Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Rogers Corp (ROG, Financial) achieved solid execution in Q2, with sales near the midpoint of guidance and gross margin performance exceeding expectations.
- The company saw stronger sales in portable electronics and wireless infrastructure, contributing positively to overall performance.
- Rogers Corp (ROG) implemented cost reduction measures in response to reduced orders, significantly boosting Q2 gross margins.
- The consolidation of high-frequency circuit material manufacturing operations is expected to improve factory utilization rates and increase operating margins by $7 million to $9 million annually.
- The company is making substantial progress with the construction of a new ceramic power substrate facility in China, which is expected to support future growth and meet local production needs.
Negative Points
- Elevated customer inventory levels of ceramic products negatively impacted sales in the EV/HEV, industrial, and renewable energy markets.
- The ceramic power substrate business experienced a significant decline, with sales down by more than 30% compared to the first half of 2023, and no meaningful recovery expected this year.
- General industrial sales remained flat, with no meaningful increase in demand despite the completion of customer destocking.
- The decision to exit the Northeastern University location and consolidate R&D efforts may disrupt long-term innovation projects.
- The uncertain timing of recovery in ceramic power substrate sales poses a challenge to achieving stronger sales in the second half of the year.
Q & A Highlights
Q: Can we start with the ceramic? You mentioned down 30% year to date. Do you expect H2 to look similar to H1 or do you see even more aggressive inventory destock in the near-term? And as a B part to that question, just in terms of market share and longer-term margin potential, anything changed at all or is it simply temporary market softness and missing inventory management with that key customer and in those end markets?
A: Hi, Dan. Colin here. Thanks for the question. Ceramic remains one of our most important BUs and has been our fastest-growing organic growth business. We don’t see any major share loss to competition. Our differentiated technology is still winning design-in wins with Western and Chinese OEMs. However, the ceramic inventory issue and demand will last throughout 2024. We have the ability to ramp up capacity quickly when the market turns around, but the ceramic business will continue to be down significantly year over year.
Q: Are there areas where you’re still seeing positive momentum and are there other areas that maybe have stalled or are a little bit weaker, given the outlook that’s maybe flattish for Q3? What’s changed in the last 60 days, 90 days, if you will?
A: One thing that’s remained consistent is the performance of our EMS business in the hybrid electric vehicle space. In terms of general industrial, power industrial markets are down significantly year over year and will continue to be slow for the rest of the year. Non-power industrial segments saw a little growth in Q1, but it seems there’s been a downturn in PMI manufacturing indices. Europe hasn’t come back as expected, and US demand remains flat. Inventory issues are behind us, but demand hasn’t increased as much as anticipated.
Q: Can you help us better understand the significant dissonance between the two automotive businesses' performance? One, battery pads, successive quarters of records, and yet the ceramic business, which is also EV related, is seeing significantly in excess inventories. How do we reconcile what’s going on with those two since they both serve the EV/HEV market?
A: The key reason has a lot to do with customer mix. Ceramic technology goes to a small concentration of power module producers, leading to rapid growth and then a slowdown due to high inventory levels. EMS, on the other hand, has won major programs with key customers that have just begun to ramp, driving growth. The customer mix is the issue driving the difference in performance.
Q: On personal electronics, is some of the upside in 2Q related to new programs with China OEMs? Is it timing related relative to what might have been expected previously in the second half or were other factors at play with the strength in calendar 2Q?
A: The Q2 increase in portable electronics was impactful in driving our Q2 revenues higher. The growth in Q3 will be driven by portable electronics, with significant program wins with OEMs in higher-performing mobile phones. The market is waiting to see if AI phone leaders can make a clear story around their AI strategy and demonstrate use cases for AI in mobile phones, which could accelerate growth in the premium phone segment.
Q: Can you break out the contribution in the 210-basis-point increase in gross margins that was due to mix versus structural cost improvement?
A: The structural cost improvement was about 100 basis points, mostly related to the ceramic plant in Germany. The other 100 basis points came from mix, driven by portable electronics, electric vehicles, and RF Solutions.
Q: The leading chipset supplier for auto radar solutions expects a strong second half of 2024. Can you talk about what you’re seeing in the business on the ADAS side and if you’re seeing potential for that business to reaccelerate in the second half?
A: ADAS remains a significant growth business, growing in the mid-single-digit range annually. We had an excellent year last year, and while there were slightly elevated inventory levels in the first half, we anticipate the business to perform well in the second half, driven by new model launches.
Q: Typically, Q4 is seasonally a bit softer than Q3. Given the slightly softer outlook and macro challenges, is there any reason to expect things would be different this year?
A: We expect the EMS business to remain strong in Q4, driven by portable electronics and electric vehicle battery pad orders. However, the AES product line, particularly ceramics, will continue to face challenges. The EMS growth will be offset by the challenges in the ceramic market, which may not recover this year.
Q: Can you talk about the opportunity funnel thus far in 2024 and any emerging technologies or products that could move the needle looking beyond the next one or two years?
A: We’re very happy with our opportunity funnel and new technologies moving through the pipeline. One exciting area is our next-generation radar technology for ADAS, which has prototypes out to customers and is in iterative testing. We feel good about our innovation portfolio and its potential for robust growth in the coming years.
Q: Regarding the consolidation of manufacturing for ceramic into the US and China, can you clarify the timing of the economic benefit and if it’s all still in front of us?
A: The benefit of $7 million to $9 million is net of any other costs and is expected in the second half of 2025. We will realize half of the benefit in Q3 and the other half in Q4 of 2025. We need to ensure customers are requalified for production from China to avoid any quality or performance issues.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
