Q3 2024 Rogers Corp Earnings Call

In This Article:

Participants

Stephen Haymore; Director, Investor Relations; Rogers Corp

R. Colin Gouveia; President, Chief Executive Officer, Director; Rogers Corp

Laura Russell; Interim Chief Financial Officer; Rogers Corp

Daniel Moore; Analyst; CJS Securities Inc

Craig Ellis; Analyst; B. Riley Securities

Presentation

Operator

Good afternoon. My name is Alicia and I'll be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation third-quarter 2024 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.

Stephen Haymore

Good afternoon, everyone, and welcome to the Rogers Corporation third-quarter 2024 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'd like to note that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to many uncertainties that exist in Rogers' operations and environment.
These uncertainties include economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement 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 US 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, which are available on our Investor Relations website.
Turning to slide 4. With me today is Colin Gouveia, President and CEO; and Laura Russell, Interim CFO. I will now turn the call over to Colin.

R. Colin Gouveia

Thanks, Steve. Good afternoon to everyone and thank you for joining us today.
Before I discuss the results for the quarter, I want to welcome Laura Russell as our Interim CFO. As we announced last August, Ram Mayampurath, our prior CFO, left the company to pursue another opportunity. Nevertheless, we are fortunate to have someone of Laura's caliber and skill set at Rogers. Laura brings more than 20 years of experience in the semiconductor space with more than a decade in senior financial roles with companies like NXP and Wolfspeed. She is already making a positive impact in her new role at the company.
Our CFO succession planning is continuing, and we will provide an update on this process when we have made a final decision.
Now turning to slide 5, I'll highlight the key messages for the quarter. Our results were mixed in the third quarter with earnings exceeding our guidance forecast, while revenues fell below the low end of our estimate.
The improved earnings were a result of a 35.2% gross margin, which surpassed the high end of our expectations, and lower operating expenses, which we continue to carefully control. Revenues for Q3 were lower than expected due to softer order patterns in the EV/HEV segment and a lower seasonal peak in portable electronics.
Overall, we are not yet seeing consistent indications of improved demand, particularly in our two largest markets, general industrial and EV/HEV. Ongoing contraction in global manufacturing activity continues to weigh on industrial. Global automotive production has been slowing in recent months, and while EV/HEV is growing, it is behind last year's pace.
However, despite the current headwinds, we do continue to see good growth potential in these and other market segments going forward. As such, we continue to make measured investments in capacity and capabilities to position Rogers for long-term growth.
One capacity highlight is the recent ribbon-cutting ceremony for our new curamik Power substrate factory in China. I'll provide more details on this event later.
Turning to slide 6. I'll review our third-quarter results. Revenues of $210 million declined 2% from the prior quarter as lower EV/HEV and ADAS sales more than offset higher portable electronics, industrial, and aerospace and defense growth.
Highlighting our key markets, I'll begin with EV/HEV. In AES, we've not yet seen meaningful demand improvement from our curamik Power module customers. In the EMS business, after two consecutive quarters of record sales, we saw softness in Q3 due to customer inventory management.
Portable electronics sales saw a strong increase from Q2 due to normal seasonal demand patterns. However, sales were below our outlook as build rates at one of our leading OEM customers were not as strong as anticipated.
Aerospace and defense registered good growth in Q3 led by AES. Although quarterly sales do fluctuate on program timing, we expect A&D sales to grow in the mid- to high single-digit rate for 2024.
RFS ADAS sales declined in the quarter, reflecting both softer auto production and increased competition at different points in the value chain. In response to these competitive dynamics, we are continuing to drive product innovation, improving our cost structure, and diversifying our customer base, particularly with emerging Asian players. Our innovation includes new copper-clad laminate technology that will be launched in Q4 and development of next-generation advanced radar solutions beyond laminates.
EMS saw a slight increase in industrial sales in Q3, led by the semiconductor segment. As I'll discuss more in a moment, overall industrial sales are still below the prior year due to the ongoing downturn in global manufacturing activity.
Wireless infrastructure sales were again strong in Q3 and improved slightly from Q2. As mentioned last quarter, this strength is driven by a specific project in India, which concluded in the third quarter. We are closely engaged with this customer on the next phase of this wireless build-out, which is currently in the design end stage.
There were clear positives in our Q3 results with improved operating margins, higher earnings, and good free cash flow generation. At the same time, we are disappointed with the Q3 sales results and the top-line Q4 outlook. The lower sales reflect persistent macro challenges and some customer-specific issues. We are intently focused on driving improvement in our top line. And in the next two slides, I'll expand on the improvement actions underway.
Starting on slide 7. I'll cover the industrial end market, where sales are roughly $10 million to $15 million lower per quarter versus the first half of 2023. The decrease is primarily due to the broader macro environment, which has impacted Rogers.
In our AES business, we are experiencing lower demand in industrial markets for our power substrates due to lower levels of capital investment in factory automation and other equipment used in automotive and semiconductor manufacturing.
The EMS industrial market is extremely diversified with roughly 15 submarkets. Demand in these markets correlates to global manufacturing activity levels, which in the US and the Eurozone have contracted for most of the last two years.
Despite the downturn, we are seeing growth opportunities in certain segments such as medical devices, data centers, and battery energy storage systems or BESS. The opportunity in BESS spans both business units.
In AES, this includes curamik Power substrates and ROLINX busbars to enable efficient conversion and distribution of power. In EMS, our urethane and silicone materials offer solutions to improve battery efficiency and life. In medical, our EMS materials seal and protect medical devices such as CPAP and dialysis machines and provide solutions to improve vaccine manufacturing and transport.
Semiconductors is another of the faster-growing opportunities in industrial. We have seen improved year-over-year sales in 2024, but demand has yet to return to 2022 levels. Growth in these markets won't come immediately, but we are seeing traction with the recent design win in data centers where our silicone adhesive films will be used in a server power supply system.
Our AES business also has opportunities targeted to AI data centers. These projects are still in the early stages but are focused on leveraging our capabilities in thermal management and signal integrity.
Turning to slide 8. I'll provide an update on the EV/HEV market, where our 2024 sales have been approximately $5 million to $15 million lower per quarter compared to the first half of 2023. As we have discussed on prior calls, the main driver is the inventory correction curamik customers have been managing since late Q1 of this year. The decline in AES sales has more than offset a greater than 50% growth in EMS EV/HEV sales year to date.
In anticipation of a recovery in the power substrate market and the compelling future growth opportunities in EV/HEV, we are making measured capacity investments in two new manufacturing facilities in China. These investments include the new curamik Power substrate facility and a new BISCO silicone production line.
We also continue to work aggressively to secure new design wins. As we've highlighted in prior quarters, we have secured several significant wins in our AES business this year with both Western and Asian power module customers and EV OEMs.
In Q3, we were awarded another design win for our AMB power substrate technology that will be used in an 800-volt silicon carbide inverter for a leading Asian OEM with deliveries beginning in Q1 of 2025. In our EMS business, we continue to have a healthy opportunity funnel and have also secured important design wins this year with several key OEMs that serve the US, Asian, and European markets.
Turning to slide 9. I'll expand on the compelling long-term opportunity we see with curamik and the EV/HEV market. Two weeks ago, I was in Suzhou, China for the ribbon-cutting ceremony of our new curamik Power substrate factory. We welcomed local government officials and dozens of customers representing both Western and Chinese-headquartered companies.
This new factory will complement our existing manufacturing facility in Germany, and importantly, will support our regional capacity strategy, enabling us to better support our customers who are expanding in China. This new factory will manufacture AMB substrates.
Third-party market research expects that the market for this latest substrate technology will grow at a 20% CAGR over the next several years, driven by the increasing adoption of silicon carbide power modules in the EV/HEV, industrial and renewable energy markets. We expect to begin shipping the first customer samples from our new factory in Q4 with mass production scheduled in late Q2 of 2025.
Now in closing, I'll recap today's key messages. First, we had mixed Q3 results with good earnings growth and a softer top line, which was below our expectations. This softer ordering is carrying through into our lower Q4 guidance, and we are working aggressively to drive improvement.
We are intently focused on securing design-in wins, pursuing regional manufacturing strategies and prioritizing higher growth segments to drive improvement in the coming quarters. We expect that these actions in combination with demand recovery in power modules, further ramping from our EV/HEV battery customers and improvement in global manufacturing activity will provide the opportunity for meaningful growth in 2025.
As we focus on the top-line growth, we will, as always, continue to manage costs and CapEx investments as we prioritize maximizing profitability and cash flow.
Now I'll turn it over to Laura to discuss our Q3 financial performance and our Q4 outlook.

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