portable electronics, we were encouraged to see a return to growth following several quarters of declines customer signals are pointing towards a further sales increase in Q3, driven by seasonal demand patterns. Although these indications are encouraging it is uncertain how much improvement we will see in Q3, given the challenging economic.
<unk>.
A&D sales also increased versus the prior quarter, primarily from our EMS business.
<unk> was driven by strong demand from commercial aerospace customers, who are moving quickly to boost aircraft production rates.
Next I'll review some of our design wins from the past quarter, beginning with EMS, we secured multiple design wins with Asian Oems for upcoming Foldable smartphones, our urethane materials will provide the high reliability solutions needed for these new generation phones.
These wins highlight our advanced materials and customer collaboration enable us to stay on the leading edge of technology developments we.
We are happy to report that this design win will utilize polyurethane materials from our <unk> factory in South Korea, which resumed operations at the beginning of the year.
And our Aes business unit, we secured a design win in the A&D market with a major prime contractor, our laminate circuit materials will be used in one of the world's most advanced air defense radar systems, which enables precision tracking of potential threats using our proven OEM engagement model, we worked closely with our customers.
To help meet their critical performance and cost targets volume on this program will begin to ramp in 2023 with a program life that is expected to extend for many years to come.
Lastly, we had several new design wins in our <unk> business in the EV space. The largest of these wins was with a tier one auto supplier, who selected our substrate technology to be used in their next generation Silicon carbide power module platform.
This multimillion dollar design win is expected to span more than five years.
On slide eight I will briefly highlight the recent ESG report supplement that we issued.
Roger's commitment to corporate responsibility and sustainability is deeply embedded in our culture, we strive to demonstrate this commitment and both the way we operate and by enabling sustainable end markets, such as electric vehicles and renewable energy.
Some of the highlights of our report supplement include.
Improved reporting quality with third party verification of greenhouse gas emission inventories and extended reporting of employee health and safety metrics.
Safety is one of our core cultural behaviors that Rogers, we have made good progress on improving our safety results in recent years and we remain focused on continuous improvement in this area.
We look forward to publishing a full ESG report in the first half of 2024 and building on our accomplishments as we continue our sustainability journey.
Now I'll turn it over to Rob to discuss our Q2 financial performance in detail.
Thank you Paul and good afternoon, everyone. In Q2, we saw continued global market volatility and slowing demand. This resulted in a lower revenue compared to Q1. However.
However, we had good operational performance that enabled us to improve gross margin and EPS. We are committed to execute on actions to improve our near term performance while.
The remaining focused on the key strategic priorities, which will enable rogers to success in the years to come.
I will now review, our second quarter 2022 results in detail beginning on slide nine.
Q2 sales of $2 31 million declined by 5%.
Versus the prior quarter.
Were below our guidance range.
<unk> margin improved by 180 basis points versus Q1 to 34, 5% and reached the high end of our guidance range.
On a GAAP basis, we had earnings of 96 per share for the quarter, which exceeded the high end of our guidance range on an adjusted basis Q2 earnings were $1 <unk> seven per share, which surpassed the midpoint of our guidance range and increased over 20% from Q1.
Our Q2 margin and EPS results continued our pattern of recent improvement.
We're pleased with the progress thus far and remain committed to driving further profitability.
Turning to slide 10, as we mentioned earlier Q2, net sales were lower mostly due to challenging market conditions.
On a reportable segment basis sales in both Es and EMS business units were lower.
Sales decreased by four 2% to $130 2 million aerospace and defense and industrial sales were higher in Q2, although this was offset by lower EV HEV and <unk> sales.
<unk> sales decreased by six 7% to $95 3 million, primarily from lower general industrial and consumer market sales.
Revenue also decreased from the sale of the natural rubber business in Q1.
As discussed earlier these markets in particular have been impacted by the ongoing slowdown of global economic activity.
This was partially offset by higher portable electronics, and A&D sales, which improved from our Q1 levels.
As stated earlier EV HEV sales in Q2 were moderated by production challenges at specific customers.
<unk> impacted our power interconnect and battery cell path product lines. However, our ceramic substrates business continued to demonstrate strong growth in Q2.
We are closely watching these evolving supply chain and manufacturing challenges and the impact on demand for these products. We remain focused on our long term strategy and investment plans turning to slide 11.
Our gross margin for the second quarter was $79 6 million or 34, 5% of sales.
This was 180 basis point improvement.
Versus the prior quarter and at the top end of our Q2 guidance range.
At the end of 2022, we communicated our commitment to improve our gross margin by 240 basis points and get to 34% by Q2 of 2023.
We're happy to report that we have exceeded that target.
The increase in gross margin since last year resulted from fixed cost reduction actions taken in Q4 22 in Q1, 2023 ongoing factory productivity improvements and overall manufacturing and logistic cost reductions.
Q2, operating profit increased to $28 million or 12, 1% of sales.
The improvement was due to lower operating expenses, lower restructuring and impairment charges and higher other income from insurance recoveries.
Adjusted operating margin was 13, 4% improved by 290 basis points from the prior quarter. The increase in adjusted operating margin resulted from the improvement in gross margin and lower operating expenses versus Q1.
Opex decreased as a result of lower variable compensation costs professional service fees and other administrative costs.
Continuing to slide 12, ending cash at June 30 was approximately $142 million a decrease of $94 million from the end of 2022, and a 52 million decrease from the end of Q1 2023.
The lower cash versus the prior quarter was primarily related to a $60 million discretionary repayment of debt on our revolving credit facility. Since the beginning of this year, we have paid down a total of $85 million on our revolver.
Continuing to invest in our long term strategic initiatives and debt management will remain at the top of our capital allocation priorities.
We remain focused on maintaining the strength and flexibility of our balance sheet.
Capital expenditures were approximately $12 million for the second quarter and $28 million year to date, we expect capital expenditures to be weighted towards the second half of the year and continue to guide in the range of $65 million to $75 million for the year.
Next on slide 13, I will discuss our guidance for the third quarter first net sales are expected to range between $2 30, and $240 million slightly above our Q2 results.
We anticipate the challenging market conditions that we experienced in Q2.
We will persist into the third quarter.
Portable electronics sales are projected to improve in Q3 based on normal seasonal patterns and as a primary reason for the higher sales in Q3.
We are guiding gross margin to be in the range of 34% to 35% for Q3.
Our consistent with our Q2 results at the midpoint of our guidance range.
We anticipate the higher sales volume to be offset by change in product mix.
Earnings per share is expected to range from $22 40, and adjusted EPS from $1 or five $2 25, our GAAP EPS range is higher than our adjusted EPS range due to expected net gains from the sale of two manufacturing facilities that should close in the third quarter.
Both locations were included in the restructuring actions, we announced previously.
We project, our full year tax rate to be around 25%.
Let me mention again, our commitment to improve gross margins and overall profitability in the quarters ahead.
We remain focused on executing our near and long term plan.
I will now turn the call back to the operator for questions.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer.
Session.
If you would like to ask a question. Please press star and then one new tenant from Quito.
Formation term.
<unk> Your line question queue Amy.
You May press Star and then two if you would like to maybe a question from the queue.
So participants using speaker equipment.
We're going to pick up your handset.
Paul Patterson with Fox.
These more participants are limited to two questions at any time, you may rejoin the question queue.
The first question will be half comes from Daniel Moore from CJS Securities. Please go ahead.
Thank you Colin and Brian Good afternoon, Thanks for taking the questions.
Hi, Dan Good afternoon, Steve.
With the margin performance quite impressive, especially in light of the revenue softness.
When we think about some of the expense tightening.
That took place during the quarter in addition to the operating improvements.
Is there are some of those expense reductions temporary some of more permanent in other words.
When revenue does start to snap back.
Are we potentially set up for an even faster ramp in operating leverage and margins or.
Particularly on the gross margin line or are there, perhaps some expenses that may flow back in when revenue returns.
Hey, Dan This is Rob I'll take that.
When we did our Q1 call we said that.
A majority of the improvements we made will kick in more in Q2, we saw some improvements in Q1, but we did say that majority of it will kick in in Q2 and Thats, what youre seeing now.
With regard to your question most of the expense reductions are permanent.
There is some variability with certain things that might be sales related but the major reductions we have made in spending are permanent.
Great very helpful. Rob.
Within the EV space.
The color on some of the opportunities and the expansion of capacity in China Keramic.
Given that discussion should we expect within your kind of core three technologies or product lines within <unk>.
Do you expect <unk> substrates to kind of lead the acceleration when it comes in 'twenty four 'twenty five may be followed by <unk>.
Compression pads and power Interconnects or do you see kind of equal growth an acceleration across all three potentially.
Hi, Dan Collin as we look ahead I would say that certainly kramnik as a very strong position and is growing rapidly.
Leigh and we're very pleased with the last two quarters that had been records, but I would say that we've got strong positions across all of our product lines and EV HEV. So the program wins as we look ahead for compression pads and other gas getting wins are there and we feel good about those.
And we also have some strong program wins with.
With rolling So I think across our product lines, we feel like each will be a strong contributor to our growth and that.
The design wins that we have have really contributed to our decision to go forward to this <unk> expansion in China.
Great great to see the Eunice facility back up and running and obviously capacity filling back up how.
How should we think about.
Into 'twenty four.
In that piece of your business given that.
New business wins and potential.
Potential for.
Additional proliferation and flip phones et cetera.
What's the pipeline of opportunity look like there.
So I would say first of all we are thrilled that our <unk> facility is up and running I had the good fortune of visited several months ago and we've been back onstream since the beginning of the year.
And the reason that fits so well within our strategy as it gives us a footprint in South Korea, which is critical for that part of the world in terms of specific Oems. So we're actually happy in terms of where we are with our <unk> growth. Some of the program win wins have come in even faster than we had thought and it's mostly <unk>.
Round R E Zorba polyurethane technology <unk> is our brand of the materials, we produce in our Utah facilities that worked very well and flip phones and some of the newer technology. So we've gotten back on our feet there and the program wins look good and there.
There'll be a very contributing factor to how we do in portable electronics going forward, we're really happy to have them back and up and running.
Okay last for me is just maybe a question on seasonality.
And Rob I appreciate you pointing out sort of the delta between Q2, and Q3 being mainly they expected seasonal ramp in portable electronics historically going back Q4.
It has typically been a little bit lighter in terms of revenue and profitability.
Maybe talk to what your expectations look like from a seasonal perspective.
In the back half of the year.
So Dan we don't guide Q4 as you know.
But some of that pattern.
<unk> bin.
Change quite a bit with the with the Covid situation and the normal seasonality of the big ramp up we see in Q3 for portable electronics in particular, sometimes stretches into Q4, two building up to the Chinese new year build.
So those historic patterns are.
Changed a bit and outside that we have continuing operational improvement and raw material procurement savings and other initiatives in the works, which we hope will continue to improve profitability beyond Q3.
Very helpful I'll jump back with any follow ups. Thank you.
Thanks, Dan Thank you.
The next question comes from Craig Ellis from B Riley Securities. Please go ahead.
Hi, This is Nathan Waddell, calling in for Craig Ellis. Thanks for taking my questions to start I was hoping you could provide a little additional color on your capacity expansion in China.
In terms of increasing capacity.
It's time to ramp and how this influences your revenue ramp.
Yes al.
Start and maybe Rob could could help out here so.
But I would say about our capacity expansion for our <unk> technology is.
I will first step back and mentioned that for the other technologies, we sell into the EV HEV space and other areas that we've already added capacity and we're in a good position to capture growth, but what we see in the ceramic substrate market.
Is a lot of growth, particularly in China. So our model would be in China for China or local for local as I said and we've worked very closely with.
Our teams and our downstream customers in terms of what the demand profile looks like and with the divine design wins, we have it's made complete sense for us to have our next factory for Keramic technology in China, which won't take away from what we're doing in Germany that is still our flagship facility in very important for us but we.
We see a lot of growth coming in China, and we need to be on the ground there locally to capture it.
In terms of.
Timing will be up and running by the end of 2025.
Gonna have a phased approach so phase one will be 2025, but we will.
Put in the right capital so that we can expand it in several different phases as our demand continues to increase so we won't Miss Miss out on the growth.
Thank you that's really helpful.
Segment Wise can you speak to.
And if you're sub segment details in particular.
<unk>.
If youre seeing any particular strength.
More broadly.
What segments are you comfortable and in what segments are.
Do you think we're at or near cyclical bottom and where do you.
Continue to see risk.
So I would say the overall question of risk, maybe maybe I'd start with just the macroeconomic level. So.
We read the data we've heard other companies reporting we've talked to customers and in general you just have a lot of challenges out there from a macro environmental perspective, so both the U S and China have.
PMI indices that are below 50, indicating contraction you've got pieces of Europe countries, such as Germany in recession, we have high inflation.
And I think there's some caution out there in terms of consumer spending so the headwinds that are impacting the macro economy I think are pretty much global and from our perspective, and we're global in terms of our sales where we're about.
Roughly a third a third a third U S Asia and Europe , So from a specific end market segment.
We have great position in EV, HEV, and while things may be a little bit.
Choppy there because in some cases downstream Oems can't get the materials, they need to ramp and we've got to be patient and wait for that to happen. We feel very good about that same for renewable energy, which continues to be in good shape for us and then for portable electronics, you get mixed reviews from the market, but in our case.
I would say our customer mix and where we participate in higher end phones as a as a strength for us there. So I would say those are some of the areas, where we feel quite strong we do see some general softness in our general industrial business several different end market segments, there and we've had a bit of a soft.
Quarter, I would say in consumer products, where consumer spending has tamped down by.
The.
I would say high inflation, but one thing we like about our portfolio as we participate in many different end segments in many different geographies. So we feel like we have enough diversification.
When one area is down we've got other areas that can help keep us moving forward.
Alright.
Absolutely. Thank you very much.
No problem.
Yeah.
Thank you.
Just a reminder, if you would like to ask a question. Please press star one now.
They seem to have any further questions.
We have a follow up question from Daniel Moore from CJS Securities.
No sorry, let me just hop off mute there.
Thanks for the follow up.
The capital allocation question obviously.
Pay down a nice chunk of debt.
During the quarter and our balance sheet remains rock solid in your long term targets imply free cash flow to reach 130 $150 million later in the period.
What does the M&A pipeline look like.
Are you thinking about along those lines are still really focused on.
The sort of 2023.
Phase of your plan right now.
And what are your sort of expected primary expected uses of capital over the next sort of two to three years.
If you don't identify attractive acquisition targets.
So I can I can start that then and I'm sure a call and we will have.
Points to add so so youre right, maintaining the strength and flexibility of our balance sheet is a key priority that management goes along with that.
This is the reason why we have been focused on paying down debt and investing in our organic expansion.
We extended the maturity of our credit facility for five more years as you know earlier this year.
So maintaining that flexibility is very important inorganic growth is certainly a key part of our strategy.
And it is important to us.
And B are very focused on that with.
With the cash generation that we expect with the organic growth and.
Profitability improvements.
The priorities continue to be invest in ourself, both in Capex and also in building the capabilities.
Maintaining the balance sheet strength in organic growth and then returning cash back to shareholders. So all of those will be looked at as we expand our cash generation here.
And then lastly go ahead. Please sir thanks, Colin I was just going to add around M&A that.
The four prongs of our strategy market facing innovation operational excellence M&A remains a key fourth pillar for us.
And we have done I think a really good job reconstituting, our M&A pipeline.
And we have I would say some very interesting ideas nothing to share at this moment, but M&A has been a key piece of Rogers a strategy in the past we have a good track record of acquiring and integrating businesses.
And we don't look for that to change in the future.
And if I can just make one quick comment I talked about our <unk> facility coming on end of 2000.
And 25 I had meant to say end of 2024 for phase one and then up and running in 2025. So just wanted to clarify that for everybody.
Terrific and while you're at it.
Just ballpark what the cost of the new facility at least phase one would look like from a capex perspective.
So thats included in the projections that we have shared Dan so including that we expect our predictions our capex investment to be in the 7% to 8% going forward.
So for the first phase I would think it's.
And the 30% to $35 million range.
Perfect Alright, Thank you again.
Thank you.
And gentlemen, just a final reminder, if you would like to own.
Please press Star then one.
For the moment as history has any follow up questions.
At this stage there are no further questions.
On behalf of Raj Corporation Corporation. Thank you for joining US today you may now disconnect your lines.
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