Good day. My name Erica. And I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Q1 2020 Earnings Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Steve Haymore, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Erica. Good afternoon, everyone. And welcome to the Rogers Corporation first quarter 2020 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. 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 could include economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement. Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations 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 is posted on the Investors section of our website. Turning to slide three, with me today is Bruce Hoechner, President and CEO; Mike Ludwig, Senior Vice President and CFO; and Bob Daigle, Senior Vice President and CTO. I will now turn the call over to Bruce.

Thanks, Steve. Good afternoon, everyone, and thank you for joining us today. Please turn to slide four. Before discussing the results for the quarter I will first provide an update related to the impact of COVID-19 on Rogers. I’m extremely proud of the Rogers team for their tremendous response which allowed us to prioritize employee health, maintain business continuity and deliver results at the top end of our guidance. Rogers is a great company because of the extraordinary capabilities and dedication of our employees. Thank you, team. When the virus outbreak first emerged early in Q1, we reacted swiftly. Site pandemic response teams implemented safety measures such as remote work arrangements, social distancing policies, providing appropriate personal protective equipment and enhanced disinfection protocols to protect employee health. Global operations and supply chain teams focused on site level measures to maintain business continuity for our customers. And at all levels of the organization other teams were empowered to make rapid decisions to protect employee safety and to meet customer’s needs. Caring for our employees at this time is an essential priority. And in addition to the robust safety measures implemented we have also temporarily expanded certain benefits to provide employees additional support to care for themselves and their families. As demonstrated in Q1, the strength of our global manufacturing network and effective supply chain management is enabling us to successfully respond to the current challenges. For example, early in the quarter our operations in China, along with other businesses in the country, were temporarily suspended by the government. In response to this disruption, our global operations and supply chain teams collaborated to shift some production to other factories and worked with our suppliers to maintain the appropriate levels of critical raw materials. Our China leadership team worked closely with local authorities…

Thank you, Bruce. Good afternoon, everyone. Before I discuss the results, I would also like to express my thanks and admiration to the employees of Rogers around the globe for an outstanding performance of delivering products to our customers in a challenging, unprecedented business and social environment. While we experienced minor disruptions and increased costs, the Rogers community demonstrated resilience and creativity in the face of uncertainty and anxiety to demonstrate their commitment to their jobs and our customers. Great results, team. In the slides ahead, I’ll review our first quarter results, followed by our second quarter guidance. Turning to slide 11, first quarter revenues, as previously noted, were $198.8 million, 3% higher than Q4 2019 and at the high end of our guidance range of $185 million to $200 million. Strong demand for power semiconductor substrates and battery materials serving EV/HEV applications, increased demand for products serving ADAS applications, as well as an increase in general industrial revenues in Elastomeric Materials were the primary drivers for the increased revenues. Revenues decreased in portable electronics and materials serving aerospace and defense applications. Disruptions of the business environment in China resulting from the coronavirus pandemic negatively impacted our portable electronics and wireless infrastructure demand in the first quarter. We saw orders increase for these applications in the second half of the first quarter as the environment in China improved. Our gross margin for the first quarter was 33%, at the midpoint of our guidance range of 32.5% to 33.5%. In the quarter we experienced a less favorable product mix of higher power semiconductor substrates and lower portable electronic revenues, and we incurred incremental costs associated with the coronavirus pandemic as we temporarily expanded certain benefits to provide employees additional support to care for their families. Improved operations execution resulted in material…

[Operator Instructions] Your first question comes from Craig Ellis with B. Riley FBR.

Yeah. Thanks for taking the question. And Bruce and team, congratulations on successfully navigating a real difficult environment [Technical Difficulty] first quarter.

Thanks, Craig.

It sounds like we’ve got some background noise, at least on this end, but I’ll [Technical Difficulty] as best I can. Bruce, I wanted to start by following up on the points you made with the China infrastructure and the domestic [Technical Difficulty] dynamic that exists with one of the suppliers. As you think about that dynamic over the intermediate term and the potential for significant 5G rollouts in other countries and geographies, how does that net out to the growth profile for Rogers? Do we see a plateau here second quarters [ph] levels? Or [Technical Difficulty] deployments next year? Would we expect to see growth off of what you can achieve in Q2?

So as we talked about in the prepared remarks, the impact of the trade policies and so forth, obviously, with that one OEM in China has impacted us because of the redesign work and local sourcing that they’ve done. As we look across the network of other OEMs and so forth, we anticipate certainly in Q2 near historic levels of share with those other OEMs. And as we move outside of China and think through the other OEMs that are providing base stations, aside from the large Chinese one, we would anticipate that our share would remain strong there as those rollouts move across the world.

Okay. So that sounds like it’s a more constructive outlook once we get to broader global deployment outside of China. Mike, I wanted to do a follow-up just on some of the gross margin points. And congratulations to the team for getting PES improvements really set structurally. As we look at the things that are going on across the business and, admittedly, we’ve got near term crisis issues that are impacting things. But as we think about longer term margin expansion potential given the improvement in PES, are we really talking about volume driven gains beyond what we would navigate through in the second quarter? Or are there more meaningful efficiency and optimization programs that can really provide significant clip from here?

Yeah. Craig, I think we’re going to see contributions on both sides of that. Again, I think the operations team really has done a phenomenal job focusing on cost reductions, whether it be material cost reductions, yield improvements and efficiencies. But I think there’s still work to be done on that and in all businesses, right? We’re going to really focus and continue to focus on PES because, again, while we’ve made some good headway there, there’s still a lot of room to be had there. But I think as we move forward, we’ll see equal benefits from continued focus on costs and cost down and manufacturing efficiencies compared with volume benefits, as well.

Okay. Great. And then I’ll come back to you if I could, Bruce, for one more before I hop back in the queue. Just looking beyond the very near term, beyond 2Q and maybe even 3Q, but really focusing on the back half of the year and the business’s exit velocity in late 2020 and 2021, as you look at the changes that are occurring where do you feel like the business is poised for real growth and growth acceleration? And where might things be changing and have the business in a less advantaged position than you might have thought you had going into the crisis? Thanks for the help, guys.

Sure. Thanks, Craig. So in terms of coming out of the year, of course we don’t give full-year guidance, but from a market perspective I think a lot depends here on the impact of coronavirus, specifically on automotive. We still believe and we even continue today to see trends in EV/HEV conversion that remain very strong. I think there was some announcement today that a large west coast provider of EVs, a producer of EVs, saying that their backlog was very strong. So that’s a real good indication to us that the market is still very interested in EV/HEVs. The work that we’re doing with a number of German auto manufacturers continues, even though the crisis, in terms of design wins and looking at next-generation systems, both on the battery side and power module side. So we see, again, EV/HEVs coming out of this as being strong. We also see growth in the 5G telecom side because of the rollouts in China. But it’s muted for us, as we talked about, because of the share situation, specifically in China. But that growth is also, we anticipate, we would hope to see some of that coming through the year, as well, certainly in Q2. So those are areas where we see strength. And I would also mention A&D, aerospace and defense. That was robust through 2019, coming into 2020 a little bit off, but really around end of program and beginning new programs that impacted there. But as we move through the year, we see that as remaining strong, not only in the ACS business but also in EMS.

Thanks, Bruce. And then just to clarify that China view, is it the company’s view that they could have some business with that leading supplier? Or after 2Q would you not be expecting to have that? Thank you.

I think it’s very cloudy, let’s say. The tenders that have gone out, we understand our position. Beyond Q2, it is very difficult to predict.

Thank you.

[Operator Instructions] Your next question is from Daniel Moore with CJS securities.

Good afternoon. Thanks for the color and thanks for taking the question, Bruce and Mike. I wanted to follow up a little bit on the wireless telecom opportunities and challenges. But given the changing landscape in terms of market share, but also given the build-out numbers that we’ve seen, do you see Q2 as being potentially a high watermark near term for wireless telecom revenue, building for you in the back half of the year but cloudy to what degree? Any additional color just kind of netting all those puts and takes, that would be very helpful.

I think certainly Q2 we see the ramping in Q2 and into the second half of the year for base station build-out in China. So we would participate in that as it moves through the year. But it is very difficult as you get towards the end of the year to understand where it all ends up. What I would also say, we talked a little bit about the re-design and de-contenting that’s gone on. And so part of the push down on maybe the total potential revenue in wireless and 5G is because we’re now looking at content per base station in the mid-100s, down a bit from what we had projected earlier, because of those redesigns and that de-contenting. So that’s muting some of the growth opportunity there for us.

Very helpful. And is that with all OEMs or just with the large Chinese OEM?

I think as we’ve discussed in the past, each OEM has their own designs. And I would say the drive by that one large Chinese OEM to significantly redesign for local content has had a big effect versus maybe some other folks.

Okay. And then shifting gears, kind of a broad, high level question. The COVID pandemic and the related increase in demand for bandwidth, could that accelerate the opportunity in 5G in North America and Europe or too early to tell?

It’s a very good thought. We’ve considered that certainly, and in the press, you’ve seen more interest and people saying, hey, we need better, more bandwidth, higher speeds. So we’re hopeful that that could have an acceleration. Certainly we’ve seen some of this in our ACS business, where we supply circuit materials used in tablets that are utilized for, obviously, distant learning and so forth. So the pandemic has had some impact on those kinds of opportunities for us.

Got it. And then shifting gears to ADAS, given the sharp declines we’ve seen in SAR [ph] in H1, specifically, in Q2, do you see Q2 as potentially a near-term bottom in terms of demand for your products or just too difficult to say in terms of the crystal ball for H2, and similar question for EV/HEV. Thanks.

Yeah. On the ADAS side, very much tied to traditional automotive, right? Those go into traditional cars as well as EV/HEVs. Across the board, certainly, we’ve seen all the shutdowns announcements of the automotive factories. So certainly Q2, as we said in the prepared remarks, is going to be a down quarter for ADAS. EV/HEV is a bit of another story. We’ll see how well that holds up, given what we’ve seen in the press about some of the EV manufacturers. But certainly you would imagine with consumer confidence waning here people aren’t going to be out buying a lot of automobiles. But maybe the ones they buy will be more oriented towards the EV/HEV side.

Got it. And lastly for me, you gave good color, Mike did as well, in terms of gross margin, understanding that a decent amount of the potential uptick or increase over time will be volume related. Given that, do you see the ability to build off of Q2 levels in coming quarters? Maybe can you quantify the extent to which you can drive margins higher just based on efficiency?

Yeah. I think, again, as I had mentioned to Craig earlier, I still think that we definitely have runway with respect to greater efficiencies, yields, right? So again, if I were to look at the opportunities down the road I still believe that we probably have - if you think about getting from 33% into the upper 30s, I would say probably I still think 35%, 40% of that will be driven by increase in efficiencies, with the other piece of it coming from volume. So, yes, I still, Dan, that we definitely have opportunities to continue to move up the gross margin from performance areas in the second half of the year.

Okay. Thank you for the color.

And there are no further questions at this time…

Okay…

Sorry.

If there is another question, we’re happy to take it.

[Operator Instructions] And you do have an additional question from Craig Ellis with B. Riley FBR.

Thanks for taking the follow up question. Bruce, I wanted to go back to one of the points that came up both in your commentary and in Mike’s comments, and it’s about the level of inventory at fabricators or cutters or elsewhere. All the work we did on inventory throughout the supply chain shows that it was at 10 year lows going into the crisis. And so one of the questions is, while there may have been some restocking that was able to occur in the first quarter, what’s your sense on where inventory levels are downstream from the company? Are they at sufficient levels if we start to get demand recovery or is there really further replenishment that will be needed so that we get to the right level for the new level of uncertainty that we have in the current environment? Thank you.

Thanks for the follow up question, Craig. What we’ve understood and what we’ve seen, and this is specifically in the EMS business, around our converters, our preferred converters, that they’re restocking in anticipation of a rebound here at some point. Now of course the length and depth of the impact of coronavirus on the industrial side of the business is hard to know. But there was a sense, certainly, I’d say mid-quarter in Q1 to build up that inventory in anticipation of maybe coming out of this and making sure that they had materials available. So it’s a good point. Again, it’s very cloudy. But there was a sense certainly that let’s make sure that we’ve got inventory available so when people come back in and start demanding it, they’ve got it on hand. So again, we’ll see how that turns out.

Thank you. Thanks, guys.

And we have an additional question in queue from Daniel Moore with CJS Securities.

Thank you, again. Maybe just a little bit of additional color across geographies, starting with China and then into Europe and the US, where you’ve got good intel on the ground, where were we in terms of the relative impact of COVID, where we are in terms of emerging from it and recovery as far as just production levels and potential interruptions across each of those? Thank you.

So as we said, obviously this whole thing started in China with our Suzhou plant. We’re back up and running, pretty much 100% there in terms of capability. And we’ve seen, I’d say, an interesting amount of demand coming back in, certainly driven by 5G, but also some of the other demand has held up a little bit, tailing off on handhelds. But over all, it’s been pretty solid there. In Europe, again I think what we’ll start to see is some of the impact on the automotive, and that’s a lot of what is supplied out of our two operations there in Europe in the PES side of the business. So I think we’ll start seeing that net effect coming in Q2 on that as well as on the ADAS side, and some of that’s coming out of Europe, as well. And in the United States, we’ve been operating our facilities, all of them. We are a provider of essential materials going into a number of different end markets. And demand, as we outlined, is remaining relatively good; again, variable by market. But we’ll see, again, where we end up at the end of the quarter. As we keep on referring, automotive, probably handhelds and then the knock-on effect on general industrial, which is supporting CapEx-type sales into factories. So factory expansion will go down. We won’t necessarily see strong sales on general industrial because of that. But that’s the way we see it. It was interesting to see the recovery in China of our teams and also the bounce back of some of the demand that came out when everybody got back to work. So hopefully that’ll follow in Europe and North America.

Understood. Thanks again for the color, Bruce.

And there are no further questions at this time. I’ll turn the call back over to management for any closing remarks.

Well, again thank you, everyone, for joining us on today’s call. As we outlined, Rogers is in a very strong position. We continue to focus on our strategic markets. We continue to focus near term to ensure that we’re matching our costs and output with demand that we see in the marketplace, and we’re able to flex and do that. But a robust balance sheet and we continue to seek opportunities to move the company ahead on a strategic nature, as well. So again, thanks for joining us, and have a safe evening and stay well.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.