Q3 2023 Rogers Corp Earnings Call

October 26, 2023

[music].

Good afternoon, My name is Somalia, and I'll be your conference operator today at this time I would like to welcome everyone to the Rogers Corporation Q3, 2023 earnings Conference call.

Speaker 1: transcript

Speaker 1: Good afternoon, my name is Shamali and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Q3 2023 Ernest Conference call.

I'll now turn the call over to your host Mr. Steve Haymore director of Investor Relations. Mr. Haymore, you may begin.

Speaker 1: transcript

Speaker 1: I'll now turn the call over to your host, Mr. Steve Heymore, Director of Investi Relations. Mr. Heymore, you may begin.

Speaker 2: transcript

Speaker 2: Good afternoon, everyone, and welcome to the Rogers Corporation third quarter 2023 earnings conference call the slides for today's call can be found on the investor section of our website, along with the news release that was issued earlier today.

Good afternoon, everyone and welcome to the Rogers Corporation third 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 would like to note that statements in this conference call that are not strictly historical are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in rogers' operations and.

Speaker 2: transcript

Speaker 2: 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 Security's litigation reform act of 1995 and should be considered as subject to the many uncertainties that exist in Rogers operations and environments.

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Speaker 2: transcript

Speaker 2: These uncertainties include economic conditions, market demands, and competitive facts.

These uncertainties include economic conditions market demands and competitive factors.

Speaker 2: transcript

Speaker 2: Such factors could cause actual results to differ materially from those in any forward looking statement made today.

Such factors could cause actual results to differ materially from those in any forward looking statements made today.

Please turn to slide three.

Speaker 2: transcript

Speaker 2: The discussions during the conference call will also reference certain financial measures that are not prepared in accordance with generally accepted accounting.

The discussions during the conference call will also reference certain financial measures that are that were not prepared in accordance with generally accepted accounting principles.

Speaker 2: transcript

Speaker 2: Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide.

Conciliations 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 My important senior Vice President and CFO.

Speaker 2: transcript

Speaker 2: Turning to slide four with me today is Colin Gavea, President and CEO , and Rob Mayem Poris, Senior Vice President and CFO . I will now turn the call over to Colin.

I will now turn the call over to Colin.

Speaker 2: transcript

Speaker 2: Thanks Steve, good afternoon to everyone and thank you for joining us today.

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

Before we turn to the next slide I will give a quick summary of our performance during the quarter in Q3, we again made good progress towards the cost improvement targets. We set for this year gross margin was 35, 1%, which was above the high end of our guidance range and exceeded the target. We set in Q1 this margin expansion and lower adjusted operating.

Speaker 2: transcript

Speaker 2: Before we turn to the next slide, I'll give a quick summary of our performance during the quarter.

Speaker 2: transcript

Speaker 2: In Q3, we again made good progress towards the cost improvement targets we set for this year. Gross margin was 35.1%, which was above the high end of our guidance range and exceeded the target we set in Q1. This margin expansion and lower adjusted operating expense.

<unk> drove adjusted EPS to the high end of our guidance range and contributed to the stronger cash flow generated in the quarter.

Speaker 2: transcript

Speaker 2: Drove adjusted EPS to the high end of our guidance range and contributed to the stronger cash flow generated in the quarter.

We achieved these margin improvements despite continued global economic headwinds impacting market demand later in the presentation I will elaborate more on these market headwinds and our Q3 results, but first I want to highlight the progress we are making to strengthen the company as we execute on our restore initiatives introduced during our Q1 Investor day.

Speaker 2: transcript

Speaker 2: We achieved these margin improvements despite continued global economic headwinds impacting market demand. Later in the presentation, I will elaborate more on these market headwinds and our Q3 results. But first, I want to highlight the progress we are making to strengthen the company as we execute on our restore initiatives introduced during our Q1 investor day.

Please turn to slide five.

Speaker 2: transcript

Speaker 2: Rogers has a history of capitalizing on secular trends in fast-growing markets. We do this by leveraging our core technology and product strength in existing markets and applying it to new growth areas. One example of this is the EV market, where our sales have increased rapidly over the past several years.

<unk> has a history of capitalizing on secular trends in fast growing markets. We do this by leveraging our core technology and product strength in existing markets and applying it to new growth areas. One example of this is the EV market, where our sales have increased rapidly over the past several years.

Speaker 2: transcript

Speaker 2: With significant growth ahead, we are adding new capacity and our ceramic power substrate business to support our customers. We have secured many design and wins for ceramic this year, and are a momentum in this base continues. For example, last quarter, a major power module supplier designed in our advanced substrate technology and their high performance silicon carbide power modules. This technology will be used in the main inverter of a major European automotive OEM.

With significant growth ahead, we are adding new capacity in our keramic power substrate business to support our customers. We have secured many design wins for <unk> This year and our momentum in this space continues for example last quarter a major power module supplier. It designed in our advanced substrate technology and our high performance Silicon carbide.

Power modules. This technology will be used in the main inverter of a major European automotive Oems.

Speaker 2: transcript

Speaker 2: This win is one of the largest in our history and reflects the tremendous growth in silicon carbide solutions for EVs and the need for our substrate technology.

This win.

As one of the largest in our history and reflects the tremendous growth in silicon carbide solutions for Evs and the need for our substrate technology.

Speaker 2: transcript

Speaker 2: We also have had good success in the EV battery market. Recently, we secured two design wins with a leading Asian and North American OEM, respectively. These strategic customers will utilize our compression pad solutions in the battery modules for some of their leading platforms.

We also have had good success in the EV battery market recently, we secured two design wins with a leading Asian and North American OEM, respectively.

These strategic customers will utilize our compression pad solutions and the battery modules for some of their leading platforms.

Speaker 2: transcript

Speaker 2: our technology was selected for its proven performance, consistency, and reliability. Both design wins are projected to extend over multiple years.

Our technology was selected for its proven performance consistency and reliability. Both design wins are projected to extend over multiple years.

Speaker 2: transcript

Speaker 2: Second, product and process innovation leadership are critical to our success and growth potential. We highlighted several examples of product innovation at our investor day in March, including the latest RF materials that enable antenna miniaturization for defense applications, advanced polarir-thane materials that improve EV battery performance, and our power substrates, which deliver integrated cooling solutions.

Second product and process innovation leadership are critical to our success and growth potential we highlighted several examples of product innovation at our Investor day in March, including our latest RF materials that enable and tenant miniaturization for defense applications advanced polo urethane materials that improve EV battery performance and Repower.

Streets, which deliver integrated cooling solutions.

In the area of process innovation, we have a significant body of work underway in both aes and EMS to improve manufacturing performance reliability and operational efficiencies improving operational effectiveness remains a key component to our long term strategy.

Speaker 2: transcript

Speaker 2: In the area of process innovation, we have a significant body of work underway in both AES and EMS to improve manufacturing performance, reliability, and operational efficiencies. Improving operational effectiveness remains a key component to our long-term strategy.

Throughout this year focusing on key leadership hires has been a priority. The senior leadership team is now complete with Griffin gap, joining Rogers as Chief Technology Officer Griffin comes to Us from Henkel, where he was the global head of innovation for Henkels adhesives automotive OEM business Griffin has extensive R&D leadership experience at large multinational.

Speaker 2: transcript

Speaker 2: Throughout this year, focusing on key leadership hires has been a priority. The senior leadership team is now complete, with Griffin Gaffert joining Rogers as chief technology officer. Griffin comes to us from Henkel, where he was the global head of innovation for Henkel's adhesives automotive OEM business. Griffin has extensive R&D leadership experience at large multinational companies driving next-generation technology. His deep expertise in advanced electronic and elastomeric materials makes him a natural fit for this role.

Companies driving next generation technology has deep expertise and advanced electronic and elastomer materials makes him a natural fit for this role.

Shamali: Good afternoon. My name is Shamali, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Q3 2023 earnings conference call.

Third we continue to focus on operational excellence to drive profitability improvements as I touched on earlier, we have made substantial progress here, we've improved gross margins and three consecutive quarters and are not letting up on our efforts with strengthened operations and supply chain leadership, we are focused on driving procurement savings yield and scrap improvements.

Speaker 2: transcript

Speaker 2: Third, we continue to focus on operational excellence to drive profitability improvements. As I touched on earlier, we have made substantial progress here. We have improved gross margins in three consecutive quarters and are not letting up on our efforts. With strengthened operations and supply chain leadership, we are focused on driving procurement savings, yielding craft improvements, and other initiatives in the options supply chain space.

Shamali: I will now turn the call over to your host, Mr. Steve Haymore, Director of Investi Relations. Mr. Haymore, you may begin.

Steve Haymore: Good afternoon, everyone, and welcome to the Rogers Corporation third quarter 2023 earnings conference call. The slides for today's call can be found on the Investor section of our website along with the news release that was issued earlier today. Please turn to slide two.

<unk> and other initiatives in the ops and supply chain space.

Speaker 2: transcript

Speaker 2: Lastly, I'll touch on synergistic M&A, where we are focusing on companies with differentiated technologies to complement our existing product portfolio.

Lastly, I'll touch on synergistic M&A, where we are focusing on companies with differentiated technologies that complement our existing product portfolio.

Steve Haymore: 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 Security's Litigation Reform Act of 1995 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.

Speaker 2: transcript

Speaker 2: Over the past nine months, we have bolstered our business development organization and have reinvigorated our pipeline of potential acquisitions. The timing of future acquisitions will be subject to many factors, but it remains an important component of our growth plan.

Over the past nine months, we have bolstered our business development organization and a reinvigorated our pipeline of potential acquisitions, the timing of future acquisitions will be subject to many factors, but it remains an important component of our growth plans.

Speaker 2: transcript

Speaker 2: Ten months into my tenure as CEO , we have made great progress in the restore phase that we described in our March Investor Day.

10 months into my tenure as CEO, we have made great progress in the restore phase that we described in our March Investor Day.

We have added impressive talent to the organization achieved significant improvement in our margins and secured many new design wins. There is still much work ahead to accelerate the growth of the business, but we remain confident in our strategy and our ability to position Rogers for success.

Speaker 2: transcript

Speaker 2: We have added impressive talent to the organization to achieve significant improvement in our margins and secured many new design wins. There was still much work ahead to accelerate the growth of the business, but we remained confident in our strategy and our ability to position Rogers for success.

Steve Haymore: The discussions during the conference call will also reference certain financial measures that are that we're not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-gap financial measures to the most directly comparable gap financial measures can be found in the slide deck for today's call.

Speaker 2: transcript

Speaker 2: Next, on slide six, I'll provide an overview of our third quarter result.

Next on slide six I'll provide an overview of our third quarter results.

Speaker 2: transcript

Speaker 2: Q3 sales of 229 million will basically flat to the prior quarter and slightly below our guidance forecast due to the challenging macro environment. Our gross margin improved to 35.1%. And this result, along with controlling operating expenses, grow adjusted earnings per share to the top end of our guidance range.

Q3 sales of $229 million were basically flat to the prior quarter and slightly below our guidance forecast due to the challenging macro environment. Our gross margin improved to 35, 1% and this result, along with controlling operating expenses drove adjusted earnings per share to the top end of our guidance range.

Steve Haymore: Turning to slide four, with me today is Colin Gavea, President and CEO, and Rob Maimporis, Senior Vice President and CFO.

Steve Haymore: I will now turn the call over to Colin. Thanks, Steve.

Colin Gavea: I will now turn the call over to Colin. Thanks, Steve. Good afternoon to everyone, and thank you for joining us today.

Turning to our market results I'll begin with industrial sales the largest component of our core markets.

Speaker 2: transcript

Speaker 2: Turning to our market results, I'll begin with industrial sales, the largest component of our core market.

Colin Gavea: Good afternoon to everyone, and thank you for joining us today. Before we turn to the next slide, I'll give a quick summary of our performance during the quarter. In Q3, we again made good progress towards the cost improvement targets we set for this year. Gross margin was 35.1%, which was above the high end of our guidance range and exceeded the target we set in Q1. This margin expansion and lower adjusted operating expenses drove adjusted EPS to the high end of our guidance range and contributed to the stronger cash flow generated in the quarter. We achieved these margin improvements despite continued global economic headwinds impacting market demand. Later in the presentation, I will elaborate more on these market headwinds and our Q3 results.

Colin Gavea: Before we turn to the next slide, I'll give a quick summary of our performance during the quarter. In Q3, we again made good progress towards the cost improvement targets we set for this year. Gross margin was 35.1%, which was above the high end of our guidance range and exceeded the target we set in Q1. This margin expansion and lower adjusted operating expenses drove adjusted EPS to the high end of our guidance range and contributed to the stronger cash flow generated in the quarter. We achieved these margin improvements despite continued global economic headwinds impacting market demand. Later in the presentation, I will elaborate more on these market headwinds and our Q3 results.

Speaker 2: transcript

Speaker 2: Q3 industrial sales decline versus the prior quarter and reflected the ongoing challenges faced by global manufacturer.

Q3, industrial sales declined versus the prior quarter and reflected the ongoing challenges faced by global manufacturers.

Speaker 2: transcript

Speaker 2: Economic activity in the manufacturing sector has now contracted 11 consecutive months in the U.S. and 15 consecutive months in the EU. China factory activity recently saw its first expansion in six months, but the overall demand environment remains weak and it is uncertain when we might see meaningful improvements.

Economic activity in the manufacturing sector has now contracted 11 consecutive months in the U S and 15 consecutive months in the EU.

China factory activity recently saw its first expansion in six months, but the overall demand environment remains weak and it is uncertain when we might see meaningful improvement.

Speaker 2: transcript

Speaker 2: In our high-growth markets, portable electronics increased sharply in Q3 versus the prior quarter due to strong demand for new smartphone introductions and typical seasonal order patterns. We continue to have leading technology in high-end phones that provide robust protection to improve device reliability and performance.

In our high growth markets portable electronics increased sharply in Q3 versus the prior quarter due to strong demand for new smartphone introductions and typical seasonal order patterns. We continue to have leading technology and high end phones that provide robust protection to improve device reliability and performance.

Colin Gavea: But first, I want to highlight the progress we are making to strengthen the company as we execute on our restore initiatives introduced during our Q1 investor day. Please turn to slide five. Rogers has a history of capitalizing on secular trends in fast growing markets. We do this by leveraging our core technology and product strength and existing markets and applying it to new growth areas. One example of this is the EV market where our sales have increased rapidly over the past several years.

Renewable energy sales declined slightly due to customer order patterns after very strong sales in the second quarter.

Speaker 2: transcript

Speaker 2: Renewable energy sales declined slightly due to customer order patterns after very strong sales in the second quarter.

Speaker 2: transcript

Speaker 2: For the year, sales have increased more than 30%, reflecting strong demand for our power substrates for solar and wind inverters. We expect this to continue to be a strong opportunity for growth moving forward.

For the year sales have increased more than 30%, reflecting strong demand for our power substrates for solar and wind Inverters. We expect this to continue to be a strong opportunity for growth moving forward.

Rounding out our high growth markets Aerospace and defense sales were flat to the prior quarter and a das sales declined year to date <unk> sales have grown at a high single digit rate and sales are typically stronger in the first half of the year.

Speaker 2: transcript

Speaker 2: Rounding out our high growth markets, aerospace and defense sales were flat to the prior quarter and ADAS sales declined. Year-to-date ADAS sales have grown at a high single-digit rate and sales are typically stronger in the first half of the year.

Colin Gavea: With significant growth ahead, we are adding new capacity and our ceramic power substrate business to support our customers. We have secured many design and wins for ceramic this year and are a momentum in this base continues. For example, last quarter, a major power module supplier designed in our advanced substrate technology and their high performance silicon carbide power modules. This technology will be used in the main inverter of a major European automotive OEM.

Speaker 2: transcript

Speaker 2: Our significant growth market tier, comprised of EV HEV sales, declined versus Q2, primarily due to lower power substrate sales as customers managed inventory levels. We anticipate EV growth.

Our significant growth markets here comprised of EV HEV sales declined versus Q2, primarily due to lower power substrate sales as customers managed inventory levels. We.

We anticipate <unk> growth to resume in Q4 on.

Colin Gavea: This win is one of the largest in our history and reflects the tremendous growth in silicon carbide solutions for EVs and the need for our substrate technology. We also have had good success in the EV battery market. Recently we secured two design wins with a leading Asian and North American OEM respectively. These strategic customers will utilize our compression pad solutions in the battery modules for some of their leading platforms. Our technology was selected for its proven performance, consistency, and reliability. Both design wins are projected to extend over multiple years.

Speaker 2: transcript

Speaker 2: On a year-to-date basis, our power substrate sales are significantly higher versus the prior year.

On a year to date basis, our power substrate sales are significantly higher versus the prior year.

Speaker 2: transcript

Speaker 2: EMS and Rolling's EV sales were up slightly versus the prior quarter.

MS enrolling EV sales were up slightly versus the prior quarter.

EV sales growth for these product lines continues to be dependent on certain customers, who are working through production ramp challenges or high inventory levels.

Speaker 2: transcript

Speaker 2: EV sales growth for these product clients continues to be dependent on certain customers who are working through production ramp challenges or high inventory levels.

Speaker 2: transcript

Speaker 2: Turning to slide 7, I'll next highlight some of the drivers we see leading to higher sales in the coming quarters. Some of these factors can be controlled directly and others are subject to improved market conditions.

Turning to slide seven I'll next highlight some of the drivers we see leading to higher sales in the coming quarters. Some of these factors can be controlled directly and others are subject to improved market conditions.

First we have seen a significant impact to 2023 sales from lower overall demand in the general industrial and portable electronics markets.

Speaker 2: transcript

Speaker 2: First, we have seen a significant impact to 2023 sales from lower overall demand in the general industrial and portable electronics market.

Colin Gavea: Second, product and process innovation leadership are critical to our success and growth potential. We highlighted several examples of product innovation at our investor day in March, including the latest RF materials that enable antenna miniaturization for defense applications, advanced polyurethane materials that improve EV battery performance, and our power substrates, which deliver integrated cooling solutions. In the area of process innovation, we have a significant body of work underway in both AES and EMS to improve manufacturing performance, reliability, and operational efficiencies.

These two markets represent close to 40% of Rogers as sales as discussed earlier industrial sales declined significantly in Q3 and are down for the full year, although our portable electronics sales improved in crude three.

Speaker 2: transcript

Speaker 2: These two markets represent close to 40% of Rogers' sales. As discussed earlier, industrial sales declined significantly in Q3 and are down for the full year. Although our portable electronics sales improved in Q3,

Speaker 2: transcript

Speaker 2: Year-to-date sales are behind prior year. This is reflective of the global smartphone market, which is at its lowest point in a decade.

Year to date sales are behind prior year.

This is reflective of the global smartphone market, which is at its lowest point in a decade.

Speaker 2: transcript

Speaker 2: Worldwide sales of tablets and smart speakers are also projected to be down sharply with declines of 15% or more versus prior year.

Worldwide sales of tablets and smart speakers are also projected to be down sharply with declines of 15% or more versus prior year.

Colin Gavea: Improving operational effectiveness remains a key component to our long-term strategy. Throughout this year, focusing on key leadership hires has been a priority. The senior leadership team is now complete, with Griffin Gapper joining Rogers as Chief Technology Officer. Griffin comes to us from Henkel, where he was the global head of innovation for Henkel's adhesive automotive OEM business. Griffin has extensive R&D leadership experience at large multinational companies driving next-generation technology. His deep expertise in advanced electronic and the last American materials makes him a natural fit for this role.

Visibility is limited to when demand may improve.

Speaker 2: transcript

Speaker 2: Visibility is limited to when demand may improve, but when these markets do improve, the benefit to our P&L will be meaningful.

Colin Gavea: Throughout this year, focusing on key leadership hires has been a priority. The senior leadership team is now complete, with Griffin Gapper joining Rogers as Chief Technology Officer. Griffin comes to us from Henkel, where he was the global head of innovation for Henkel's adhesive automotive OEM business. Griffin has extensive R&D leadership experience at large multinational companies driving next-generation technology. His deep expertise in advanced electronic and the last American materials makes him a natural fit for this role.

But when these markets do improve the benefit to our P&L will be meaningful.

Next we expect increased sales in coming quarters associated with design wins in the EV space. This is particularly the case in our EMS business, where demand from certain customers is expected to grow as vehicle production rates increase.

Speaker 2: transcript

Speaker 2: Next, we expect increased sales in coming quarters associated with design wins in the EV space. This is particularly the case in our EMS business, where demand from certain customers is expected to grow as vehicle production rates increase. The magnitude and timing of these incremental sales will be subject to how quickly the production ramp proceeds.

The magnitude and timing of these incremental sales will be subject to how quickly the production ramp proceeds.

The remaining two items relate to production capacity for our Keramic power substrate manufacturing the process innovation efforts referenced earlier are helping keramic unlock additional output at our factory in Germany, enabling us to increase sales in 2020 for this incremental capacity will support our customers until our new China facility comes online.

Speaker 2: transcript

Speaker 2: The remaining two items relate to production capacity for our ceramic power substrate manufacturing. The process innovation efforts referenced earlier are helping ceramic unlock additional output at our factory in Germany, enabling us to increase sales in 2024. This incremental capacity will support our customers until our new China facility comes online, which we expect will be in late 2024.

Third, we continue to focus on operational excellence to drive profitability improvements. As I touched on earlier, we have made substantial progress here. We have improved gross margins in three consecutive quarters and are not letting up on our efforts. With strengthened operations and supply chain leadership, we are focused on driving procurement savings, yielding craft improvements, and other initiatives in the option supply chain space.

Colin Gavea: Third, we continue to focus on operational excellence to drive profitability improvements. As I touched on earlier, we have made substantial progress here. We have improved gross margins in three consecutive quarters and are not letting up on our efforts. With strengthened operations and supply chain leadership, we are focused on driving procurement savings, yielding craft improvements, and other initiatives in the option supply chain space.

<unk>, which we expect will be in late 2024.

Speaker 2: transcript

Speaker 2: Of all these activities, the new keramic plant is expected to provide the most significant boost to revenue.

Of all these activities the new Keramic plant is expected to provide the most significant boost to revenue.

Colin Gavea: Lastly, I'll touch on synergistic M&A, where we are focusing on companies with differentiated technologies that complement our existing product portfolio. Over the past nine months, we have bolstered our business development organization and have reinvigorated our pipeline of potential acquisitions. The timing of future acquisitions will be subject to many factors, but it remains an important component of our growth plans.

Speaker 2: transcript

Speaker 2: This is not a complete list, but highlights some of the key drivers of future growth.

This is not a complete list, but highlight some of the key drivers of future growth.

Speaker 2: transcript

Speaker 2: As this relates to the 2025 targets that we outlined at our Investor Day, we are not making any updates at this point. We continue to focus on executing on the key priorities in our restore, accelerate, and elevate phases to achieve the targets we set, including annual sales in the range of 1.2 to 1.3 billion.

As this relates to the 2025 targets that we outlined at our Investor day, we are not making any updates at this point, we continue to focus on executing on the key priorities and our restore accelerate and elevate phases to achieve the targets, we set including annual sales in the range of one two to $1 3 billion.

Colin Gavea: Ten months into my tenure as CEO, we have made great progress in the restore phase that we described in our March investor day. We have added impressive talent to the organization, achieved significant improvement in our margins, and secured many new design wins. There was still much work ahead to accelerate the growth of the business, but we remain confident in our strategy and our ability to position Rogers for success.

Speaker 2: transcript

Speaker 2: When we set this top-line target in Q1 of this year, it was based on two key assumptions. The first is the rate at which design wins would begin to ramp in 2024 and 2025. Second, it was based on a certain level of global economic recovery and growth that would return in 2024 and continue into 2025.

When we set this topline target in Q1 of this year. It was based on two key assumptions. The first is the rate at which design wins will begin to ramp in 2024 and 2025 second it was based on a certain level of global economic recovery and growth that would return in 'twenty four and continue into 'twenty five.

It is still too early to know how these factors will evolve over the coming two years relative to our expectations. We expect to have a better view in the coming months, which will inform any potential updates to our 2025 targets.

Speaker 2: transcript

Speaker 2: It's still too early to know how these factors will evolve over the coming two years relative to our expectations. We expect to have a better view in the coming months, which will inform any potential updates to our 2025 target.

Colin Gavea: Next, on slide six, I'll provide an overview of our third quarter results. Q3 sales of 229 million will basically flat to the prior quarter and slightly below our guidance forecast due to the challenging macro environment. Our growth margin improved to 35.1%, and this result, along with controlling operating expenses, grow adjusted earnings per share to the top end of our guidance range.

Speaker 2: transcript

In summary, we continue to execute on our plans and proven strategy, even as market conditions remain challenging we're making good progress in the areas that we can control we are securing new design wins, improving operating costs and managing operating expenses. We've added capacity in many different product lines to support our customers and have improved the organization with <unk>.

Colin Gavea: Turning to our market results, I'll begin with industrial sales, the largest component of our core markets. Q3 industrial sales decline versus the prior quarter and reflected the ongoing challenges faced by global manufacturers. Economic activity in the manufacturing sector has now contracted 11 consecutive months in the US and 15 consecutive months in the EU. China factory activity recently saw its first expansion in six months, but the overall demand environment remains weak and it is uncertain when we might see meaningful improvement.

<unk> leadership capabilities and the tools needed to execute on our strategy.

Speaker 2: transcript

Speaker 2: Now I'll turn it over to Ram to discuss our Q3 financial performance and Q4 outcome.

Now I'll turn it over to Ron to discuss our Q3 financial performance and Q4 outlook.

Thank you Colin and good afternoon, everyone building on what Colin stated earlier.

Speaker 3: transcript

Speaker 3: Thank you, Colin. And good afternoon, everyone. Building on what Colin stated earlier, despite difficult market conditions, we have accomplished a great deal over the course of this year. We have kept our focus on improving profitability and cash flow. We are also committed to making the investments necessary to prepare the business for long-term growth. These improvements include driving gross margin higher by 350 basis points compared to Q3 of 2022.

Despite difficult market conditions, we have accomplished a great deal over the course of this year.

Our focus on improving profitability and cash flow were all.

Colin Gavea: In our high growth markets, portable electronics increase sharply in Q3 versus the prior quarter due to strong demand for new smartphone, introductions, and typical seasonal order patterns. We continue to have leading technology and high-end phones that provide robust protection to improve device reliability and performance. Renewable energy sales decline slightly due to customer order patterns after very strong sales in the second quarter. For the year, sales have increased more than 30 percent, reflecting strong demand for our power substrates for solar and wind inverters. We expect this to continue to be a strong opportunity for growth moving forward.

We're committed to making the investments necessary to prepare the business for long term growth. These improvements include driving gross margin higher by 350 basis points compared to Q3 of 2022.

Speaker 3: transcript

Speaker 3: achieving an adjusted EBITDA margins of nearly 20% at 375 basis points improvement over the same time period.

Achieving an adjusted EBITDA margins of nearly 20% a 375 basis points improvement over the same time period.

Speaker 3: transcript

Speaker 3: IRCAST generation that has allowed us to invest in capacity and capabilities for growth while paying down debt.

Higher cash generation that has allowed us to invest in capacity and capabilities for growth, while paying down debt.

Let me now review, our third quarter 2023 results.

Speaker 3: transcript

Speaker 3: Let me now review our third quarter 2023 results in detail, beginning on slide 8. Q3 sales of 229 million declined by less than 1 percent versus the prior quarter and were slightly below our guidance range. Gross margin of 35.1 percent improved 60 basis points versus Q2 and exceeded the high end of our guidance expectation.

Detail beginning on slide eight Q3 sales of $229 million declined by less than 1% versus the prior quarter and was slightly below our guidance range.

Colin Gavea: Rounding out our high growth markets, aerospace and defense sales reflect to the prior quarter in ADAS sales declined. Year-to-date ADAS sales have grown at a high single digit rate and sales are typically stronger in the first half of the year. Our significant growth market tier comprised of EVA-TV sales declined versus Q2 primarily due to lower power substrate sales as customers managed inventory levels. We anticipate EV growth to resume in Q4. On a year-to-date basis, our power substrate sales are significantly higher versus the prior year. EMS and rolling EV sales were up slightly versus the prior quarter. EV sales growth for these product clients continues to be dependent on certain customers who are working through production ramp challenges or high inventory levels.

<unk> margin of 35, 1% improved 60 basis points versus Q2 and exceeded the high end of our guidance expectation.

Speaker 3: transcript

Speaker 3: On a gap basis, earnings per share was $1.02, slightly below the range due to the timing of the expected sale of an asset held for sale.

On a GAAP basis.

Earnings per share was $1 <unk> slightly below the range due to the timing of the expected sale of an asset held for sale.

Speaker 3: transcript

Speaker 3: Adjusted earnings per share of $1.24 increased by 15% sequentially and was at the top end of our guide.

Adjusted earnings per share of dollars 24 increased by 15, 15% sequentially.

And was at the top end of our guidance range.

We've made good progress in 2023, with our margins and adjusted EPS.

Speaker 3: transcript

Speaker 3: We have made good progress in 2023 with our margins and adjusted EPS. We remain intently focused on driving further profitability improvement.

Intensely focused on driving further profitability improvements.

Colin Gavea: Turning to slide seven, on next highlights, some of the drivers we see leading to higher sales in the coming quarters. Some of these factors can be controlled directly and others are subject to improved market conditions. First, we have seen a significant impact to 2,023 sales from lower overall demand in the general industrial and portable electronics markets. These two markets represent close to 40% of Rodgers' sales. As discussed earlier, industrial sales decline significantly in Q3 and are down for the full year.

Turning to slide nine I'll discuss Q3 net sales in greater detail.

Speaker 3: transcript

Speaker 3: Turning to slide 9, I'll discuss Q3 net sales in greater detail.

Speaker 3: transcript

Speaker 3: The slight decline in total sales was due to lower volume of approximately 900,000 and unfavorable foreign currency fluctuations of around 700,000.

The slight decline in total sales was due to lower volume of approximately 900000 and unfavorable foreign currency fluctuations of around 700000.

Speaker 3: transcript

Speaker 3: On a reportable segment basis, AES sales decreased from the prior quarter by 2.9% to 126.4 million.

On a reportable segment basis sales decreased from the prior quarter by two 9% to $126 4 million.

Speaker 3: transcript

Speaker 3: The less than 4 million decrease was related to lower EVHV, aerospace and defense and ADAS sales. The EVHV sales decline was a result of short-term inventory fluctuations by some customers and we expected a turn to growth in Q4. In addition, program delays resulted in lower sales in other markets.

Less than 4 million decrease was related to lower EV, HEV aerospace and defense and Adas sales.

Colin Gavea: Although our portable electronics sales improved in Q3, year-to-date sales are behind prior year. This is reflective of the global smartphone market, which is at its lowest point in a decade. Worldwide sales of tablets and smart speakers are also projected to be down sharply with the clients of 15% or more versus prior year. Visibility is limited to when demand may improve, but when these markets do improve, the benefit to our P&L will be meaningful.

The EV HEV sales decline was a result of short term inventory fluctuations by some customers and we expect to return to growth in Q4.

In addition program delays resulted in lower sales in other markets.

Speaker 3: transcript

Speaker 3: However, we continue to see good growth opportunities in all three of these marks.

However, we continue to see good growth opportunities in all three of these markets.

Speaker 3: transcript

Speaker 3: EMS sales increased by 2.8 percent to 98 million, led by seasonally strong portable electronic sales and continued strength in our aerospace and defense. These improvements more than offset significantly lower industrial sales. As stated earlier, industrial sales declined more than any other market in Q3 as a result of continuing weakness in the global manufacturing sector.

<unk> sales increased by two 8% to $98 million led by seasonally strong portable electronics sales and continued strength in our aerospace and defense.

Colin Gavea: Next, we expect increased sales in coming quarters associated with design wins in the EV space. This is particularly the case in our EMS business, where demand from certain customers is expected to grow as vehicle production rates increase. But magnitude in timing of these incremental sales will be subject to how quickly the production ramp proceeds.

These improvements more than offset significantly lower industrial sales as stated earlier industrial sales declined more than any other market in Q3 as a result of continuing weakness in the global manufacturing sector.

Colin Gavea: The remaining two items relate to production capacity for our ceramic power substrate manufacturing. The process innovation efforts referenced earlier are helping ceramic unlock additional output at our factory in Germany enabling us to increase sales in 2024. This incremental capacity will support our customers until our new China facility comes online, which we expect will be in late 2024. Of all these activities, the new ceramic plant is expected to provide the most significant boost to revenue.

Turning to slide 10, our gross margin for the third quarter was $84 million or 35, 1%.

Speaker 3: transcript

Speaker 3: Turning to slide 10, our gross margin for the third quarter was $80.4 million, or 35.1%.

Speaker 3: transcript

Speaker 3: Despite lower volume, the improvement in gross margin versus the prior quarter was a result of direct and indirect procurement cost savings and favorable mix.

Despite lower volume the improvement in gross margin versus the prior quarter was the result of direct and indirect procurement cost savings and favorable mix.

In addition to manufacturing excellence driving procurement savings continued to be a key part of our ongoing margin improvement strategy.

Speaker 3: transcript

Speaker 3: In addition to manufacturing excellence, driving procurement savings continue to be a key part of our ongoing margin improvement strategy, and we are starting to see results from our efforts.

Colin Gavea: This is not a complete list, but highlights some of the key drivers of future growth.

We are starting to see results from our efforts.

Q3, adjusted net income increased to $23 2 million, an improvement of 16% versus Q2.

Colin Gavea: As this relates to the two thousand and twenty five targets that we outlined at our investor day, we are not making any updates at this point. We continue to focus on executing on the key priorities in our restore, accelerate and elevate phases to achieve the targets we set, including annual sales in the range of 1.2 to 1.3 billion.

Speaker 3: transcript

Speaker 3: Q3 adjusted net income increased to 23.2 million and improvement of 16% versus Q2.

Speaker 3: transcript

Speaker 3: This translates to Q3 adjusted earnings per share of $1.24, which was $0.17 better than Q2. The increase in adjusted net income resulted from improved gross margin, lower adjusted operating expenses, and higher other income.

This translates to Q3 adjusted earnings per share of dollars 24.

Which was <unk> 17 better than Q2.

The increase in adjusted net income resulted from improved gross margin lower adjusted operating expenses and higher other income.

Colin Gavea: When we set this top line target in Q1 of this year, it was based on two key assumptions. The first is the rate at which design wids would begin to ramp in 2024 and 2025. Second, it was based on a certain level of global economic recovery and growth that would return in 24 and continue into 25. It's still too early to know how these factors will evolve over the coming two years relative to our expectations. We expect to have a better view in the coming months, which will inform any potential updates to our two thousand and twenty five targets.

Speaker 3: transcript

Speaker 3: The increase in other income was related to gain on foreign exchange transactions.

The increase in other income was related to gain on foreign exchange transactions.

Speaker 3: transcript

Speaker 3: and lower interest expenses from debt repayment.

Lower interest expenses from debt repayments.

Continuing to slide 11, ending cash at September 30 was approximately $126 million a decrease of $109 million from the end of 2022, and a $15 million decrease from the end of Q2 2023.

Speaker 3: transcript

Speaker 3: Continuing to slide 11, ending cash at September 30th was approximately 126 million, a decrease of 109 million from the end of 2022 and a 15 million decrease from the end of Q2 2023. We generated strong operating cash flow of 42 million in Q3, which enabled us to make a 50 million

Colin Gavea: In summary, we continue to execute on our plans and proven strategy, even as market conditions remain challenging. We are making good progress in the areas that we can control. We are securing new design wins, improving operating costs and managing operating expenses. We have added capacity in many different product lines to support our customers and have improved the organization with strong leadership capabilities and the tools needed to execute on our strategy.

We generated strong operating cash flow of 42 million in Q3, which enabled us to make a $50 million.

Discretionary repayment of our debt on our revolving credit facility capital expenditures were approximately $7 million in the quarter and 35 million year to date for the full year. We now expect capital expenditures to be in the range of $55 million to $65 million.

Speaker 3: transcript

Ramakumar Mayampurath: Now, I'll turn it over to Ron to discuss our Q3 financial performance and Q4 outlook. Thank you, Colin, and good afternoon, everyone. Building on what Colin stated earlier, despite difficult market conditions, we have accomplished a great deal over the course of this year. We have kept our focus on improving profitability and cash flow. We are also committed to making the investments necessary to prepare the business for long-term growth. These improvements include driving growth margin higher by 350 basis points compared to Q3 of 2022.

Speaker 3: transcript

Speaker 3: We have made good strides this year to further strengthen our balance sheet. We have continued to invest in our long-term strategic initiatives while paying down a total of $135 million on our revolver and increasing our net cash position.

Good good strides this year to further strengthen our balance sheet.

<unk> continued to invest in our long term strategic initiatives, while paying down a total of $135 million on our revolver and increasing our net cash position.

Next on slide 12, I will discuss our guidance for the fourth quarter.

Speaker 3: transcript

Speaker 3: Next, on slide 12, I will discuss our guidance for the fourth quarter. First, net sales are expected to range between $215 and $225 million. The main reason for the lower guidance relative to Q3 sales are as follows.

First net sales are expected to range between 215 and $225 million.

The main reason for the lower guidance later Q3 sales are as follows.

First the fourth quarter has historically been our lowest sales volume for the year as customers run with leaner inventory levels and delays are modest until the following year. For example, we are seeing this in our EMS A&D sales, which have been very strong in 2023, but are expected to decline in Q4.

Speaker 3: transcript

Speaker 3: First, the fourth quarter has historically been our lowest sales point for the year as customers run with linear inventory levels and delays the models until the following year. For example, we are seeing this in our EMS-AND sales, which have been very strong in 2023 but are expected to decline in Q4.

Ramakumar Mayampurath: Achieving an adjusted EBITDA margins of nearly 20%, at 375 basis points improvement over the same time period. Higher cash generation that has allowed us to invest in capacity and capabilities for growth while paying down debt. Let me now review our third quarter 2023 results in detail, beginning on slide 8. Q3 sales of 229 million declined by less than 1% versus the prior quarter and were slightly below our guidance range. Growth margin of 35.1% improved 60 basis points versus Q2 and exceeded the high end of our guidance expectation.

Sure.

In addition, we anticipate the current macro challenges to amplify this typical year end decline.

Speaker 3: transcript

Speaker 3: In addition, we anticipate the current macro challenges to amplify this typical year in decline. This is particularly true in industrial markets where we expect sales to decline further in Q4.

This is particularly true in industrial markets, where we expect sales to decline further in Q4.

Speaker 3: transcript

Speaker 3: We expect EV-HEV sales to grow in Q4 relative to the third quarter, but we expect this growth will be more than offset by these other factors.

We expect EV HEV sales to grow in Q4 relative to the third quarter, but we expect this growth will be more than offset by these other factors.

Ramakumar Mayampurath: On a gap basis, earnings per share was a dollar and two cents slightly below the range due to the timing of the expected sale of an asset health for sale, at just a earnings per share of $1.24 increased by 15% sequentially and was at the top end of our guidance range. We have made good progress in 2023 with our margins and adjusted EPS. We remain intently focused on driving further profitability improvements.

We are guiding gross margin to be in the range of 34% to 35% for Q4, the 34, 5% midpoint of our guidance is lower than Q3 results, reflecting the sales volume decline.

Speaker 3: transcript

Speaker 3: We are guiding gross margin to be in the range of 34% to 35% for Q4. The 34.5% midpoint of our guidance is lower than Q3 results reflecting the sales volume decline.

Speaker 3: transcript

Speaker 3: Earnings per share is expected to range from $0.71 to $0.91 and adjusted EPS from $0.90 to $1.10.

Earnings per share is expected to range from 71 to 91.

And adjusted EPS from 90 to $1 10.

Our GAAP.

Speaker 3: transcript

Speaker 3: Our gap, our Q4 gap EPS range incorporates an expected gain on the sale of a small manufacturing facility. This was part of the factory footprint optimization we announced previously. We project our full year tax rate to be around 25 percent.

Our Q4, GAAP EPS range incorporates an expected gain on the sale of a small manufacturing facility.

Ramakumar Mayampurath: Turning to slide 9, I will discuss Q3 net sales in greater detail. The slide decline in total sales was due to lower volume of approximately 900,000 and unfavorable foreign currency fluctuations of around 700,000. On a portable segment basis, AES sales decreased from the prior quarter by 2.9% to 126.4 million. The less than 4 million decrease was related to lower EVHV aerospace and defense and ADAS sales. The EVHV sales decline was a result of short-term inventory fluctuations by some customers and we expected a turn to growth in Q4.

This was part of the factory footprint optimization, we announced previously.

We project, our full year tax rate to be around 25%.

Speaker 3: transcript

Speaker 3: We are focused on executing the activities that drive improved profitability and increase cash generation and remain committed to investing in the capacity and capabilities necessary to drive our future growth. I will now turn the call back.

We are focused on executing the activities that drive improved profitability and increased cash generation and remain committed to investing in the capacity and capabilities necessary to drive our future growth.

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

Thank you and at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Speaker 1: transcript

Speaker 1: Thank you. And at this time, we will be conducting a question and a session. If you would like to ask the question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two, if you would like to remove your question from the queue. The participants use the speaker equipment, and may be necessary to pick up your handset before pressing the star keys. We also ask that everyone to limit themselves to only two questions throughout our other staff.

Information tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.

Ramakumar Mayampurath: In addition, program delays resulted in lower sales in other markets. However, we continued to see good growth opportunities in all three of these markets. EMS sales increased by 2.8% to 98 million, led by seasonally strong portable electronic sales and continued strength in our aerospace and defense. These improvements more than offset significantly lower industrial sales. As stated earlier, industrial sales declined more than any other market in Q3 as a result of continuing weakness in the global manufacturing sector.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

We also ask that everyone limit.

Themselves to only two questions to all other SaaS.

Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Speaker 1: transcript

Speaker 1: Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Speaker 4: transcript

Speaker 4: Good afternoon. Thanks for taking questions. Congrats on some margin progression. Maybe I'll start with EV. There's obviously been a lot of noise lately around EV sales slowing, and you saw a little bit of slow down in Q3, but it sounds like some winnings, very significant new orders and platforms.

Good afternoon, thanks for taking the questions congrats on the margin progression.

Maybe I'll start with EV.

Theres, obviously been a lot of noise lately around EV sales slowing and you saw a little bit of slowdown in Q3, but.

It sounds like winning.

Ramakumar Mayampurath: Turning to slide 10, our growth margin for the third quarter was 80.4 million dollars or 35.1%. Despite lower volume, the improvement in growth margin versus the prior quarter with the result of direct and indirect procurement cost savings and favorable mix. In addition to manufacturing excellence, driving procurement savings continued to be a key part of our ongoing margin improvement strategy and we are starting to see results from our efforts. Q3 adjusted net income increased to 23.2 million and improvement of 16% versus Q2.

Very significant new orders and platforms what are your customers and you expect to return to growth sequentially at least in Q4. So what are your customers telling you about their plans for production and expansion as we look out to 'twenty four specifically in <unk>.

Speaker 4: transcript

Speaker 4: What are your customers, and you expect to return to growth sequentially, at least in Q4, so, you know, what are your customers telling you about their plans for production and expansion as they look out to 24 specifically, and, you know, any color by geography, if you could break it down, kind of North America, Europe , Asia,

Any color by geography, if you could break it down kind of in North America, Europe Asia that would be very helpful. Thanks.

Speaker 2: transcript

Speaker 2: Sure, Dan. Colin here. Thanks for calling in. So you're right. There has been a lot of information and news lately about EV from a lot of different companies weighing in what what we hear from customers in general.

Sure Dan calling here, thanks for calling in so you're right. There has been a lot of information in the news lately about EV from a lot of different companies weighing in.

What we hear from customers in general would be.

Ramakumar Mayampurath: This translates to Q3 adjusted earnings per share of dollar 24 cents, which was 17 cents better than Q2. The increase in adjusted net income resulted from improved growth margin lower adjusted operating expenses and higher other income. The increase in other income was related to gain on foreign exchange transactions and lower interest expenses from debt repayments. Continuing to slide 11, ending cash at September 30 was approximately 126 million, a decrease of 109 million from the end of 2022 and a 15 million decrease from the end of Q2 2023.

There was always anticipated to be some choppiness as EV scaled up and it comes back to the fact that some of the supply chains and getting these vehicles into the market. It just hasnt been developed as the.

Speaker 2: transcript

Speaker 2: there was always anticipated to be some choppiness as EV scaled up. And it comes back to the fact that some of these supply chains and getting these vehicles into the market, it just hasn't been developed as.

Speaker 2: transcript

Speaker 2: the ice engines have been. I mean, these materials or ice products have been in the market for more than 100 years, and the supply chain here are still pretty nice.

On the ice.

Engines have been I mean, the ice materials or ice ice products have been in the market for more than 100 years in the supply chain heroes are still pretty nascent. So overall, even though there may be a quarter or two of an issue most of our Oems feel in all the regions that the growth will be there for EV HEV I think there were some recent comments.

Speaker 2: transcript

Speaker 2: So overall, even though there may be a quarter or two of an issue, most of our OEMs feel in all the regions that the growth will be there for EVHEV. I think there were some recent comments from

From Toyota.

Speaker 2: transcript

Speaker 2: Toyota around how they feel like maybe plug-in hybrids will be more effective and growing in the marketplace. But we also hear that pure battery vehicles are also going quite strong. So while there are some bumps in the road initially, we certainly feel like long-term there's still a good decade of growth ahead for both platforms.

Toyota around how they feel like maybe plug in hybrids will be more effective in growing in the marketplace, but we also hear that pure battery vehicles are also going quite strong. So while there are some bumps in the road. Initially we certainly feel like long term there is still a good decade of growth ahead for for both platforms.

Ramakumar Mayampurath: We generated strong operating cash flow of 42 million in Q3, which enabled us to make a 50 million The discretionary repayment of our debt on our revolving credit facility. Capital expenditures were approximately 7 million in the quarter and 35 million year today. For the full year, we now expect capital expenditures to be in the range of 55 to 65 million. We have made good strides this year to further strengthen our balance sheet. We have continued to invest in our long-term strategic initiatives while paying down a total of 135 million on our revolver and increasing our net cash position.

Very helpful and general industrial appreciate all the commentary there and obviously very consistent with what we are seeing in the macro.

Speaker 4: transcript

Speaker 4: Very helpful. And General Industrial, appreciate all the commentary there and obviously very consistent with what we, you know, are seeing in the macro. Maybe, would you describe it as incremental slowing or just kind of continue to remain choppy overall and what are your customers, you know, telling you about their expansion expansion or CapEx plans, you know, beyond Q4, maybe for the next

Maybe would you describe it as incremental slowing or just kind of continued to remain choppy overall and what are your customers telling you about their expansion expansion your capex plans.

Beyond Q4, maybe for the next several quarters.

Speaker 2: transcript

Speaker 2: Sure, Dan. So I would describe it mostly as incremental. Within that bucket of general industrial, we have a lot of different end markets, such as capital equipment, semiconductor appliances lighting. And it just feels like it's coming to the end of the year. It's part of the issues of the overall general economy, impacting our sales into these end markets.

Sure Dan So I would describe it mostly as incremental within that bucket of general industrial we have a lot of different end markets such as capital equipment semiconductor appliances lighting.

Ramakumar Mayampurath: Next, on slide 12, I will discuss our guidance for the fourth quarter. First, net sales are expected to range between 215 and 225 million.

And it just feels like it's coming to the end of the year. It's part of the issues of the overall general economy impacting our sales into these end markets.

Ramakumar Mayampurath: The main reason for the lower guidance rate of the Q3 sales that has followed. First, the fourth quarter has historically been our lowest sales point for the year as customers run with leaner inventory levels and delay some orders until the following year. For example, we are seeing this in our EMS-A&D sales which have been very strong in 2023 but are expected to decline in Q4. In addition, we anticipate the current macro challenges to amplify this typical year and decline.

Speaker 2: transcript

Speaker 2: and we'll continue to watch it closely. Certainly, high interest rates are not helping in terms of new home sales, and that would probably roll back and impact our HVAC business, which is also in the general industrial end segment. So that's how I would look at it. Ram, I don't know if you wanted to add anything different to that.

And we'll continue to watch it closely certainly high interest rates are not helping in terms of new home sales and that would probably roll back and impact our HVAC business, which is also in the general industrial end segments. So that's how I would look at it Rob I don't know if you wanted to add anything different to that.

Speaker 3: transcript

Speaker 3: No, I agree. I think we are seeing it slower. Goals go weaker in Q4, Dan, so it is increasingly slowing. I hope that's the bottom of it and we'll start some recovery, but for now we don't.

No I agree I think we are seeing it slower go go go weaker in Q4 then.

Ramakumar Mayampurath: This is particularly true in industrial markets where we expect sales to decline further in Q4. We expect EV-A&D sales to grow in Q4 relative to the third quarter but we expect this growth will be more than offset by these other factors. We are guiding growth margins to be in the range of 34 to 35% for Q4. The 34.5% midpoint of our guidance is lower than Q3 results reflecting the sales volume decline, earnings per share is expected to range from 71 cents to 91 cents and adjusted EPS from 90 cents to dollar 10 cents.

So it is increasingly saw slowing I hope that's the bottom of it and we'll start some recovery, but for now we don't.

See any recovery in sight.

Speaker 4: transcript

Speaker 4: Okay. Second and a half question and I'll jump out, but I appreciate the color on the 25 targets. I think it's very helpful. Would you, you know, kind of expect to be in a better position to provide an update when you report, you know, your full year results in February or just it's fluid and, you know, we'll kind of continue to monitor it for you?

Okay second half question and I'll jump out but.

Appreciate the color on the 25 targets I think it's very helpful.

Would you kind of expect.

We expect to be in a better position to provide an update when you report.

Your full year results in February or just it's fluid and.

We'll kind of continue to monitor it monitor it for here. Thanks again.

Thanks, Dan Yes, we are.

Speaker 2: transcript

Speaker 2: Thanks Dan. Yeah, we're working on that and we'll share what we have as soon as we.

We're working on that and we will share what we have as soon as we can.

Ramakumar Mayampurath: Our Q4 gap EPS range incorporates an expected gain on the sale of a small manufacturing facility. This was part of the factory footprint optimization we announced previously. We project our full year tax rate to be around 25%.

Our next question goes to that line of Craig Ellis with B Riley Securities.

Speaker 1: transcript

Speaker 1: Our next question goes to the line of Craig Ellis with Be Righty Securities. Please proceed with your question.

Please proceed with your question.

Speaker 2: transcript

Speaker 2: Yeah, thanks for taking the questions. And guys, I wanted to say congratulations on the cost and margin execution in a real tough environment.

Yeah, Thanks for taking the questions.

Ramakumar Mayampurath: We are focused on executing the activities that drive improved profitability and increased cash generation and remain committed to investing in the capacity and capabilities necessary to drive our future growth.

Guys I wanted to say congratulations on costs in March and execution and a real tough environment.

Now do you see out there.

Speaker 2: transcript

Speaker 2: Not easy out there and nice to see gross margins hitting 35%.

Nice to see gross margins hitting 35%.

Speaker 2: transcript

Speaker 2: Colin, I wanted to start with a couple of clarifications really for you.

And I wanted to start with a couple of clarifications really for you.

Shamali: I will now turn the poll back to the operator for questions. Thank you and at this time we will be conducting a question and access session. If you would like to ask the question please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question Q. You may press star 2 if you would like to remove your question from the Q. The participants use the speaker equipment and may be necessary to pick up your handset before pressing the star keys.

Speaker 5: transcript

Speaker 5: on the product side. So starting with the EV business and the plans for the China Power substrate facility that you're ramping up, you know, our checks are showing that there's within China local manufacturers that are partnered up with other international entities are real.

On the product side, so starting with the EV business and our plans for the China power.

Substrate facility that you are ramping up our checks are showing that there is within China.

Local manufacturers that are partnered up with other international entities of real significant ambition to grow silicon carbide output next year by pretty dramatic levels and so the question is this as you look up ramping up your facility how would that facility size compared with the <unk>.

Speaker 5: transcript

Speaker 5: significant ambition to grow silicon carbide output next year by pretty dramatic levels and so.

Shamali: We also ask that everyone to limit themselves to only two questions to our others to ask.

Speaker 5: transcript

Speaker 5: The question is, this is, as you look at ramping up your facility, how would that facility size compare to the one that you have, I believe, in operation now in Germany, and how quickly would you expect to ramp capacity there? And is it possible, if demand came in early, that you'd able to get to higher volume before calendar 25?

Daniel Moore: Our first question comes from the line of Daniel Moore with CJS Security. Please proceed with your question. Good afternoon. Thanks for taking questions. Congrats on some margin progression. Maybe I'll start with EV.

They have I believe in operation now in Germany.

And how quickly would you expect to ramp capacity power.

And is it possible if demand came in early.

Colin Gavea: There's obviously been a lot of noise lately around EV sales slowing and you saw a little bit of slow down in Q3 but it sounds like winning some very significant new orders and platforms. What are your customers and you expect to return to growth sequentially at least in Q4? What are your customers telling about their plans for production and expansion as they look out to 24 specifically? Any color by geography? If you could break it down kind of North America, Europe Asia, that would be very helpful.

They both to get higher volume before calendar 'twenty five.

Speaker 2: transcript

Speaker 2: Sure, I'll start and then anyone can jump in to help me, Ram or Steve. So, the way we're looking at this factory, Craig, is that we're putting it in in different phases. So, this first CapEx spend.

Sure I'll start and then anyone can jump in to help me RAMAR, Steve So the.

The way we're looking at this factory Craig is that we're putting it in different phases. So this first capex spend.

Speaker 2: transcript

Speaker 2: that we're putting into this factory is phase one. But what we're doing is, while we're bringing up the entire production, changing the project is getting thicker technologies, and technology cryptocurrency will Hober

That were putting into this factory is phase one of what we're doing is while we're bringing up the entire production.

To be able to produce we're putting in the infrastructure. So we can add additional phases without having to add more large infrastructure spend. So we're trying to think ahead and bring it up mindfully to match demand, but we'll have a much larger infrastructure built out so that if demand goes faster than we think we should be.

Speaker 2: transcript

Speaker 2: you know, to be able to produce, we're putting in the infrastructure so that we can add additional phases without having to add more large infrastructure spend. So we're trying to think ahead and bring it up mindfully to match demand, but we'll have a much larger infrastructure built out so that if demand goes faster than we think, we should be able to ramp up and get to phase two much more quickly.

Colin Gavea: Thanks. Sure Dan, Colin here. Thanks for calling in. So you're right, there has been a lot of information in news lately about EV from a lot of different companies weighing in. What we hear from customers in general would be there was always anticipated to be some choppiness as EV scaled up and it comes back to the fact that some of these supply chains and getting these vehicles into the market, it just hasn't been developed as the ICE engines have been.

To ramp up and get the phase III much more quickly.

Is how we're thinking about it.

And how it phase one or phase one plus phase III comparative.

Speaker 5: transcript

Speaker 5: And how would Phase 1 or Phase 1 plus Phase 2 compare to the capacity that you already have in place over in Europe ?

Alright capacity that you already have in place over in Europe.

Colin Gavea: I mean these the ICE materials or ICE products have been in the market for more than a hundred years and the supply chain here are still pretty nascent. So overall, even though there may be a quarter or two of an issue, most of our OEMs feel in all the regions that the growth will be there for EVA-TV. I think there was some recent comments from Toyota around how they feel like maybe plug-in hybrids will be more effective and growing in the marketplace.

We're not really talking at this moment the size of the capacity, but what we believe is we've got it with the production improvements and operational efficiencies were driving out of our eschenbach, Germany plants.

Speaker 2: transcript

Speaker 2: We're not really talking at this moment the size of the capacity, but what we believe is we've got it with the production improvements and operational efficiencies we're driving out of our Eschenbach, Germany.

Speaker 2: transcript

Speaker 2: and with the phased approach for the Kremlin facility we put into China. We think we can match the ramp curve we have from our customers.

And with the phased approach for the chronic facility, we put into China. We think we can match the ramp curve, we have from our customers.

For the next several years and we've also built an upside case, where we think we can beat that also so ultimately.

Speaker 2: transcript

Speaker 2: for the next several years. And we've also built in an upside case where we think we can beat that also. Ultimately, we'll talk about capacity in terms of how much we have, but we're not prepared to do that specific thing at this moment. So what will be...

Colin Gavea: But we also hear that pure battery vehicles are also going quite strong. So while there's some bumps in the road initially, we certainly feel like long-term, there's still a good decade of growth ahead for both platforms. Very helpful.

We will talk about capacity in terms of how much we have but we're not prepared to do that specific thing at this moment yeah.

Colin Gavea: In general industrial, appreciate all the commentary there and obviously very consistent with what we are seeing in the macro. Maybe would you describe it as incremental slowing or just kind of continue to remain choppy overall and one of your customers telling you about their expansion or cap ex plans beyond Q4 maybe for the next several quarters. Thanks. Sure Dan. So I would describe it mostly as incremental. Within that bucket of general industrial, we have a lot of different end markets, such as capital equipment, semiconductor appliances lighting.

So what we've shared publicly.

Speaker 3: transcript

Speaker 3: Greg is that it's about a 32 to 35 million investment and we look for about a three year payback on our investment.

Greg is that its about a third $32 million to $35 million investment.

And we look for about a three year payback on our investments.

Great that's really helpful guys.

Speaker 6: transcript

Speaker 6: Great. Let's have you really help with guys. I'm sorry. I said that.

I'm sorry.

So that should give you an idea.

Speaker 5: transcript

Speaker 5: Yep, that's real helpful. Second, product related question for Colin. Colin, on the slide that you had that showed the long-term drivers you talked about, you talked about personal electronics and the smartphone inventory issues that are out there. We're hearing that while certainly IOS has been very strong over the last couple of years. Obviously, Android went into correction two years ago, but...

Yeah, that's real helpful.

Product related question for.

For calling calling on the on that.

Slide that you had that showed the longer term drivers you talked about you talked about personal electronics.

And the smartphone inventory issues that are out there.

We're hearing that wall certainly.

Colin Gavea: And it just feels like it's coming to the end of the year. It's part of the issues of the overall general economy impacting our sales into these end markets. And we'll continue to watch it closely. Certainly high interest rates are not helping in terms of new home sales and that would probably roll back and impact our HVAC business, which is also in the general industrial end segment. So that's how, you know, I would look at it.

IOS has been very strong over the last couple of years, obviously Android went into correction two years ago.

Check suggests that that's finally, starting to bottom out and we could start to see more normalized product cycles next year. So the question on that side of your business what sensor you're getting from customers about reengagement for new product activity next year.

Speaker 5: transcript

Speaker 5: Check suggests that that's finally starting to bottom out and we could start to see more normalized product cycles next year. So the question on that side of your business, what sense are you getting from customers about re-engagement for new product activity next year?

Colin Gavea: Ram, I don't know if you wanted to add anything different to that. No, I agree. I think we are seeing it slower. Go weaker in Q4 then. So it is increasingly slowing. I hope that's the bottom of it and it stops in recovery.

Speaker 2: transcript

Speaker 2: So, that's a good question. Where we are now with the Port of Electronics, it really is a 10-year low in terms of handset cells, below 1.2 billion. So, what we hear from a lot of companies is that, you know, they're anxious for that to end. And we're fortunate in terms of how we're positioned in China that we can call on all the local OEMs and also Western OEMs who are produced in the region.

So that's a good question.

We are now with the portable electronics. It really is a 10 year low in terms of handset cells below $1 2 billion. So what we hear from a lot of companies is that theyre anxious for that to end and we're fortunate in terms of how we're positioned in China that we can call on all the local.

Colin Gavea: But for now, we don't see any recovery in sight. Okay.

Daniel Moore: Second and a half question, and I'll jump out. But I appreciate the color on the 25 targets. I think it's very helpful. Would you kind of expect to be in a better position to provide an update when you report your full-year results in February or just it's fluid and we'll kind of continue to monitor it monitor it for here. Thanks again. Thanks, Dan.

<unk> and also western Oems for produce in the region.

Speaker 2: transcript

Speaker 2: And while we feel reasonably optimistic about our design wins for 2024 and 25, we're working...

And.

While we feel reasonably optimistic about our design wins for 2024 and 25.

We are working.

Speaker 2: transcript

Speaker 2: closely with them to understand how their projection things to go. One thing I'll mention that's helped us a lot is that we had that Udice fire several years ago, but that facility now is up and running, and we're seeing a lot of design winds coming from that team with that technology. So that helps us in terms of what we think about growth and portable.

Closely with them to understand how they are protected for things to go.

One thing I'll mention that's helped US a lot is that we had that eunice fire several years ago, but that facility now is up and running and we're seeing a lot of design wins coming from that team with that technology. So that helps us in terms of what we think about growth in portable electronics for next year.

Colin Gavea: Yeah, we're working on that and we'll share what we have as soon as we can.

Craig Ellis: Our next question goes to the line of Craig Ellis would be writing securities. Please proceed with your question. Yeah, thanks for taking the questions and guys, I want to say congratulations on the cost and margin execution in the real tough environment.

No. That's that's very encouraging and then Brian if I could just a couple for you quickly you mentioned the new Capex guidelines for this year.

Speaker 5: transcript

Speaker 5: Now, that's very encouraging. And then, Ram, if I could, just a couple for you quickly. You mentioned the new CapEx guidelines for this year. The change versus prior, is that really just the timing of growth that's related to some of these macro factors that everybody's dealing with? Or were there efficiencies that the team found that are just allowing you to do more with a little less CapEx than what you had expected?

The change versus prior or is that really just the timing of growth.

Colin Gavea: Not easy out there and nice to see gross margin sitting 35%. Colin, I wanted to start with a couple of clarifications really for you on the product side. So starting with the EV business and the plans for the China power substrate facility that you're ramping up, you know, our checks are showing that there's within China local manufacturers that are partnered up with other international entities. A real significant ambition to grow silicon carbide output next year by pretty dramatic levels.

That's related to some of these macro factors that everybody is dealing with or where there are efficiencies that the team pounds that are just allowing you to do more with a little less capex than what you had expected.

Yes, that's a good question Craig so suddenly increase.

Speaker 3: transcript

Speaker 3: Yeah, that's a good question Greg. So certainly by increasing throughput and removing some of the bottlenecks, particularly in our ceramic facility in Germany, we have been able to lower our overall cap up expanding. And in terms of the guidance for the year, that's mostly just cash flow timing.

Increasing throughput and removing some of the bottlenecks, particularly in our <unk> facility in Germany, we have been able to lower our overall capex spending.

And then in terms of the guidance for the year, that's mostly just cash flow timing.

Colin Gavea: And so the question is this is as you look at ramping up your facility, how would that facility size compare to the one that you have? I believe in operation now in Germany and how quickly would you expect to ramp capacity bear? And is it possible if the man came in early that you'd able to get to higher volume before calendar 25? Sure, I'll start and then anyone can jump in to help me, Ram or Steve.

Speaker 3: transcript

Speaker 3: The expansion plants in the the ceramic facility in China and the others we talked about are As planned and scheduled going on as scheduled the timing of the cash flow as we manage cash Has brought down the cap exflightly low

The expansion plans and the <unk> facility in China, and the others we've talked about.

As planned and scheduled going on as scheduled the timing of the cash flow as we manage cash.

It has brought down the capex slightly lower.

Speaker 3: transcript

Speaker 3: But also, I say that we are targeting a 7 to 8% for the next couple of years in CAP.

I would also say that we are we are targeting a 7% to 8% for the next couple of years.

Capex.

Very helpful. And then finally from me before I hop back in the queue.

Speaker 5: transcript

Speaker 5: Very helpful. And then finally for me before I hop back in the queue,

Speaker 5: transcript

Speaker 5: The team did a great job this year executing on drivers to gross margin expansion and hitting the 35% target per quarter earlier than I certainly had expected. The question is this is we look ahead, Ram, I think. You've historically said that the path to the target model gross margin is about 30% efficiencies and other things.

The team did a great job this year executing on drivers to gross margin expansion in hitting that 35% target a quarter earlier than I certainly had expected.

Colin Gavea: So the way we're looking at this factory Craig is that we're putting it in in different phases. So this first capex spend that we're putting into this factory is phase one. But what we're doing is while we're bringing up the entire production, you know, to be able to produce, we're putting in the infrastructure so we can add additional phases without having to add more large infrastructure spend. So we're trying to think ahead and bring it up mindfully to match demand, but we'll have a much larger infrastructure built out so that if the man goes faster than we think we should be able to ramp up and get to phase two much more quickly is how we're thinking about it.

Question is this as we look ahead, Rob I think you've historically said that the path to that target model gross margin.

Bout, 30% efficiencies and other things.

Speaker 5: transcript

Speaker 5: that could be cost-related and then 70% volume and mix. Is that still the right way to look at the path from here to that 39%?

That could be cost related and then 70% volume and mix is that still the right way to look at the path from here to that 39%.

Speaker 3: transcript

Speaker 3: That is still the right way to look at it. Now, needless to say, we will continue our operational excellence, manufacturing procurement and design improvements efforts to lower that cost.

That is still the right way to look at it now needless to say, we will continue our operational excellence manufacturing procurement.

Colin Gavea: And how would phase one or phase one plus phase two compare to the capacity that you already have in place over in Europe? We're not really talking at this moment the size of the capacity, but what we believe is we've got it with the production improvements and operational efficiencies we're driving out of our Eschenbach Germany Flamp. And with the phased approach for the Kramik facility we put into China, we think we can match the ramp curve we have from our customers for the next several years.

And design improvements efforts to lower that cost.

Speaker 6: transcript

Speaker 6: fast and as efficiently as possible. But the big step change will come from volume returning. And once you correct that cost line, as you know, once we see that volume, you can see much more quicker improvement of the margins. Absolutely. Thank you.

Fast and as efficiently as possible, but the big step change will come from volume returning in once you correct that cost line as you know once we see that volume you can see much more quicker improvement of the margin.

Absolutely. Thank you very much guys I appreciate the help.

Thank you.

Speaker 1: transcript

Speaker 1: As a reminder, if anyone has any questions, you may press star one on your telephone, keep that to join the question and answer queue.

As a reminder, if anyone has any questions you May press star one on your telephone keypad to join the question and answer queue.

Colin Gavea: And we've also built in an upside case where we think we can beat that also. So ultimately, you know, we'll talk about capacity in terms of how much we have, but we're not prepared to do that specific thing at this moment. Yeah. So what we have shared publicly, Greg, is that it's about a 32 to 35 million investment and we look for about a three-year payback on our investments. So let's help the guys. I'm sorry. So I said that should give you an idea.

Okay.

And it appears that there are no further questions and this does conclude our question and answer session.

Speaker 1: transcript

Speaker 1: And it appears that there are no further questions and this does conclude our question and answer session. Therefore, I'll now turn the call back over to Colin Goveil for a close remarks.

I'll now turn the call back over to Colin angle CEO for closing remarks.

Just wanted to say thanks, all for joining and look forward to talking with several of you over the next several weeks.

Speaker 2: transcript

Speaker 2: Just wanted to say thanks all for joining and look forward to talking with several of you over the next several weeks.

And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Speaker 1: transcript

Speaker 1: And this concludes today's conference. May disconnect your line at this time. Thank you for your participation.

Colin Gavea: Yep, that's helpful. Second, how to create a question for Colin. Colin, on the slide that you had that showed the long-term drivers you talked about, you talked about personal electronics and the smartphone inventory issues that are out there. We're hearing that while certainly iOS has been very strong over the last couple of years, obviously Android went into correction two years ago, but Check suggests that that's finally starting to bottom out and we could start to see more normalized product cycles next year so the question on that side of your business, what sense are you getting from customers about re-engagement for a new product activity next year?

Okay.

Speaker 7: transcript

Speaker 7: ?? ?? ?? ?? ??

Okay.

[music].

Sure.

Okay.

Thank you.

Okay.

[music].

Colin Gavea: So that's a good question. Where we are now with the portal electronics, it really is a 10 year low in terms of handset cells, below 1.2 billion. So what we hear from a lot of companies is that they're anxious for that to end and we're fortunate in terms of how we're positioned in China that we can call on all the local OEMs and also Western OEMs for produce in the region. And while we feel reasonably optimistic about our design wins for 2024 and 25, we're working closely with them to understand how they're projecting things to go.

Okay.

Speaker 7: transcript

Speaker 7: I.

Sure.

Colin Gavea: One thing I'll mention that's helped us a lot is that we had that UDIS fire several years ago but that facility now is up and running and we're seeing a lot of design wins coming from that team with that technology. So that helps us in terms of what we think about growth and portable electronics for next year.

Yes.

Ramakumar Mayampurath: Now that's very encouraging. And then Ram, if I could just a couple for you quickly, you mentioned the new CAPEX guidelines for this year. The change versus prior is that really just the timing of growth that's related to some of these macro factors that everybody's dealing with or were there efficiencies that the team found that are just allowing you to do more with a little less CAPEX than what you had expected.

Yeah.

Okay.

Ramakumar Mayampurath: Yeah, that's a good question, Greg. So certainly by increasing throughput and removing some of the bottlenecks particularly in our ceramic facility in Germany, we have been able to lower our overall CAPEX spending. And in terms of the guidance for the year, that's mostly just cash flow timing. The expansion plans and in the ceramic facility in China and the others we talked about are our as planned and scheduled going on as scheduled. The timing of the cash flow as we manage cash has brought down the CAPEX slightly lower. But also say that we are targeting a 7 to 8% for the next couple of years in CAPEX.

Yes.

Okay.

Yes.

Ramakumar Mayampurath: Very helpful. And then finally for me, before I hop back in the queue, the team did a great job this year executing on drivers to gross margin expansion and hitting the 35% target a quarter earlier than I certainly had expected. The question is this, as we look ahead, Ram, I think you've historically said that the path to the target model gross margin is about 30% efficiencies and other things that could be cost-related and then 70% volume and mix.

Ramakumar Mayampurath: Is that still the right way to look at the path from here to that 39% that that is still the right way to look at it. Now needless to say, we will continue our operational excellence manufacturing procurement and design improvements efforts to lower that cost, as fast and as efficiently as possible, but the big step change will come from volume returning. And once you correct that cost line as you know, once we see that volume, you can see much more quicker improvement of the margins.

Craig Ellis: Absolutely. Thank you very much, guys. Appreciate that. Thank you. As a reminder, if anyone has any questions, you may press star one on your telephone, and I'll keep that to join the question and answer queue.

Shamali: And it appears that there are no further questions, and this does conclude our question and answer session.

Colin Gavea: Therefore, I'll now turn the call back over to Colin Goveil for close remarks. I just wanted to say thanks all for joining and look forward to talking with several of you over the next several weeks.

Shamali: And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Q3 2023 Rogers Corp Earnings Call

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