Rogers Corporation (NYSE:ROG) Q4 2023 Earnings Call Transcript
Rogers Corporation (NYSE:ROG) Q4 2023 Earnings Call Transcript February 21, 2024
Rogers Corporation misses on earnings expectations. Reported EPS is $0.6 EPS, expectations were $1. Rogers Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Kevin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Rogers Corporation Fourth Quarter 2023 Earnings Conference Call. I'll 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 Fourth 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. 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 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. The discussions during this conference call will also reference certain financial measures that were not prepared in accordance with U.S. 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 four, with me today is Colin Gouveia, President and CEO; Ram Mayampurath, Senior Vice President and CFO; and Larry Schmid, Senior Vice President of Global Operations and Supply Chain. I will now turn the call over to Colin.
Colin Gouveia: Thanks, Steve. Good afternoon to everyone and thank you for joining us today. I'll begin with the headlines of our quarter, year, and outlook on slide five. Overall, the macro-economic headwinds we faced throughout the fiscal year persisted through the fourth quarter, prompting more pronounced destocking at our customers and contributing to broad market softness across our end markets. In particular, our sales in the general industrial and portable electronics segments significantly declined compared to the third quarter. Lower sales volumes more than offset the procurement cost savings we achieved in Q4, and as a result, gross margins and adjusted earnings fell below our expectations. The ongoing contraction in global manufacturing activity, which has persisted for more than a year in many countries, continues to have a meaningful impact on the general industrial market, which comprises much of our core business.
We are not yet seeing sustainable signs of improvement in this market, but we believe we are near the bottom of this cycle and may begin to see some recovery mid-year. While we anticipate the macro environment will remain challenging, Rogers continues to focus on variables within our control to position us to respond once demand improves. Our commitment to aggressively manage costs while simultaneously advancing our growth strategy is reflected in our full-year 2023 results which include gross margin improvement and solid free cash flow generation. We also secured significant design wins and brought on new team members to help execute our strategy. I'll speak more about our 2023 accomplishments and near-term priorities later in the call. We also announced today that due to persistent challenges in the global manufacturing economy and a lack of near-term quite visibility in the EV market, the timeline to reach our March 2023 Investor Day targets is being extended beyond 2025.
We have not changed our view about what we can achieve, just the timing of when we achieve it. The longer time frame for recovery does not change our strategic objectives or confidence in the future. Rogers is grounded in leading industry positions and relationships with our customers. As we manage this business for growth, profitability, and success over the long and short term, we continue to invest, so we are positioned to capture opportunities when the market recovers. We believe the strength of our team, significant opportunities in our end markets, and our differentiated technology will position us to achieve our goals. Before providing more detail on our quarterly performance, I'd like to touch on some of our Restore accomplishments in 2023.
Please turn to slide six. Our recent actions have helped fortify our business against the weaker macroeconomic environment, while at the same time positioning us for long-term success. The first key objective we outlined was cost improvement. We took a series of actions in 2023 to adjust our cost structure to meet demand, strengthen our product portfolio, and optimize our capacity footprint. We also executed on operational excellence initiatives which lowered costs and helped us better serve customers. Larry Schmid, our SVP of Operations and Supply Chain, will speak more about our progress in these areas shortly. Executing on our cost improvement objectives and carefully managing adjusted operating expenses helped us make progress in our margin improvement journey in 2023.
Our objective was to achieve 35% gross margins in the second-half of 2023, which we hit in Q3, demonstrating what Rogers can achieve despite a tough environment. Lower sales volumes did lead to a decline in our gross margin in Q4, however, we saw a meaningful full-year 2023 gross margin improvement. These actions to improve our cost structure are sustainable and will help drive an increase in gross margin as sales return to more normalized levels. Next, we bolstered the organization with new leadership in R&D, operations, supply chain, legal, human resources, and business development. We now have the right skill sets in place to execute on our short and long-term goals as we move forward. Lastly, we secured important design wins in our key end markets.
We selectively invested in new capacity and we paid down $185 million on our revolving debt facility. With an even stronger balance sheet entering 2024, we will be able to continue to fund both organic and inorganic growth. I'll now turn it over to Larry to discuss our progress on operations.
Larry Schmid: Thanks, Colin. Turning to slide seven, I'll discuss how we delivered on the 2023 operations objectives that we outlined at last year's Investor Day and more importantly, the many ongoing operational and supply chain excellence initiatives that we continue to pursue. I'll begin with our most important resource, our dedicated and talented employees. I'm very pleased with the great progress we made over the course of the year, bringing on highly experienced talent from top-tier multinational organizations. Through a targeted hiring process, we filled key global leadership positions in safety, procurement, supply chain, and technical operations. Simultaneously, we fortified our safety management, processes, and systems.
The safety culture at Rogers has always been a strength and we remain focused on driving our performance towards best in class. Second, as Colin touched on, we made substantial progress with our operational excellence initiatives in 2023. For example, we delivered significant manufacturing and procurement cost savings by implementing new sourcing strategies focused on optimizing both direct and indirect spending. Additionally, we continued to drive year-over-year manufacturing efficiencies and productivity improvements to lower structural costs. We also improved on on-time delivery performance to customers and drove improvements in our integrated business planning process. Looking ahead, we are still working aggressively to drive further supplier diversification and deliver additional savings in manufacturing spend.
Likewise, we will continue to pursue improvements in yields, asset utilization, maintenance and reliability costs, and energy usage. Lastly, the operations team achieved a nearly 10% capacity utilization improvement in our Curamik operation, our fastest-growing business last year. With strong demand in our Curamik business, we also began deploying new capacity in China. This work is continuing at full speed in 2024 and we look to begin commissioning and internal qualification activities later this year, with mass production expected to begin no later than mid-2025, of course, subject to overall market conditions and customer approvals. As always, we will also continue to implement other yield, capacity, and quality improvements this year to help support customers and the growth of our businesses.
With that, I'll now pass it back to Colin.
Colin Gouveia: Thanks, Larry. Turning to slide eight, I'll next touch on our fourth quarter results. Sales of $205 million declined approximately 11% from the prior quarter and were below the low end of our guidance due to lower than anticipated industrial and portable electronics sales. In reviewing the end market sales results, I will start with the EV/HEV segment, our significant growth category. Q4 EV/HEV sales improved at a double-digit rate versus the prior quarter led by our power substrate products. Demand for EMS, EV, HEV battery products also improved. For the full year, EV/HEV sales declined mid-single digits. We had very strong growth in our power substrate technology where the growing demand for silicon carbide power modules and EVs and HEVs continues to drive demand for our products.
This sales increase was more than offset by much lower power interconnect sales, which declined in 2023 as certain customers work through higher inventory levels ordered in 2022. In our high-growth markets, portable electronic sales declined meaningfully versus the prior quarter due to normal seasonality and weaker demand from certain key OEMs. This ended the year where the global smartphone market declined sharply. We anticipate some improvement in 2024 depending on consumer traction with new models that will be introduced later this year. Sales in the aerospace and defense market declined versus the prior quarter. Commercial aerospace demand was lower following a very strong Q3, and defense demand declined primarily related to program timing.
Full year sales also declined, but we expect this will be a key growth market going forward. We saw good full year growth in both the ADAS and renewable energy markets. The growth in renewable energy was led by demand for our advanced power substrates. In our core markets, we saw a sequential double-digit decline in industrial sales. Full year industrial sales were also significantly lower versus 2022. As we've highlighted, the ongoing contraction in manufacturing activity in the U.S. and EU combined with a weak post-COVID recovery in China created a strong headwind in this market last year. Lastly, we secured sizable design wins in our AES and EMS business this past quarter. Our ceramic advanced substrate technology was designed in by a major power module supplier and will be utilized in this customer's high performance 800 volts silicon carbide power module platform.
In our rolling’s business, we secured a design win for our power interconnects and a major renewable energy project. We also secured an important design win in our EMS business with a leading medical device manufacturer. Rogers was selected based on the performance of our advanced materials and our highly customized solution design. Now I'll turn it over to Ram to discuss our Q4 financial performance and Q1 outlook.
Ram Mayampurath: Thanks, Colin. I will begin on slide nine by reviewing our full year results before discussing Q4 in more detail. As Colin and Larry highlighted, we have made good progress in many areas in 2023, including improving our cost structure and driving free cash flow even as macro conditions were challenging. Full year sales were $908 million, a decrease of 6.5% from the prior year. Gross margins increased by approximately 75 basis points to 33.8%. The improvement in gross margin on meaningfully lower sales volume highlights the structural cost reductions made last year. We also contained 2023 operating expenses and lowered our overall SG&A spend dollars versus 2022. With the improvement in gross margin and by flexing OpEx lower, we partially offset the impact from drop in sales volumes.
Adjusted EBITDA margins was 16.3% in 2023 and roughly in line with the prior year. For the full year, adjusted EPS was $3.78 compared to $4.91 in 2022. On slide 10, I'll discuss our Q4 sales results in more detail. Net sales of $205 million declined 11% versus the prior quarter due to lower volume of approximately $23 million and unfavorable foreign currency fluctuations of close to $2 million. On a reportable segment basis, AES revenue decreased from the prior quarter by 7.2% or $117 million. Sales decreased in aerospace and defense, industrial, and renewable energy markets. This was partially offset by higher EV/HEV sales and a slight increase in ADAS. EMS revenue decreased by 14.9% to $83 million resulting from lower portable electronics and general industrial sales.
These declines offset improvement in EV/HEV sales. Turning to slide 11, our gross margin for the fourth quarter was $67 million or 32.9%, which declined from 35.1% in Q3. The decrease in gross margin was mainly a result of lower sales volumes and under absorbed production costs. These demand related headwinds reduced gross margin by approximately 350 basis points from the prior quarter. This reduction was partially offset by approximately 150 basis points of procurement savings and other manufacturing efficiencies in Q4. Although we are seeing some impact to gross margin from our current factory staffing levels, we intend to carry these costs through Q1 in anticipation of improved demand by midyear. Q4 adjusted income decreased to $11 million versus $23 million in Q3.
Q4 adjusted earnings per share was $0.60 compared to $1.24 in the prior quarter. The sequential decrease in Q4 adjusted net income resulted mainly from lower gross margin and higher adjusted operating expenses, which was partially offset by lower tax expenses. Adjusted operating expenses were higher in the quarter mainly due to increase in R&D cost and G&A professional services to support key strategic initiatives. Adjusted operating income does not include an insurance recovery of approximately $24 million received in the fourth quarter in connection with the fire that occurred at our Utis factory in 2021. This recovery is reflected in our GAAP net income of $23 million and GAAP EPS of $1.24. Continuing to slide 12, ending cash at December 31st was approximately $132 million, a decrease of $104 million from the end of 2022 and a $5 million increase from the end of Q3 2023.
We generated strong operating cash flow of $72 million in Q4 and $131 million for the full year. This enabled us to invest in capital to support our organic growth initiatives and make discretionary repayments of $185 million on our revolving credit facility. Capital expenditures were $23 million in the quarter and $57 million for the year. We dedicated considerable effort in 2023 to improve gross margin and manage working capital, which further strengthened our balance sheet. We are well positioned to execute on our capital allocation priorities, primarily driving organic growth as well as managing debt, strategically investing in synergistic M&A, and returning capital to shareholders. Next on slide 13, I will discuss our guidance for the first quarter of 2024.
Net sales are expected to range between $205 million and $215 million. The midpoint of this range is slightly higher than Q4 as RF solutions demand is forecasted to be stronger in Q1. We are guiding gross margin to be in the range of 32% to 33% for Q1. The 32.5% midpoint of our guidance is lower than our Q4 results due primarily to changes in product mix. As mentioned, our guidance also reflects costs that we are carrying in anticipation of a topline recovery. In addition to the capacity expansion investments, we will incur additional operating expenses this year to capitalize on our growth opportunities. Startup costs are projected to be between $1 million and $2 million in Q1 and will continue for the remainder of the year. Depending on how demand levels evolve, these startup costs may be adjusted.
Earnings per share is expected to range from $0.30 to $0.50 and adjusted EPS from $0.45 to $0.65. We project our full-year tax rate to be around 25%. Finally, based on our current view, we anticipate Q1 guidance to be the low point of sales in 2024. We also anticipate that the second-half of the year will be stronger than the first-half. I will now pass the call back to Colin to discuss our multiyear financial targets.
Colin Gouveia: Thanks, Ram. Turning to slide 14, following some significant changes in the external environment in 2023, we are extending the timeline to achieve our Investor Day financial targets to beyond 2025. This decision is a result of several compounding factors across various markets that have affected our business over the last year. The first and most impact factor is the slower than expected recovery in the global manufacturing industry. As reflected in our Q4 '23 results and our Q1 '24 outlook, the continuing contraction of the manufacturing economy meaningfully reduced sales in our general industrial and other core markets. These challenges have been broad-based, including in the U.S., Europe, and China. We believe we may begin to see some recovery in industrial markets in the second-half of 2024, but there is much uncertainty around the timing of a recovery.
The next factor leading to this change is the lack of near-term visibility on electric vehicle growth. Since the middle of 2023, there have been a number of automakers that have announced changes to their EV production plans in response to the demand environment. Subsidies have also been reduced or removed for EV's, for example in Germany. As a result, there is increased variability in the timing of when certain design wins and projects in our opportunity funnel will happen. To be clear, these recent events do not change our view of the long term growth potential in the EV market, but it does create a lack of visibility at the present time. Third, we are revising our growth rate in certain markets that are facing different challenges. In the portable electronics market, we are projecting some recovery in 2024 following the significant market declines in 2023.
However, the medium-term outlook remains muted as the premium segment of the market where we primarily participate is forecasted to grow at a lower rate as consumers keep existing phones longer. In the wireless infrastructure market, we expect sales to decline going forward given the weaker than anticipated 5G based station rollout in many regions. Before moving on to more specifics regarding our growth targets, I'd like to reiterate that we will remain firmly committed to our strategy that will position Rogers for sustainable growth and long term shareholder value. The EV/HEV opportunity remains a significant long term growth driver for our business and the global automotive industry in general. As leading OEMs work through the near-term challenges associated with this transition, Rogers is a valued partner providing mission-critical materials solutions for our customers.
Overall, our technology and strong positions in our key markets remain differentiators for the company that will propel us forward despite the present headwinds. On slide 15, we have provided the key assumptions and strategic initiatives that will help us reach our multi-year sales target of $1.2 billion to $1.3 billion. We are also providing growth rate expectations for our core, high, and significant markets, although these are directional in nature given the current level of uncertainty. Starting with our significant growth markets, we continue to believe that our significant growth market comprised of EV/HEV will be the strongest contributor to reaching our sales target. We project this market will increase at a CAGR in the high teens or possibly stronger depending on EV demand levels.
This growth is expected to be led by our ceramic power substrate business, which grew rapidly in 2023 and where we have the greatest visibility to customer demand. The first phase of our new ceramic facility is anticipated to be a major contributor to this growth. We are planning for commercial production to begin in 2025 with a full production run rate to 2026. The growth outlook for silicon carbide in EVs and HEVs remains very strong and our power substrate solutions are integral to enabling that growth. We also anticipate that some of our significant EMS EV battery design wins will begin to ramp in the 2025 to 2026 time frame. The timing is later than expected at this time last year and has changed due to specific OEM manufacturing challenges and softer demand leading to production delays.
We are on the print in these important programs and we expect this will be a strong growth opportunity for us as production increases over the coming years. In our rolling’s business, we are opening a new facility in Mexico that will manufacture our advanced Busbar technology primarily for the EV/HEV and renewable energy markets. This targeted investment continues our regional footprint strategy and will enable us to better serve our customers in North America. Importantly, this projected growth in EV will not be linear given the timing of our new capacity additions and likely fluctuations in market demand. Turning to our high-growth markets. We are planning for these markets to grow at a mid-single digit range over the next few years. This is lower than our previous assumption due to the challenges discussed in the portable electronics markets, a more measured view of global economic growth in the coming years, and the likelihood that these markets will not grow as quickly.
We expect aerospace and defense and renewable energy to provide the strongest growth. The outlook for A&D is based on both specific defense programs utilizing advanced radar technologies and the substantial backlogs in commercial aerospace production. The outlook for new solar and wind deployments remains strong and we expect growth with both our power substrate and power interconnect solutions. And in our core markets, we anticipate growth in the low single-digit range. This reflects both the weaker near-term demand in general industrial and consumer markets and our expectations for a gradual recovery. The outlook for decline in the wireless infrastructure market is also contributing to the lower growth rate. Finally, while our targets are based on organic growth assumptions, synergistic M&A will remain a key part of our strategy.
As always, it will be subject to timing as we follow our disciplined process to identify the right opportunities to be transacted within targeted financial parameters. In summary, we have a very clear strategy to achieve these financial targets. Based on the visibility of design win ramps and supporting capacity investments, we expect growth over the next few years. However, the current market uncertainty makes it challenging to predict timing and the exact rate of growth. For this reason, we are not currently able to specify at what point in the next few years we are likely to reach these targets. As we wrap up our prepared remarks, let me reiterate today's key messages. First, we made great progress in 2023, making structural changes to our cost structure, improving cash flow, and storing up the organization.
We are also making the necessary investments in capacity and organizational capabilities to grow as these significant market headwinds ease. We have great confidence in our technology, our innovation capabilities, and the talented employees at Rogers as we work to deliver on our financial targets. With that, I will now turn the call back over to the operator for questions.
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