Rogers Corporation [ROG] Conference call transcript for 2023 q1
2023-04-29 14:56:04
Fiscal: 2023 q1
Operator: Good afternoon. My name is Joe, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Q1 2023 Earnings Conference Call. I will now turn the call over to your host, Mr. Steve Haymore, Director of Investor Relations. Mr. Haymore, you may begin.
Steve Haymore: Good afternoon, everyone, and welcome to the Rogers Corporation First 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 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 Securities Litigation Reform Act of 1995 and should be considered as subject to many uncertainties that exist in Rogers operations and environment. These uncertainties include economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements made today. Please turn to Slide 3. The discussions during this conference call will also reference certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call. Turning to Slide 4, with me today is Colin Gouveia, President and CEO; and Ram Mayampurath, Senior Vice President and CFO. I will now turn the call over to Colin.
Colin Gouveia: Thanks, Steve. Good afternoon, everyone, and thank you for joining us. Before I discuss the results for the quarter, I'll touch on the progress we are making related to our key priorities, which we outlined at our recent Analyst and Investor Day. I'll begin on Slide 5. As highlighted last month, our plan is to achieve breakthrough growth and profitability as we restore, accelerate and elevate our performance. This includes driving immediate improvements in our near-term profitability, taking actions to strengthen the organization and maximizing the opportunities in our sales funnel and innovation pipeline to drive growth. We continue to make good progress in all of these areas. Specific to our Restore efforts, as we discussed on the Q4 conference call in February, we've taken a number of actions to improve our cost structure, including implementing a 7% reduction in Rogers' global workforce, divesting a noncore natural rubber product line, driving manufacturing and yield improvements, and optimizing our laminate circuit materials manufacturing footprint. As part of our continuing footprint optimization efforts, we have decided to exit a smaller manufacturing location in Asia. This decision is expected to improve utilization levels and further reduce operating costs. This action is in addition to the decision to sell the Price Road facility, which we communicated previously. We are beginning to see the results of these recent actions in our P&L. Ram will provide detail around the one-time charges associated with these decisions when he reviews our Q1 results. Additionally, we continue to bolster the organization with new talent. As announced, we recently hired Mike Webb as Senior Vice President and Chief Administrative Officer and Jessica Morton as Vice President, General Counsel and Corporate Secretary. We are delighted to have Mike and Jessica join Rogers and both bring significant experience and expertise to the company. We also expect to soon announce the hiring of a new Chief Technology Officer, and we'll share more information on this topic at a later date. Turning to the Accelerate phase, as we emphasized at our Investor Day last month, we see compelling growth opportunities across our markets, driven by secular trends in EVs, ADAS, aerospace and defense, 5G smartphones and renewable energy. We have strong positions in these markets, and with our differentiated technology, are intently focused on capitalizing on these market tailwinds to reach the 7% to 10% top line CAGR included in our 2025 targets. Also supporting this growth outlook are some significant program wins, which will ramp up over the next 3 years, particularly in the EV space. We continue to gain traction with our customers, and I'll discuss some notable design wins in a moment. Third, in the Elevate phase, our goal is to sustain a double-digit revenue growth rate and a 40% gross margin. To maintain faster top line growth in this period beyond 2025, we are focusing on growing our sales opportunity funnel and converting more opportunities into design wins. In addition, commercializing the new technology in our innovation pipeline is a top priority to support our growth in the future. We are excited about the path ahead, and we are taking the necessary actions today to be able to achieve these longer-term targets. Turning to Slide 6. I'll next provide some highlights from the quarter, beginning with several recent design wins. First, in the ADAS market, we leveraged our trusted reputation and applications expertise to secure a win with a strategic OEM in Asia. Our advanced circuit materials will be utilized in a front-facing radar system that enables adaptive cruise control for level 2 and above autonomous driving. Production of the unit began this quarter and sales associated with this multimillion dollar design win are expected to extend over the next 5 years. Also in the AES business, we secured multiple new design wins for our advanced ceramic substrates in Q1. In the EV market, our technology was selected to enable efficient energy conversion in an EV OEM's charging network. Our solutions were also selected in the renewable energy market to be utilized in solar inverters to help maximize energy conversion. Sales associated with both design wins are expected to extend over the next 3 years. In our EMS business, we also had a notable design win in the EV market. In Europe, our silicone technology was selected by a major OEM as a battery pack environmental sealing solution. The duration of this project is expected to extend more than 5 years with multimillion dollar annual sales potential. We are encouraged by our continued progress in securing new design wins resulting from leveraging our innovation capabilities and applications expertise. Turning to Q1 financials. Sales increased by 9% to $244 million led by improved results in the ADAS, renewable energy and general industrial markets. ADAS market sales continue to improve following challenges in 2022, where COVID-related restrictions in China disrupted our customers' operations. We are encouraged by the improvement and continue to see high growth potential over the next several years, driven by the increased penetration rate of ADAS systems and the increasing levels of vehicle autonomy. Sales in the renewable energy market increased rapidly in the first quarter based on strong demand for our power conversion and power interconnect solutions. This market also has strong long-term potential with new installations as solar and wind power continue to grow rapidly. In the general industrial market, Q1 sales improved after declining in the fourth quarter. We are encouraged by the improvement, although we remain cautious on the outlook for general industrial sales given the uncertain macroeconomic environment. Our general industrial revenues are diversified across many markets, but in some cases, can be impacted by the overall economic landscape. Sales in the portable electronics market declined further in the first quarter. The disruptions that we saw to our customers' operations in the fourth quarter were resolved by Q1. However, end consumer demand remained weak. We expect sales in the second half of the year to improve based on consumer seasonal buying patterns and the assumption that the supply disruptions and COVID lockdowns in China that impacted portable electronics in 2022 will not repeat in 2023. Sales in the EV market were lower in the first quarter. The decline was due to both very strong Q4 sales and timing and the fact that some of our ROLINX power interconnect customers' production ramp schedules have pushed out. The overall outlook for the EV market remains robust, and we continue to work on maximizing plant output across several of our product lines to meet the demand. Turning to gross margin. We made progress in Q1 reaching 32.7%, an increase of approximately 90 basis points from the prior quarter and above the high end of our guidance range. This is a step forward as we continue to drive our profitability improvement actions. As we've stated, we are targeting 34% gross margin in the second quarter, with further improvement in the second half of the year. Ram will cover our first quarter results in more detail. In summary, our first quarter results were a good first step in the right direction. There is uncertainty in some of our markets and the macroeconomic environment continues to be very dynamic. However, we are executing aggressively on the things we can control and are making progress getting back to historic levels of profitability. Next, I'll reiterate our compelling investment thesis, which I introduced at our Investor Day. Please turn to Slide 7. So why Rogers? First, we are focused on growth. As highlighted earlier, we have exposure to strong secular trends in the EV and other high-growth market segments. In addition, we have a solid base with our core business, which generates strong cash flows to fund faster-growing opportunities. Second, we have a history of innovation leadership. We have a proven track record of developing and commercializing our unique materials solutions. We have leveraged decades of experience in power electronics, RF materials and advanced elastomerics to solve today's challenges in electric vehicles, renewable energy, automotive radar, advanced defense communications and 5G smartphones. Third, we have a repeatable customer engagement model that provides a strong competitive advantage. Over the years and decades, we have built trusted relationships with key OEMs and engaged with them at an engineer-to-engineer level to understand the complex challenges they are trying to overcome. We then leverage our innovation capabilities and deep applications expertise to provide unique solutions to solve their unmet needs. Lastly, we believe that as we execute on our strategy, this will provide a significant value-generating opportunity for all our shareholders. Based on the 2025 targets we introduced in March, we're anticipating sales of $1.2 billion to $1.3 billion, gross margins of 38% to 40%, and adjusted earnings in the range of $8.50 to $9.50 per share. We have outlined a path to achieve these compelling goals and we remain focused on executing our strategy. With that, I will turn it over to Ram to discuss our Q1 financial performance in detail.
Ram Mayampurath: Thank you, Colin, and good afternoon, everyone. I will review our first quarter 2023 results in detail and later discuss our guidance for the second quarter. Let me begin on Slide 8. As Colin mentioned, our results for the first quarter were a positive start to the year. Q1 sales of $244 million and gross margin of 32.7% both exceeded the high end of our guidance range. On a GAAP basis, we had a net loss of $0.19 per share for the quarter. This was mainly due to the $11.9 million of restructuring, severance and impairment costs and $7.6 million of non-routine shareholder advisory cost. However, on an adjusted basis, Q1 earnings were $0.87 per share, also exceeding the high end of our guidance range. I will discuss the restructuring and other non-GAAP items in more detail later in the presentation. Our Q1 results are a step in the right direction, and we remain focused on realizing the full benefits of the cost and productivity improvement actions we have announced, which we expect will continue to drive additional financial improvements. Turning to Slide 9. Q1 net sales of $244 million improved 9% versus the prior quarter. Most of the improvement was from higher volume, but we also benefited from favorable foreign currency fluctuations of $6 million. On a reportable segment basis, we had sequential improvements in both AES and EMS business units. AES sales increased 8.4% to $135.9 million. The higher revenues resulted from a strong double-digit sales growth in ADAS and renewable energy markets and improved industrial sales. Sales in the wireless infrastructure market was lower versus Q4. Foreign currency fluctuations benefited AES by $4.1 million versus Q4. EMS sales increased by 9.1% to $102.2 million led by double-digit sales growth in general industrial and aerospace and defense markets. As Colin mentioned, portable electronics sales declined as end consumer demand was weak. Foreign currency fluctuations benefited EMS sales by $1.8 million versus Q4. We saw a decline in overall EV/HEV sales in Q1 following very strong Q4 sales. Also, as noted earlier, there is a timing element involved as some of our power interconnect customers, production ramp-up schedules have been pushed out further. Turning to Slide 10. Our gross margin for the first quarter was $79.7 million or 32.7% of sales. This was a 90 basis points improvement versus the prior quarter and 20 basis points above the top end of our Q1 guidance range. The increase in gross margin resulted from higher volume, which was partially offset by unfavorable product mix. Improved factory utilization and lower logistics costs also contributed to the higher gross margin. The cost actions we undertook in Q4 and Q1 began to have a positive effect on margins in Q1, and we expect even greater impact in Q2. Turning to Slide 11. I will next discuss the change in operating income versus prior quarter. In aggregate, Q1 operating profit decreased approximately $83 million versus Q4. This was primarily due to the receipt of a one-time $142 million termination fee net of expenses from the terminated DuPont merger in the fourth quarter of 2022. This termination fee more than offset the restructuring and impairment charges related to the Price Road facility and the rubber business that were incurred in that quarter. On a GAAP basis, we recorded a slight operating loss of $0.3 million in Q1. After adjusting for restructuring, severance, impairment charges of $11.9 million, non-routine shareholder advisory cost of $7.6 million and other items, adjusted Q1 operating profit was $25.5 million. Adjusted operating margin of 10.5% improved 120 basis points from Q4. Continuing to Slide 12. Ending cash at 31st March was approximately $194 million, a decrease from $236 million at the end of 2022. The decrease in cash was primarily related to a $25 million discretionary repayment of debt on our revolving credit facility and capital expenditure in the quarter. Also in the quarter, we amended the terms of our revolving credit facility to extend the maturity date to March 2028, while maintaining the same primary borrowing limits and a slightly higher expansion feature. Capital expenditures were $16.4 million in the first quarter. We maintain our full year capital expenditure forecast at $65 million to $75 million. As emphasized at our recent Investor Day, we will focus on maximizing throughput of existing production lines before investing in new capacity. Next, on Slide 13, I will discuss our guidance for the second quarter. First, net sales are expected to range between $235 million and $245 million, similar to Q1 results. We expect some near-term challenges in the macro environment to temper sales growth in Q2, particularly in the industrial and portable electronic markets. Despite the relatively flat volume versus the first quarter, we expect continued improvements in gross margin from the cost improvement actions implemented. As a result, we expect gross margin to be in the range of 33.5% to 34.5% for Q2. Earnings per share is expected to range from $0.65 to $0.85 and our adjusted EPS range is expected to be between $0.95 and $1.15. Our GAAP EPS range includes approximately $3 million of after-tax accelerated depreciation and severance expenses related to our previously announced actions. This is in addition to the $2.5 million of after-tax acquisition intangible amortization expenses. We continue to expect our full year tax rate to be around 23%. We are committed to our profitability improvement goal. And as we execute our cost improvement actions, we are focused on achieving 34% gross margin in Q2 and making additional improvements in the second half of the year. I will now turn the call back to the operator for questions.
Operator: [Operator Instructions] And our first question comes from the line of Daniel Moore with CJS Securities.
Operator: Our next question comes from the line of Craig Ellis with B. Riley Securities.
Operator: [Operator Instructions] Our next question comes again from the line of Daniel Moore with CJS Securities.
Operator: Our next question comes again from the line of Craig Ellis with B. Riley Securities.
Operator: Thank you. Ladies and gentlemen, there are no further questions at this time. And this will conclude today's conference. You may disconnect your lines, and have a great rest of your day.
