Good day. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Q2 2020 Earnings Call. [Operator Instructions] I will now turn the call over to your host, Mr. Steve Haymore, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Jason. Good afternoon, everyone, and welcome to the Rogers Corporation Second 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 2. 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. 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 3. 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. As expected, the COVID-19 pandemic led to challenging market conditions in Q2. Despite these circumstances, strong execution during the quarter enabled Rogers to deliver solid financial results. Before discussing our results in more detail, I’ll provide an update on our ongoing response to the COVID-19 pandemic. Please turn to Slide 4. As I highlighted during our last earnings call, our priorities are to manage through the current macroeconomic environment, while building upon our strategic positions and strengths for Rogers’ future success. From an operations standpoint, all of our manufacturing facilities continue to operate in Q2 as essential businesses and did not experience any significant disruptions related to COVID-19. Our factory teams continue to do an excellent job of managing the current situation and adapting to robust health and safety protocols. Our non-manufacturing employees have transitioned seamlessly to remote work arrangements. They are maintaining effective collaboration with their colleagues and with our customers, where we continue to secure design wins and support customer needs. For example, an OEM customer was at risk of missing a critical milestone in the development of their new EV technology after returning from a forced shutdown. Rogers’ employees acted with a sense of urgency, engaging on design support and delivering the critical components needed to keep the customer on schedule. This dedication, in addition to our balance sheet, market positions and product portfolio gives Rogers a strong foundation to overcome current market dynamics. Turning to Slide 5. I’ll next discuss our financial results in more detail. Q2 net sales of $191 million were down 4% from the prior quarter and were within our guidance range. Second quarter gross margin of 36.6% and adjusted EPS of $1.13 per share exceeded our guidance. Gross margin gains…

Thank you, Bruce and good afternoon, everyone. In the slides ahead, I’ll review our second quarter results, followed by our third quarter guidance. Turning to Slide 13. Second quarter revenues, as previously noted were $191.2 million, 4% lower than Q1, but within our guidance range of $190 million to $205 million. Weak demand in most automotive applications, consumer applications, including portable electronics and general industrial applications were responsible for the lower revenues in Q2. Strong demand in the second quarter for materials serving the defense market as well as the anticipated increase in materials for 5G base station deployments, mainly in China mitigated the revenue decline in the quarter. Our gross margin for the second quarter was 36.6%, an increase of 360 basis points compared to the Q1 margin and well above the top end of our guidance range of 32.5% to 33.5%. In the quarter, we experienced a more favorable product mix as the higher margin ACS revenues represented a higher percentage of total revenues. In addition, our focus on operational excellence including improved manufacturing yields, material cost savings and matching our revenues with our demand profile is reflected in the higher gross margin. Lastly, we benefited from a China trade legislation decision in the second quarter, which will reimburse Rogers for increased tariffs paid in past quarters. This tariff refund of $3.3 million, which we did not anticipate more than offsets the $3 million for COVID-19-related expenses incurred in the second quarter. GAAP operating income for Q2 of $21.1 million included $3.9 million of accelerated amortization for certain intangible assets acquired in the DSP acquisition in 2017. As the DSP demand has significantly decreased, we determined that certain of the acquired intangible assets have an economic life that will expire at the end of 2020. Accelerated amortization for…

[Operator Instructions] Your first question comes from the line of Daniel Moore from CJS Securities. Your line is open. Q – Daniel Moore: Bruce, Mike. Good afternoon. Thanks for taking the time and the questions. I’m going to start with the maybe elaborate a little on the opportunity for your silicon nitride substrates, how that opportunity is evolving, who the kind of key players in silicon carbide producers are that you’re selling into. And I think you described a 35% CAGR over the next five years. Can you talk a little bit about the cadence that you expect and when we should start to see those revenues ramp?

So as we talked about in the prepared remarks, this is an area of great opportunity for us. Our silicon nitride substrates, we believe are leading in the industry for silicon carbide chip mounting. And what we’re seeing is a lot of design activity, particularly with the European OEMs and a number of new models being released in the coming model year of full EVs. Bob, maybe you could expand a little bit more on the outlook that we see for the EV growth.

Yes. Happy to do that, Bruce. Yes. So Dan, I think it’s pretty well understood in the industry who the big players are in terms of making the silicon carbide chips. In most cases, those semiconductors are packaged by module makers. So you’ll find that the silicon carbide chips are sold to module makers that will purchase our substrate and use them to package the chips. We’re pretty much working with everybody and it’s a pretty diverse or there’s a fair number of players at that level that make modules and they’re all people we work with on a regular basis. So this is a pretty broad industry opportunity for us that really is going to be driven more so. I think the way to think about it is more so the proliferation of electric vehicles because what you’ll read and hear about is that the vast majority of automakers that are going down the path of producing full electric vehicles and to a great degree, also plug-in hybrids are moving toward the wide band gap semiconductors because they basically offer much higher efficiency, which translates into a longer range for the vehicle with the same size battery or a lower cost battery for the same range. So I think the trend right now is its broad adoption. And I think if you’re going to try to get your arms around, kind of what the growth opportunities are, it really comes down to those higher end vehicles, the EVs, the plug-in hybrids, at least in the next few years. But you’ll also hear that over time because of the cost of these wide band gap semiconductors are coming down that over time, it becomes a much broader market opportunity that really across a much broader spectrum of electric vehicles. But also in applications such as renewable energy and some of the high-end industrial motor drives. Q – Daniel Moore: Whether it is fair to assume if it’s in the 2021 model year that we see some level of a ramp into if not the back half of this year or the next year?

Yes. I think the pipeline of new vehicles of the new platforms, new EV platforms at least what I’m hearing and seeing tend to be using the wide band gap semiconductors. Q – Daniel Moore: Got it. Helpful. And then switching gears to EMS. Maybe you just talk about what makes your pouch cells special, who you’re competing with. And I think you threw out some numbers there, Bruce. But in terms of content per vehicle across the higher end EVs, what type of growth and revenue opportunity is reasonable over the next few years?

So Bob, I’ll let you take the first part of that with on the performance technology and the [indiscernible].

Yes, sure. Yes. So and it’s primarily been in the pouch [ph]. There’s the three technologies for battery packaging that are pretty common today. You have what are called pouch cells. And they’re similar size often to think of it as the size of a piece of printer paper, thin and they basically stack those up in an enclosure. There’s a little there’s the aluminum heat fin that basically make contact with the pouches. And that’s important because you need to manage you need to pull out heat. Now when you think about a large stack up and a battery enclosure, you run into challenges. And those challenges tend to be when lithium-ion batteries discharge charge and discharge, they’ll grow and shrink. Let’s say, swell by it can be 15%. Also over time, as the battery pouches age, they tend to get a little bit thinner. So as you might imagine, since reliability is a key factor in over, let’s say, 15-year life, you need a, call it, a pressure pad or a compression pad that maintains a constant force to make contact between the pouch cells and these heat fins. And then you get into the yes, so what we provide. And again, I think we’ve talked about this before, is our PORON material is the premier material and has been for decades in terms of what’s called compression set, which think of it this way it’s basically, it always comes back to the same dimension. So over the life of the battery, it’s important that you have a low compression set product that keeps the constant force. The other thing they look for is really since volume is money in a car; it also affects capacity, obviously. So if you want to have a high energy density battery, you need pads that can do all that, provide a constant pressure in the right range, a consistent pressure across a full range and last forever and you need to do that as thin as you possibly can and then as lighter weight as you possibly can and that’s where our technology comes in. We’ve developed technology that does that job better as we believe better than competitive products. And I believe our customers see that as well and has allowed us. Frankly, to get a very, very strong position in that space because we can we solve that problem for our OEM customers. Hope that helped, Dan. Q – Daniel Moore: Yes. In content, yes, $30 north of there and higher end EVs.

Yes. Right.

Yes. And then and that’s specific. We’re talking about pressure pads, in that case, there’s vibration dampening pads, battery pack sealing solutions and so forth that also would be added in there for additional content. Q – Daniel Moore: Perfect. Last from me. Just wireless infrastructure. It sounds like the average content is ticking a little bit lower once again toward the lower end of the $100 to $200 range. Who are some of the OEMs that are maybe following Huawei down the path to a slightly less complex and lower design type solution?

As we talked about in the prepared remarks, the de-contenting is continuing and it’s continued pretty much across all the OEMs in different ways and different focus areas. I would say that we’ve been able to be stable in our position with the other OEMs. As we move forward and as we look -- we talked about Q3, the concern that we have on the outlook is really the ongoing impact of added controls that are being put on Huawei with regard to TSMC or I’m sorry, with the chips available, TSMC out of Taiwan. And how that might impact the ability of Huawei to continue to manufacture, at least present designs of 5G base stations so we see that also impacting as we move forward into Q3 and possibly into Q4. Q – Daniel Moore: So more of a less content or less sharing content with Huawei versus others significantly de-contenting? Is that the right way to think about it?

Yes. So that’s you have the Huawei situation on share and then others looking at de-contenting. Q – Daniel Moore: Okay, all right, that’s helpful. I’ll follow-up and jump back in queue with any follow-ups. Thanks.

Thanks, Dan.

Your next question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.

Thanks for taking the question. And guys, thanks for all the detail. Bruce, I just wanted to follow up on some of the points you made about some of the broader trends that exist now in wireless infrastructure and really understand what it meant for your and the Board’s view on how you allocate R&D, marketing and manufacturing assets towards that opportunity? And if it, in fact is all the headwinds that we’re seeing causing you to allocate resources away and what that means in longer term for how we think about wireless infrastructure as a sub segment within ACS.

So from the perspective of the market outlook for us with regard to wireless, we still see this as a good part of the ACS business. There are future opportunities that we’re looking at. I think we’ve talked about in the past with advanced antenna materials, low earth orbit satellite receivers, high-speed digital, and so forth. So that work continues. The R&D and the work with customers continues on that front. Specifically in telecom, 4G and 5G, we’ve outlined the headwinds that we see there. And we see this the wireless business for us basically being a low to flat growth outlook moving forward with all the reasons that we’ve outlined. But we do still see significant opportunity for us in the ACS business in defense. And I highlighted that in the call, 25% growth quarter-to-quarter, year-on-year, is substantial. And we see that continuing because of the long-term nature of the wins that we’ve had. And of course, defense employs a lot of the historical capabilities that we’ve had in high frequency and that we just see that continuing. So from the standpoint of allocating capital and so forth, from a manufacturing perspective, we see advanced mobility. We talked about the growth in the curamik business, in the silicon nitride substrates, where we continue to make investments there to ensure that we have proper capabilities and capacity. In addition, we also are ensuring that we have capacity ready when it’s needed for the battery pressure pads and separators and so forth that we talked about on the EMS business. So we, again, continue to evolve and reallocate our focus where we see the biggest growth opportunities. And at this point, the bigger growth opportunity for the corporation is in advanced mobility.

That’s helpful, Bruce. And one more for you before I hand it to Mike for a question. And the follow-up question is this, while Rogers certainly has many global customers that really touch all points of the world, it also is unique and that it has a meaningful manufacturing footprint in many geographies such as China, the US and Europe. I’m wondering, with that footprint, can you give us a sense of any differences that you’re seeing economically as we come out of the COVID environment? What are you seeing in Japan versus Europe versus the US with customer demand that may be a little bit more micro than some of your global suppliers that span the globe?

It’s interesting. From our perspective and I see it in how our factories are operating and our staff in the various regions. In China, for example Suzhou, our entire team is now pretty much back in the office, operating, visiting customers on an as-needed basis. And we see things opening back up, I would say, relatively extensively in the China market. Europe is behind China in that opening. And the US right now is because of what we’ve seen over the last month or two with the spiking in infection rates, I think is basically an unknown moving forward and how it’s going to happen. But we are seeing some return to normalcy, let’s say from a commercial perspective in Asia, and it’s moving toward Germany and I should say, Europe as well, that things are starting to get back to more normalcy.

Yes. That’s encouraging. Two for you, Mike. First, in your prepared remarks, you mentioned that there was 200 to 400 basis points of upside on gross margin, but subject to volume. I wasn’t clear if that was a PES statement or if that was a corporate average statement.

Yes, that was a PES statement, right. I still believe that on the company side I think, we still have, even from a performance standpoint, Craig, I think we had mentioned in the last call, somewhere ballpark of 200 to 300 basis points opportunity with continued improvement. Certainly, we captured a significant piece of that in the second quarter, but I still believe that from a corporate standpoint, I still think we have a couple of hundred basis points with continued yields, material cost reductions and whatnot. And then on top of that, it’s going to be more about volume and leveraging the volume. But the specific comment of 200 to 400 was really a PES specific statement.

Got it. And then lastly, in the prepared remarks, there was reference to inventory that was picked up in 1Q that’s held downstream that’s impacting the business near term. What’s the company’s view for where that’s most significant? And how long does it take that to burn off? Said differently, while it’s a really uncertain demand environment, when are you operating more normally absent those inventory headwinds?

Right. So we saw that probably see the inventory headwinds in two areas, both conventional automotive from our ADAS business and a little bit in general industrial business. I would say that we think it may be more significant in the ADAS and automotive and believe that even though we’re seeing some, I think, some early signs of recovery in the conventional auto market, we still think, as we talked about in the prepared remarks, it’s going to probably be late third quarter before we start seeing some pickup in the conventional auto business from our perspective.

Bruce, Mike. Thank you very much. I’ll hop back in the queue.

[Operator Instructions] There are no further questions at this time. I’ll turn the call back to the presenters for closing remarks.

Thank you. I want to thank everyone for joining us on today’s call. And I want to remind everyone to please be safe and social distance. And have a good evening, everyone.

That concludes today’s conference call. Thank you everybody for joining today and have a wonderful evening.