Rogers Corporation (ROG) Earnings Call Transcript & Summary

All right. Well, thanks, everyone, for joining for those in-person in Scottsdale or online. Welcome to the UBS Global Technology Conference. My name is Josh Spector, North America Analyst covering chemicals and packaging companies for UBS. And we're hosting Rogers Corporation this next fireside chat. With me on stage are Colin Gouveia, who joined Rogers in 2019 and was promoted as CEO earlier this year and has 30-plus years in specialty chemicals with firms such as Eastman, Rohm and Haas and ICI. We also have Ram Mayampurath, who joined Rogers in 2014, was promoted as CFO in 2021. And in the front row here, we have Steve Haymore, Investor Relations for Rogers in the past 5 years with prior experience in finance and other Investor Relations roles. I'm going to turn it over to Colin in a second for a brief overview of Rogers and then we'll go into Q&A. [Operator Instructions] So I'll turn it over to you, Colin.

Thanks so much. So we have a brief presentation, if we can go to the next slide, and the next one, and the next one. Here are the speakers we were just introduced. So a couple of slides just to introduce Rogers and then we'll move through this so we can get to the questions. So I'll start with the investment thesis. Why invest in Rogers? Several reasons. First, we have a growth focus. So we're focused about 50% of our business in secular growth markets, and we'll talk about those in a bit in the upcoming next slides. We're an innovation leader. So at the heart of things, Rogers has been around for more than 190 years and leads the way with innovations in areas like high-frequency circuits and other areas. And we'll talk about our innovation pipeline as a growth thesis. We also have a unique value creation model in terms of our sales engineers calling directly on their OEM counterparts to understand unmet needs to drive specifications and then be put on the print, and that's been a model that's worked very successfully for the company for many, many years. And then finally, we'll get to the end, we'll talk about a compelling financial opportunity. So we'll talk about our current state of our business and where we see it going in the future. But all in all, we feel like we have a very robust and compelling growth thesis around Rogers. Next slide. I do want to comment that having been with the company for multiple years, we have a very good strategy that remains unchanged. It focuses on 4 pillars. The first one being market-focused in terms of our businesses are set up to focus on end markets to deeply understand unmet needs and develop solutions to solve those unmet needs, through innovation, which is the second thrust of our strategy. Finally, operational excellence is a key pillar, and that involves the 15 manufacturing sites we have globally. But improving our product and being able to produce on time in [ full ] to customers is a key piece of our strategy. And then the inorganic piece. We've made 5 acquisitions in the past 8 years and inorganic growth and M&A also remains a key piece and the fourth pillar of our strategy. Next slide. So just quickly at a glance. So we have around 3,600 employees globally. Our revenues last year were just north of $970 million. We've got 15 manufacturing facilities globally, 3 innovation centers, and then we have more than 5,000 customers in 70 countries. And when you think about Rogers, we have about 1/3 of our revenues in North America, 1/3 in Europe and about 1/3 in Asia. So we're well diversified in terms of geography and customers. Next slide. In terms of who we are. I won't go through each one of these but we can talk more about this in the Q&A but our technology enables things you use every day. So for example, as you pull out into heavy traffic and you're putting on your blinker to change lanes and that light goes on and your side mirror, that's ADAS. That's Advanced Driver Assistance Systems Radar. It picks up that car in your blind spot, helps you drive more safely. Another area where we participate heavily is portable electronics. So you can see smartphone durability. Most people have a case on their smartphone. And when they drop their phone, it prevents the phone from cracking, which is great. In fact, a lot of our material goes into the smartphone case companies as well. More importantly, we have the gasketing and sealing in place so that your camera array is not damaged. So if you drop your phone, your camera will still function. That's one of the areas where we participate in portable electronics. We'll go more into this in more detail later in the presentation and also in Q&A. If we go to the next slide, just very quickly, we have 2 reportable segments: One of them, Advanced Electronic Solutions or AES, contains 3 product lines. Our Curamik Substrate Technology is one. We have our ROLINX, power interconnect business, laminated busbars, and then we have our Radio Frequency Solutions business, which is Copper Clad Laminates that are a starting point to make radar and antennas. In the other reportable segment, Elastomeric Material Solutions, we have multiple brands but they basically consist of polyurethane and silicone foams. Also PTFE films and tapes, and they go into the key end markets you can see here, and we'll get into the end markets on the next slide. But basically, that's how we run our company. 2 reportable segments but we have 4 business units within those reportable segments, and they're listed here. Next slide, please. So this gets back and we'll provide more detail on what we talked about in terms of our growth thesis. So we're really excited about the markets where we participate. About 20% of our business at this moment goes into EV/HEV sales. And we view that as a high-growth market, in fact, significant growth, growing at about 20% to 25% CAGR per year. Another 30% of our business in what we consider are high-growth markets, which are the 4 end applications you see here, ADAS, aerospace and defense, renewable energy and also portable electronics. These markets grow roughly where we participate in that high single-digit, low double-digit CAGR per year. And then finally, about 50% of our business is in what we call our core markets, it's general industrial, which is probably about 10 different end market segments, such as oil and gas, appliances, lighting, medical and also wireless. And thus this core business, we like it because although it grows at GDP or GDP plus. It's great margins, and what it does is, provide a baseline to load our facilities to help us support this high-growth markets that you see on your right. Next slide. Here's a quick look at where we participate just in the EV space. And again, we'll talk more about this in the Q&A but it talks about our ceramic power substrates, which you see, which provides semiconductor chip packaging and also heat sink for power modules that go into inverters. Within the EV battery solution, our EMS business provides sealing and gasketing for the battery pack and also battery separator pads. And then finally, for our power interconnect business or our ROLINX brand, it will pull together through laminated busbars, all the power interconnect that's needed within an EV. In this case, it puts together the battery cell with all the power distribution mechanisms that go to run the vehicles such as the motor and headlights, et cetera. Next slide. What we've been trying to do over the past year is we've put out a 3-year plan that began being formulated when our deal with DuPont did not finish. And so this past year, we spent a lot of time restoring the company in terms of a lot of focus on cost improvement. We've made great progress in terms of our margin focus, moving our gross margin up to 35.1% in the third quarter, where it came out of quarter 4 last year was in that 32% range. And then we've also done a great job in terms of rehiring and bringing in new talent into the organization. We've rebuilt the executive team and also a level or 2 below and we think that's really positioned us for growth going forward. And the next phase, which we're talking about is the accelerate phase, which will be next year and '25, where we'll capture growth in these secular market trends. We'll work on commercial excellence in terms of improving capabilities there. We've got designed -- design-in wins that are already in place, and so we'll support those ramp-ups and we'll also scale the organization to keep pace. And then finally, we see us hitting the elevate stage at 2025 and beyond, where our financial performance will be quite good and we'll have our opportunity funnels delivering along with our innovation funnel. So this would be just a quick look at our path forward. If we go to the next slide. I'll turn it over to Ram to finish up, and then we'll get to that Q&A session.

Thank you, Colin. As Colin said, we are in the restore phase now, and we have made significant improvements in our gross margin, EBITDA and cash flow this year, and we've continued to project further growth in the years to come. We've set a goal of 38% to 40% for our gross margin improvements by 2025. And most of that is going to come from the top line growth that we discussed a minute earlier. About 70% of that growth is going to come from top line improvements. But we are also correcting the cost structure and the product cost. And most of that improvement will come from ongoing global manufacturing efficiencies, footprint consolidation, improving plant performance, procurement savings, about 55% of our product cost is raw material. So sourcing savings from -- saving our raw material cost is going to be a big part of our cost improvements and also design improvements, which come in the form of vertical integration pulling simple make versus buy decisions where it makes more sense for us to do rather than outsourcing certain operations. So a combination of manufacturing excellence, procurement savings and design improvements is how we track product cost improvements. And as we correct our cost line and the top line comes back, we'll see a lot more drop into the bottom line. We will have some headwinds. We did have some inflation headwinds that continue through this year. We will also have some investments we need to make, both in capacity expansion and in the P&L, to prepare for the demand that's coming. So that's going to hurt us in the gross margin by about 100 basis points in this time frame we are talking about. A couple of proof points of the margin improvements in the restore space. Our gross margin, like Colin said, has gone up by about 350 basis points year-over-year from Q3 last year to Q3 this year. And EBITDA went up by about 375 basis points. And EBITDA improvements also include OpEx savings, as we control our discretionary spending. So overall, our ambition is to grow the top line, improve our gross margins to 38% to 40% and then EBITDA and cash flow improvements. Capital allocation strategy is our last slide, and that has not changed. If there are any questions on that, I'll take it up in the Q&A. That concludes our prepared remarks.

We went a bit long there. So...

No problem. I mean I think it's a helpful overview to go through. I think to maybe start. So if you kind of roll up all your targets around the different markets and growth, you guys have forecasted about a high single-digit revenue growth potential over the next 5 years. I think if you look at Rogers historically, you've grown decently below that level. So when you're looking at the portfolio and the opportunity set now, what's different for Rogers that allows you to achieve that target and drive some of your confidence?

So what gets us excited about the growth is the markets where we participate. So that has changed over the past several years. I'll start with EV. We said it's about 20% of our business at this moment. Several years ago, it was 10%. So we've really seen some great growth in the EV space over the past several years. And we anticipate EV to be probably about 30% of our business over the next coming years. We like EV, especially because every one of our product lines participates there. And we've been able to grow and win design wins because our technologies are differentiated and provide value that our customers see and we feel good about that. The second thing is, when we provide guidance in terms of growth, we have a very good pipeline in terms of design wins, not just in the EV space but also in other end markets that we talked about. And these design wins are quantified, and we are ramping next year and the year after, and that gives us a lot of confidence in terms of our ability to deliver that growth rate. Another comment I'll make is that we've revamped our R&D group within the company. We had great talent that got us to this point, but we've brought in some, I would say, a new Chief Technology Officer, who will make a huge difference in terms of our innovation pipeline. We've already seen changes in terms of how we run our programs, how we're more efficient, and our innovation pipeline is very solid. So that gives us a lot of confidence in terms of how we can grow and hit these targets in the future. And then finally, we put a lot of effort into commercial excellence. So in terms of where to play and how to win, our organic growth playbook has changed in terms of how we do our strategic marketing in terms of making the right choices to allocate resources and there's been quite an improvement in this past year. This is a methodology I've seen and deployed and used very effectively at past companies. And Rogers is adopting as quickly. And I think this will also help us make the right choices to grow at that growth rate we've talked about.

Okay. And I guess, I mean, given the importance on EV -- importance of EVs, you showed some of the examples earlier, but I guess where do you think is the biggest opportunity that investors should look for in terms of EVs going in this direction, helps Rogers most versus least and some of the products behind that?

One of the biggest opportunities is related to our Curamik Substrate business, a ceramic substrate bonded with copper that goes into power modules that then go into inverters, pretty much every electric vehicle will need an inverter or has to have an inverter. Inverters also are used in renewable energy and in other places like appliances. So we have the leading technology in terms of providing the best performance around energy density for power modules that are built with silicon carbide chips. And we see that technology going into inverters as the leading technology. And those chips run hotter than previous silicon chips in the market. So you need better heat sink production. And we have the applications data to show our curamik material outperforms the competition, and has selected many times as the product of choice to go into power modules. So that's led us to put forward a quite a large expansion into China and to build a facility in China to mirror our existing facility we have in Eschenbach, Germany. So this will be built in China for China. Our facility in Eschenbach, Germany, has performed very well. We've been able to debottleneck in the past year of over 20% excess capacity. But we know when we see the ramp rates of our customers, that will need extra capacity. So we feel this is an excellent opportunity in terms of growth, and it's something we're also very excited about.

Yes. So I guess within that facility, is there a way to size or think about what that means for Rogers, so it comes online in 2025 and kind of the ramp-up period that investors should expect?

Yes, I can start, and then Ram can finish on that one. So our target is that plant will be ready to operate at the end of 2024. And then we'll ramp up and get qualified, and we should be at full run rate somewhere in the middle of the year 2025. But we're going to do it in phases. We're not going to bring on the entire capacity at once. We will size it so that we can expand the Phase 2 when needed, but we'll bring up Phase 1 first and then time Phase 2 according to market demand and how things develop. Ram, you may want to talk a little bit about the CapEx spend and how we do that?

That's right. So the CapEx spend for the first phase is in the $32 million to $35 million range. It includes the infrastructure needed for both phases and the and the equipment production lines for Phase 1 and will scale up as we see further demand. We haven't given out a number of capacity-wise, what that turnover will be next year, we'll get there. We'll communicate that as we get closer but it is clearly a step improvement from the normal growth we are seeing. So what Colin said before, the growth in the next years are not going to be linear, it's going to be tied to the capacity we put in place and the design wins kicking in, the timing of some of those design wins kicking in. So we clearly see a step change in '25.

Okay. That makes sense. And I guess when you talk about the advanced materials and the automotive radar and ADAS opportunity, can you maybe expand upon that a bit in terms of what Rogers is enabling and the applications there?

So for ADAS, good question, good one to expand on. Rogers is actually the market leader in terms of selling Copper Clad Laminates to the ADAS space to enable that type of radar, both in, I'd say, variable speed control or cruise control, blind spot radar also in cabin control. And what our materials do is, they act as the starting point to make antennas and radars that go into these vehicles. ADAS typically grows about 10% a year, and it grows much faster than the overall light vehicle market, which grows about 2%. Now EV/HEVs are growing 20% to 25%, as we said. And pretty much every EV has an ADAS package on it for safety. But what we also see is that for ICE engines, we see ADAS is growing there quite rapidly also. So even though they're growing flat or even declining, we're still seeing an increase in ADAS because people are putting ADAS in medium type of automobiles for safety. So we think that's going to remain a really strong growth area for us for many years to come, and we are the market leader in technology in terms of supplying the upstream starting materials that companies use to build the radar package.

Okay. And I guess -- so we're talking about a bunch of different products here, curamiks, laminates, the elastomeric materials, high-growth applications, what do you think about the moats against competition and what differentiates Rogers? And thinking more specifically when we're thinking about EVs and that opportunity, what prevents material or market share or value to maybe seed to Asia, more copycats versus the innovative products that you guys have been launching?

Sure. Well, Rogers has been a business for 190 years. So we're not afraid to compete and we have a long track record of competing. In terms of EV, and China, we've also been in China -- producing in China for more than 25 years. So we're familiar with Chinese technology. So it's a couple of things. First, it's around continually innovating. So if you stand pat on your existing technology, ultimately, competitors will catch up. So you need to continually drive innovation that provides more benefits that the customers are interested in. And I can talk about specifics of that in a minute. But I think one of the other reasons we remain differentiated for our competitors are 2 things I mentioned before. First would be our engagement model where, our sales engineers are highly trained engineers. And I've worked at many good companies previous to Rogers. But I think our sales engineers are the best trained sales folks I've ever seen, and they have a real strong capacity to interact with our OEM counterpart, to really get down and solve problems based on unmet CTQs at customers. And what we then do is we have a lot of deep applications expertise. So we can bring in our tech service and development folks. And if the product we have doesn't exactly meet what the end customer needs, we can run an iterative process where we can tweak the product on the bench through pilot lines or other means to get just to the product that our end customer wants. And that's pretty much unmatched. So if you think about the fast followers, they don't have that deep technical knowledge, and it's necessary for these high-value programs that we're winning. They also don't have, I would say, the applications expertise. So we can actually go in, for example, with a polyurethane foam and show data in terms of how it's performed in battery cells or modules and how versus competitive materials, we can increase the cycle -- the site -- the battery cycles twice or 3x as much by using our technology foam versus the competition. And that's very powerful in terms of winning design and wins because the conversation stays focused on cost and use and overall cost benefit to the customer and not on price. What we see typically from our competition is that typically, it's a price play, but we really focus on cost and use and value pricing and value selling. And that model has worked for us very successfully for many, many years, and we'll continue to tweak it and improve, but we think it will carry us forward and support our growth plans.

That's all interesting. It makes sense. Just bringing it back maybe a little bit more near term here. 2023 has obviously presented a lot of challenges for you guys and the broader economy market as a whole. I guess, framing relative to how you think about your growth, is there any way to think about what you expect to see play out in 2024, given maybe the low visibility that you guys have today?

Right. Well, maybe I'll start. So we don't typically provide guidance more than 1 quarter in advance and we're not reaffirming guidance from our last call. But when we look at '24, we feel optimistic based on the design-in wins that we've had started this year and their ramp volumes that are projected and also the new program wins that will start in '24. So we feel really good about that, where there's more I'd say, unclarity going forward is the macro environment. So at a certain point in time, we do depend on macro growth to help and bolster and support these design-in wins. And at this moment, it still remains unclear. If we're on the bottom now or if it will still be a quarter or 2 ahead before we get to the bottom, I think that's where the uncertainty comes in, in terms of for us 2024. But Ram, maybe you could add to that?

Yes. No, I think you covered it. But if you extend '24 into '25 and the targets we set, it was the key assumptions were putting the right capacity in place to take on the demand, the design-in wins that Colin talked about and the macro situation. One and 2 are in our control, and we are very satisfied with the progress there. 3 is what we are watching closely. And about 50% of our portfolio still is in what we call general industrial, very profitable segments of market but still tied very closely to macro. And that's the area we are watching carefully as it gets into '24 and beyond when that recovery will happen.

Okay. And I guess maybe linked with that, at your Investor Day, you guys had targets around top line growth and you just hit on the gross margin targets that you have only 9 months or so ago from then to now. But anything changed in terms of your thinking as you look out to 2025 and your 5-year plan?

So like I said, the first 2 that we control, the capacity expansion plans regionally, including the expansion in China, and the design-in wins we are very comfortable with. The macro, as we know, hasn't really played out this year, and we haven't seen the recovery we are expecting from China and other parts of the world that we saw at the beginning of the year. That's what we're evaluating now.

Okay. That makes sense. And just on the margin improvement side. So you mentioned 70% of that is linked more with growth, and you showed the slide earlier that showed basically you're halfway to your target. So as you look out over the next couple of years, how much of the residual margin improvement is from cost within your control versus growth?

We do have additional improvement actions on the cost side, particularly on the procurement savings. We have ongoing -- manufacturing excellence programs going on. So between that and possible design wins for pulling operations in-house where it makes sense, we do see further margin improvements from cost. But as we correct that cost line and product costs in general. The top line improvement in the right mix is really what will drive the big step change. So we do continue to see margin improvements from cost, but the big change getting us to the -- closer to that 40% will come from as top line comes back.

Okay. And I guess you hit on the capital allocation slide, but we didn't really go into it in much detail. Your balance sheet is in a pretty strong position. So how are you thinking about capital allocation priorities here?

So we are a growth company, and our primary focus is to invest in our organic growth, both in capacity expansion and also in building the capabilities in which we will have a P&L impact and R&D and commercial operations, process improvements as we create the platform for the growth ahead. Our second priority will be to manage debt and maintain the strength and flexibility of our balance sheet, especially because the interest rates where they are. And since inorganic growth has been a key part of our strategy, we like to keep that flexibility in the balance sheet. We borrow money only for inorganic growth and acquisitions. We don't need to borrow money for organic growth. So that's our second and third priority. And then as the top line growth and the margin improves, we'll generate a lot more cash, which will give us more opportunities to return cash back to the shareholders through opportunistic share buyback.

Okay. And then maybe for my last question, just thinking on inorganic growth and M&A opportunities. I guess where do you see the opportunity for Rogers? Is it expanding existing technologies, new technologies, market focused? How do you think about that framework?

Sure. I mean I can take that. So a good example would be to look at our last M&A piece of work, which happened just before the DuPont deal. So that would be kind of 2021 October. We bought Silicone Engineering. So that was a great fit for us for a couple of reasons. We have a good silicone portfolio but we didn't quite have a silicone sponge product that our customers sometimes needed. So that gave us an additional add to our silicone portfolio. It also gave us manufacturing in Europe. So in terms of supply chain security, a lot more OEMs now want local production. And we had long wanted to produce silicone in Europe, and that allowed us to do so. The other thing that was great about that acquisition was that it was the similar model as Rogers. It had a high-touch model dealing with OEMs, good margins and good growth. And it was a bolt-on in the range of, let's say, $50 million revenue, and that's just in the sweet spot of what we'd be looking to do. So we'll look out there and try to bolt on adjacent technologies that improve our offering to the marketplace, and we'd want them to be relevant for the key growth markets where we're participating. But it would be more of a bolt-on rather than, I would say, a transformational M&A move when we finally get to the right target.

All right. I appreciate that. I think that's well up for time. So I want to thank Colin and Ram, Steve, for joining us, people for joining us here in Scottsdale and online, if there's any questions, reach out to myself, Steve, if we can try to connect you up with the team. So thanks, everybody.

Thank you. Thanks for having us.