Rogers Corporation
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good day. My name is Cody, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation First Quarter 2021 Earnings Call. At the end of today’s prepared remarks, there will be an opportunity to ask questions. I would now like to turn the call over to your host, Mr. Steve Haymore, Director of Investor Relations. Sir, you may now begin.

[Steve Haymore:]

Thank you, Cody. Good afternoon, everyone. And welcome to the Rogers Corporation first quarter 2021 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 today.

[Bruce Hoechner:]

Thanks, Steve. Good afternoon, everyone. Thank you for joining us today. Please turn to slide four. Rogers delivered another strong financial performance in Q1, driven by growth in Advanced Mobility markets, a strengthening market recovery and continued operational excellence. First quarter net sales increased 9% to $229 million and exceeded the top end of our guidance. Gross margin improved to 39% as a result of our strong operational performance. EPS also exceeded the high end of our guidance and we reported earnings of $1.66 per share on a GAAP basis and record adjusted earnings of $1.92 per share. The increase in Q1 sales was broad based and nearly all of our markets increased at double-digit rate. The impressive growth was enabled by both our strategic focus on fast growing markets and the ongoing economic recovery. We continue to realize the benefits of our multiyear investments in innovative technologies to capitalize on the accelerating opportunities in Advanced Mobility markets. EV/HEV and ADAS sales increased at double-digit rates sequentially and grew more than 30% compared to Q1 of 2020. Sales of compression pads and related solutions for EV batteries were especially strong and more than doubled year-over-year. Sales of our power semiconductor substrate solutions were also higher.

[Mike Ludwig:]

Thank you for the kind words and well wishes, Bruce. Your thoughts are truly appreciated. I’ve enjoyed my time at Rogers immensely and I’m appreciative of the opportunity to have made a positive impact on the results and culture of Rogers. It’s been my fortune to work with a tremendous senior management team, a supportive Board and the hardworking, dedicated Rogers global community. Let’s jump back to the results and the slides ahead. I’ll review our first quarter 2021 results. Turning to slide nine, as Bruce mentioned, Rogers delivered strong financial results in the first quarter. Revenues increased sequentially in both our EMS and AES business segments. As communicated in our Q4 earnings call, the AES business segment is comprised of the former ACS and PES business segments. We delivered gross margin that was 70 basis points higher than Q4 through increased volumes and operating efficiency, despite a less favorable product mix and significantly higher commodity and freight costs. In Q1, we delivered strong earnings through increased revenues, improved gross margins and increased other income. In our GAAP results we recognized $1.5 million in restructuring cost related to the footprint optimization activities communicated in our third quarter 2020 call and $1.3 million for the loss resulting from the fire at our UTIS facility, net of expected insurance proceeds. Our effective tax rate for Q1 was 21.2%. Turning to slide 10, our Q1 revenues of $229.3 million increased by $18.6 million, compared to the fourth quarter, reflecting broad strength across our product markets. AES revenues increased 10% to $131.9 million, while EMS revenues grew 6% to $91.8 million. Currency exchange rates favorably impacted first quarter revenues by approximately 1.5% compared to Q4. AES revenues grew sequentially due to strong demand in all three product lines, RF solutions, power semiconductor substrates and power interconnects. Within RF solutions, the aerospace and defense business accounted for 19% of the business segment revenues and grew 15% sequentially, the ADAS business accounted for 18% of the revenues and grew 12% and wireless infrastructure accounted for 17% of the revenues and grew 26%.

[Ram Mayampurath:]

Thank you, Mike. It is a privilege to be named as CFO at Rogers and I am extremely excited about the opportunity to serve in this capacity at such a pivotal time for the company. I would like to thank Mike for his leadership and have appreciated the opportunity we have had to work closely together. Lastly, I look forward to becoming better acquainted with the members of our investment community. Turning now to the second quarter guidance on slide 13. As Bruce discussed earlier, we see continued strength in many of our markets particularly in advanced mobility, general industrial, defense and wireless infrastructure. Based on this strong outlook, we are guiding our second-quarter revenues to be in the range of $230 million to $240 million. Effect of our UTIS factory being offline and the lack of availability of certain raw materials will impact our second quarter growth. Following several quarters of significant gross margin improvements, we expect Q2 to be flat sequentially before improving further in the second half of 2021. To prepare for our strong second half, we will be stepping up our resources across the business in the second quarter. Also in the quarter, we will continue to see challenges from mix, raw material cost increases and supply constraints related to the Gulf Coast interruptions mentioned earlier. We have taken commercial actions to mitigate the increase in raw material costs. These actions will have a positive impact on our gross margins in the second quarter with full impacts benefiting the second half of 2021. We expect to overcome the supply constraints by the end of the second quarter and see favorable impact from higher volume and better mix in the second half. We guide our gross margins to be in the range of 38.5% to 39.5% consistent with our first quarter. The company will recognize higher operating expenses in the second quarter from timing of certain expenses including performance based compensation. Costs incurred to support anticipated growth in the second half and to restore UTIS operations will also increase operating expenses in the quarter. We are guiding GAAP Q2 earnings in the range of $1.58 to $1.73 per fully diluted share and we guide fully diluted adjusted earnings in the range of $1.80 to $1.95 per share for the second quarter. I will now turn the call back to the Operator for questions.

[Operator:]

Thank you. We’ll take our first question from Craig Ellis with B. Riley Securities. Please go ahead.

[Craig Ellis:]

Yeah. Thanks for taking the question. Congratulations on the first quarter execution. Welcome aboard, Ram or welcome to the role. You’ve been onboard for a long time and Mike, thanks again for all your help. So, I’ll start with a clarification question Ram, on your comments for the second quarter guide. Can you just help us understand the magnitude of the supply chain issues that are at play both in revenues and gross margin, can you quantify what those are on those two line items?

[Ram Mayampurath:]

So, the supply chain constraints are about a $1 million impact, if you may. Both the raw material price -- net of price increases and the supply constraints contributed to about 75% of our gross margin comparison to Q1, so about $1 million mostly from shortages in raw materials.

[Craig Ellis:]

Okay. So that’s…

[Ram Mayampurath:]

Okay.

[Craig Ellis:]

… pretty small, but -- yeah. Got it. Okay. And then the second question and I’ll keep it in your court and then I’m going to flip over to Bruce for a couple. You had talked about enjoying a benefit in the second half from higher volume and favorable mix on gross margin. So the question on the volume point is, where do you have better demand visibility in the second half? And to what extent is it really the -- potentially the fourth quarter return of the UTIS business and better portable electronics participation that’s driving that higher volume or is it things that you’re seeing in the other parts of the business, whether it be Advanced Mobility with its pieces, et cetera?

[Ram Mayampurath:]

Yeah. It’s a combination of both the reasons you mentioned, Craig. Second half tends to be, as you know, particularly Q3, stronger for our portable electronics business and we are generally seeing an overall lift in many of our markets, general industrial, EV continue through and even exceed in the second half. That’s why we’re making some of our investments in Q2 to prepare for that.

[Craig Ellis:]

Got it. And then, Bruce, I’ll flip it to you for more of an intermediate to longer term question. It certainly seems like you’ve engineered the portfolio and the team’s got the business very well aligned for an array of strong growth drivers and the company is committing $70 million to $80 million in capital spending to provide the capacity for growth. The question is, to what extent does that capacity start to come on this year and to what extent is that really a 2022 benefit and is it particularly beneficial to any of the segments or the sub-segments or will it be more broadly applicable to the portfolio?

[Bruce Hoechner:]

So it kind of channels in over the course towards the end of this year and then as we move into 2022. So we see certainly on the ceramic side some increases in capacity coming onstream. Of course, the recovery of UTIS also brings back some more capacity back onstream and the investments that we’ve already announced on the PORON business will come into effect in 2022. So we’ve -- a lot of it -- some of it comes in the end -- towards the end of this year and then certainly as we move into 2022.

[Craig Ellis:]

Got it. And can you quantify what magnitude of capacity that would give you beyond where you are today? If the business has capacity that’s some degree above current revenue levels, how much could that $70 million to $80 million add beyond where you are currently?

[Bruce Hoechner:]

It’s -- that’s an interesting question. The way that we look at it, this capacity as we look out over the next couple of years gets us in very good shape with the growth trajectories that we see. So, the 30%, 40% growth in EV/HEV in both sides of the house, in both the ceramic side, as well as on the PORON -- on the Elastomeric side as well. So we think we’re keeping in pace with the growth rates. I think we’ve also indicated, as we move into 2022 and beyond. We will carefully monitor the needs that we have. These are high growth markets and we’re very -- been very analytical in looking at and understanding when the next tranche of investment needs to happen to continue with the trajectory of the market growth. So as we go through this year and into next year, I would say, that CapEx is going to be probably similar in 2022, given the growth outlooks that we have. So we’re well-tuned in here to keeping pace with these high growths.

[Craig Ellis:]

That’s very helpful. Thanks so much, Bruce.

[Bruce Hoechner:]

Sure. Thanks, Craig.

[Operator:]

Thank you.

[Bruce Hoechner:]

Good to talk to you.

[Operator:]

Thanks so much. We’ll hear next from Daniel Moore with CJS Securities.

[Daniel Moore:]

Good afternoon. Thanks for taking the questions and I’ll echo, Mike, thank you for all your help, and Ram, very much look forward to meeting and working with you.

[Mike Ludwig:]

Thanks, Dan.

[Daniel Moore:]

Just wanted to clarify -- thank you. The $1 million impact that is Q2 -- that’s the impact that we expect for Q2 or that’s what we saw in Q1 from the supply chain challenges?

[Ram Mayampurath:]

That’s the impact for Q2.

[Daniel Moore:]

Okay. Okay. So it is pretty modest. That’s helpful. And then maybe just talk about the broad recovery in industrial. Is it gaining momentum from your perspective kind of sequentially over the first four months of the year and are there particular end markets or geographies that you’re seeing recover faster?

[Bruce Hoechner:]

So, on the industrial side, so we saw a broad-based recovery quarter-on-quarter in our EMS business. So there’s -- it’s just broad base there. But we’re also -- we also saw it on the ceramic side of the house with motor controls, but also the laser systems and so forth, power modules for laser, that continue to rebound. And again, as we mentioned in the prepared notes, the capital investment in factories is driving the resurgence certainly in motor control systems and in the manufacturing lasers and so on, also as we mentioned in chip manufacturing equipment. So we see this -- this was the first real strong rebound that we’ve seen in the industrial side quarter-on-quarter and we see this continuing as we move into through the rest of the year.

[Daniel Moore:]

Excellent. And then we talk about it a little less these days, but wireless, maybe just talk about the outlook there? And more generally, are there any areas of your business where we should be thinking about H2 volumes lower versus H1 that would offset any of the strength that you’re seeing across really most facets of your business?

[Bruce Hoechner:]

Yeah. I’ll take the second part of your question first. I think we see sort of broad-based impact of the economic recovery across many, many of the markets that we’ve talked about. And then laying on top of that, we have the EV/HEV dynamic that’s propelling growth in those high 30% to 40% kind of numbers. In terms of the wireless side, there’s been sort of, I’d say, a flatness in China, in the rollout there, it slowed a bit and globally maybe slightly uptick outside of China. But that’s not too meaningful, because the bulk, as we’ve always talked about really is inside of China. But it was a good quarter-on-quarter growth for wireless infrastructure. But again, as we’ve mentioned, this is a relatively flat market for us, given the puts and takes between 4G and 5G demand. But overall, we see this as a nice continued part of the business. But we don’t see this as a real growth driver.

[Daniel Moore:]

Perfect. Very helpful. I’ll jump back with any follow-ups. Thank you.

[Bruce Hoechner:]

Thanks, Dan.

[Operator:]

Thank you. It appears we have no additional questions in the queue at this time. I’d like to turn the conference back over to Mr. Bruce Hoechner for any closing or additional remarks.

[Bruce Hoechner:]

I want to thank everyone for listening and attending today and it’s been a pleasure, as I said, working with, Mike, and I look forward to working more with Ram as we move ahead and take this country -- company forward. So thank you. Have a good evening everyone.

[Operator:]

Thank you. That does conclude today’s conference. We do thank you all for your participation. You may now disconnect.