Rogers Corporation (ROG) Q3 2020 Earnings Report, Transcript and Summary

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

Thank you, Holly. Good afternoon, everyone and welcome to the Rogers Corporation third 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. 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, 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. Please turn to Slide 4. Rogers delivered solid third quarter results led by growth in key strategic markets and strong operational execution. Q3 net sales were $202 million. Gross margin was 37.4%, earnings were $0.37 per share and adjusted earnings were $1.45 per share. Net sales, gross margin and adjusted EPS all improved sequentially and exceeded our previously announced guidance ranges. Strong demand in the EV/HEV ADAS portable electronics and defense markets drove the higher-than-expected sales. EV/HEV sales grew double digits sequentially driven by strong demand for battery pad and ceramic substrate applications. ADAS sales experienced a sharp recovery in Q3, but the broader automotive market remains below pre-pandemic levels. The substantial growth in sales for the portable electronics market resulted from improved seasonal demand bolstered by a fast ramp in 5G smartphones. Defense market sales increased at a rapid pace in Q3, adding to the impressive year-to-date performance. We have a long history of success in this market and recent design wins and new product introductions are adding to our growth. Sales in the wireless infrastructure market were lower in Q3 as supply chain challenges resulting from trade restrictions slowed the 5G rollout in China. We have yet to see broad recovery in the general industrial and mass transit markets. Visibility to the timing of a recovery in these markets remains less clear. Rogers continued to achieve strong results with our operational excellence initiatives, which helped drive our improved gross margin performance. The higher gross margin and effective management of expenditures and working capital resulted in strong free cash flow of $48 million. We are pleased with our Q3 results and our year-to-date performance in the face of challenging market conditions. Our strong results highlight the benefits of both our diversified market and operational excellence strategies. Turning to Slide 5, I will next discuss the outlook for some of our key markets. Beginning with advanced mobility, Rogers’ differentiated materials technology is a key performance enabler for this market. The long-term outlook for the EV/HEV market continues to be robust with industry experts projecting a compound annual growth rate of approximately 35% over the next 5 years. The trends driving this outlook include continued investment by automakers in EV and HEV technologies, regulatory measures and increasing consumer demand. Recent strong sales in Europe highlight the continued resiliency in this emerging segment of the automotive market. Year-to-date European sales are at record levels and third-parties expect that full year 2020 sales will be 3x higher than 2019. As I will discuss, Rogers is well positioned to capitalize on growth across the full spectrum of EVs and HEVs. We also have a leading position in the ADAS market where our high-frequency circuit materials are distinguished by our performance and reliability. Over the next 5 years, this market is expected to grow at a CAGR of between 15% and 20%. Driving this growth is higher penetration rates of ADAS units which are increasingly becoming standard safety features on new vehicle models. Also, as vehicle autonomy gradually increases over time, the average number of radar sensors per vehicle is expected to grow. In advanced connectivity, we are optimistic about the growth prospects in the portable electronics market led by 5G smartphone sales. Third-party estimates point to modest growth in the total smartphone market over the next 5 years with a CAGR of about 4%. However, the 5G portion of that market is expected to grow at a much faster 35% CAGR. This is significant for Rogers as advanced features incorporated in 5G handsets have created a greater content opportunity. The higher content ranges from 10% to 15% in mid-range devices up to 30% more content for certain premium products. With our high-performing materials and reputation for reliability, we are well positioned to capitalize on this growth. We are encouraged by the positive long-term outlook for growth in Advanced Defense Systems. Defense spending is increasingly shifting to technology programs such as missile defense and radar systems, which drive increasing demand for Rogers’ advanced circuit materials. Our long history of providing high-reliability solutions for demanding applications and our differentiated engineering capabilities puts us in a strong position to continue our success in this market. We also continue to leverage our innovation centers to develop new technologies that support advanced communications, radar and guidance systems. As mentioned, we are gaining traction with recent product introductions, and we remain focused on developing future advanced materials solutions. Please turn to Slide 6. All three of our business units are focused on the significant growth opportunities we see ahead in advanced mobility, which includes the EV/HEV and ADAS markets. Today, I’ll focus on our advanced mobility solutions specific to EV/HEV, beginning with EMS. EV/HEV battery performance, reliability and safety are of great importance to automakers and their customers. Leveraging our expertise in polyurethane materials, we have developed high-performance solutions that enable improved battery reliability for full electric and hybrid electric vehicles. Battery compression pads for plug-in HEVs and EVs are the largest opportunity in this market where content can be greater than $30 per vehicle. We have numerous design wins and a strong pipeline of additional opportunities with leading OEMs and battery manufacturers. Moving to PES, we have a strong market position in high-performance ceramic substrates, which are used across the full spectrum of EVs and HEVs. As a reference point, the content opportunity for our substrates ranges from $5 in a 48-volt mild hybrid to around $40 in a full electric vehicle. Increasingly, EV and HEV designs are incorporating wide-bandgap semiconductors, which require high-performance packaging. This advanced technology provides substantial efficiency improvements, which results in increased vehicle range and lower-cost batteries while reducing the size of the inverters. Rogers is well-positioned to capitalize on this growing trend. Our new generation of silicon nitride substrates helps to maximize the performance of silicon carbide devices in demanding EV applications. Power interconnects provide an additional content opportunity in EV/HEV. And like our substrate solutions, the dollar content can range broadly. Power interconnects are critical components in EVs, and they ensure the safety and reliability of the vehicle. We are encouraged by design wins we have secured with several leading entrants to the EV market. Please turn to Slide 7. Rogers’ growth strategy is built on four pillars, which include being a market-driven organization, delivering innovation leadership, utilizing synergistic M&A and driving operational excellence. I would like to highlight our operational excellence strategy, which we apply to our manufacturing activities and all parts of our business. Beginning with our manufacturing operations, we have gained significant traction in recent quarters, which has resulted in sustainable improvements to our gross margin. At the core of our success is our standardized and scalable operating system that leverages lean manufacturing to drive performance improvements in the areas of safety, quality, cost and flexibility across all our global sites and supply chain. Some of the guiding principles of our system include establishing a proactive safety culture with 100% employee engagement, driving operational excellence through a lean manufacturing culture that embraces continuous improvement and optimizing our global manufacturing footprint to maximize capital utilization while best serving our global customer base. Each of these elements has a strategy behind it to drive scalable, systematic and measurable improvements while delivering increased value to our customers. Here are some examples of the results that we are seeing from applying this standardized system. First, we have seen substantial improvements in yields, scrap rates and on-time deliveries in all three of our business units compared to the prior year. This has benefited our financial performance and improved customer satisfaction. Second, our system has provided a structure to make decisions about optimizing our global factory footprint. As announced, we are making adjustments to certain manufacturing facilities in Europe and Asia. These actions will significantly benefit the company by better aligning capacity with end market demand, improving factory utilization and increasing our cost competitiveness. Third, in addition to our manufacturing improvement efforts, we are engaged in an enterprise-wide continuous improvement initiative focused on optimizing all business processes. This will drive further operating expense efficiency as we leverage our commercial and administrative infrastructure, and complement our manufacturing improvement efforts. Recapping the key messages from today’s call, we are pleased with the solid results for the quarter resulting from our diversified market strength and the consistent execution of our operational improvement initiatives. We are encouraged by the strength in many of our key strategic markets even as a recovery is not yet evident in other areas. I especially want to thank our employees for their dedication and contributions throughout this challenging year. Now, I will turn the call over to Mike to discuss our Q3 results in more detail.

Thank you, Bruce and good afternoon everyone. In the slides ahead, I’ll review our third quarter results, followed by our fourth quarter guidance. Turning to Slide 9, as Bruce mentioned, Rogers delivered solid results in the third quarter that exceeded our guidance for revenues, gross margin and adjusted EPS. We delivered GAAP EPS of $0.37 per fully diluted share which was above the midpoint of our guidance range. In the third quarter, we recorded restructuring and impairment charges of $9.4 million related to manufacturing footprint optimization plans involving certain Europe and Asia locations mentioned earlier. Additional restructuring charges of between $2.5 million and $4.5 million are expected in the fourth quarter. Many of the restructuring actions will not commence until late in Q4 and into the first half of 2021, at which point, we will have a comprehensive view of the annual benefits from the planned actions. In addition, consistent with our communication last quarter, we incurred $11.7 million of expense in Q3 from the acceleration of our amortization of intangible assets from the DSP acquisition. Neither the restructuring charges nor the accelerated amortization were included in our adjusted fully diluted earnings per share for Q3 of $1.45. Turning to Slide 10, our Q3 revenues of $201.9 million increased $10.7 million or 6% compared to the second quarter of 2020. EMS revenues increased 21% to $86.4 million. PES revenues increased 6% to $47.9 million, while ACS revenues decreased 10% to $63.7 million sequentially. Currency exchange rates favorably impacted third quarter revenues by approximately 1% compared to the second quarter. The sequential EMS revenue increase resulted primarily from significantly higher portable electronic application revenues, which grew 72% sequentially and accounted for over 35% of the segment revenues. The revenue increase was spread across many of the large OEMs as the early momentum we witnessed at the end of the second quarter gained significant traction in Q3, bolstered by 5G handsets and increased content in certain 5G phones. In addition, revenues from EV/HEV battery pad applications grew 77% sequentially as the adoption of our materials into new design wins with battery makers for significant OEMs continue to demonstrate the application advantage of our PORON product. We expect the demand for both portable electronics and EV/HEV applications to remain robust in Q4. Revenues for general industrial applications, which comprise over 35% of the segment revenues, declined 2% sequentially. The rate of decline in Q3 lessened significantly from the second quarter’s sequential decline. We are a bit cautious regarding Q4 demand for general industrial applications as the increase in COVID-19 cases could slow the momentum of the economic recovery. The increase in the PES revenues compared to Q2 was driven by a 20% increase in EV/HEV application revenues, which account for just under 30% of the segment revenues. The sequential increase reflects the continued momentum in the market. In addition, traditional automotive revenues for x-by-wire applications grew 60% sequentially, resulting from the automotive recovery that commenced in Q2. The industrial variable frequency drive business, which accounts for close to 25% of the segment revenues, declined 6% compared to Q2, an indication of the continued weakness in the general industrial market. ACS revenues decreased sequentially, primarily due to a 42% decline in our wireless infrastructure revenues, which comprise approximately 23% of the segment revenues. The decline was felt in both 4G and 5G revenues as the supply chain challenges from trade restrictions felt by Huawei have negatively impacted the pace of the China 5G installations. We believe these challenges will continue to impact 5G revenues into the fourth quarter. Aerospace and defense revenues, which now account for over 40% of the segment total, grew 11% sequentially from existing and new programs in the defense market. We expect these defense revenues to be flat to slightly down in the fourth quarter due to the timing of orders for certain programs, while we maintain our bullish outlook on our long-term prospects in this market due to the alignment of the advanced defense system requirements with the technical capabilities of our products. ADAS revenues grew 42% sequentially as the automotive market commenced the recovery in the second quarter, and our customers worked through their inventories early in the third quarter. We expect to see continued strength for ADAS applications in the fourth quarter. Turning to Slide 11, our gross margin for the third quarter was $75.5 million or 37.4% of revenues, an increase of 80 basis points over the second quarter. The increase in gross margin percentage was primarily due to increased volume, a favorable product mix and improved manufacturing execution. Gross margins increased significantly for EMS in the third quarter due to increased volumes, a favorable mix with higher portable electronic revenues and less expense for excess inventory reserves. ACS gross margin declined in the quarter due to lower volumes and not having the benefit of the tariff refund accrued in the second quarter. The unfavorable impacts were partially offset by increased yields. PES gross margin declined in the quarter, primarily due to an unfavorable product mix. The impact of the unfavorable mix was partially offset by increased volume and the continued improvement in manufacturing performance. We continue to be encouraged by the results generated from our increased focus on operational execution. The gross margin for Q3 2020 was 180 basis points higher than Q3 2019 gross margin of 35.6% on approximately $20 million less revenues. At the same revenue level and the same product profile as Q3 2019, our Q3 2020 gross margin would have approximated 39%. Also on Slide 11, we detail the changes to adjusted net income for Q3 of $27.1 million compared to adjusted net income for Q2 of $21.1 million. The adjusted operating income for Q3 of $35 million and 17.3% of revenues was 190 basis points higher than Q2’s adjusted operating income. Adjusted operating expenses for Q3 of $40.5 million or 20.1% of revenues were approximately flat compared to Q2’s expenses, demonstrating good spending discipline on increasing revenues. We terminated our interest rate swap agreement late in the third quarter, which resulted in recording additional interest expense of $2.4 million in Q3. Rogers’ effective tax rate for the third quarter decreased to 8.1% as a result of reducing evaluation allowance on R&D credits in the quarter. We now expect our effective tax rate for 2020 will be approximately 23% to 24% with our long-term rate projected to be in the range of 20% to 22%. Turning to Slide 12, in the third quarter, the company generated strong free cash flow of $47.9 million, and ended the quarter with a cash position of $186.1 million. In the quarter, we generated $58.7 million from operating activities, including a $22.2 million reduction in working capital, and repaid $163 million on our credit facility. We ended the third quarter with an outstanding balance on our credit facility of $60 million, and a net cash position defined as cash and equivalents in excess of the amount owed under our credit facility of $126.1 million. In Q3, the company spent $10.8 million on capital expenditures. We spent $28.9 million year-to-date through September. And for 2020, expect to be at the low end of our communicated $40 million to $45 million range. On October 16, the company entered into the fourth amended and restated credit agreement, which effectively extends the maturity of our revolving credit facility from February 2022 to March 2024. Turning to our fourth quarter guidance on Slide 13, we expect to see strength in portable electronics driven by 5G handsets, strength in EV/HEV driven by the continued marketplace momentum and strength in traditional automotive markets resulting from the recovery in the end market. We expect the timing of defense orders to weigh on revenues in Q4, and the supply chain challenges caused by trade restrictions to continue to negatively impact the wireless infrastructure market in Q4. While we see some positive signs pointing toward the beginning of a recovery in general industrial markets, we are cautious in our forecast due to the influence of current developments of COVID-19 containment and outbreaks in different geographies. As a result, Q4 revenues are estimated to be in the range of $195 million to $210 million. We expect the Q4 volume and revenue mix profile to approximate our Q3 profile. Therefore, we guide gross margin in the range of 37% to 38%. We guide GAAP Q4 earnings in the range of $0.50 to $0.70 per fully diluted share. On an adjusted basis, we guide fully diluted earnings in the range of $1.30 to $1.50 per share for the fourth quarter. I will now turn the call back over to the operator for questions.

Thank you. [Operator Instructions] And our first question is going to come from the line of Craig Ellis with B. Riley Securities.

Thank you for taking the question and congratulations on the strong quarter and guidance, and the continued robust margin execution, guys.

Thanks, Craig.

Mike, what I wanted to do just – you are welcome. What I wanted to do to start is just to drill down on the gross margin point. So nice strength in the third quarter, and I think you identified three factors that contributed to expansion. The question is, I think going into the third quarter the view was there was still 150 basis points of PES-related volume agnostic margin expansion potential in the business. Was that part of the third quarter’s gross margin strength? And if so or if not, are we still looking at something like 150 basis points of volume agnostic help from here?

Yes. So Craig, I would say that the 150 basis points, we probably generated somewhere between 25 and 50 basis points of incremental margin at PES from improvements in manufacturing performance, I would say, primarily yield, but also with respect to lowering the cost of our raw materials, so a little bit there. And I would say going forward, both from PES and even from a company perspective, I would say we still have in the ballpark of 100-plus basis points that would be, as you called it, volume agnostic going forward. So I think we still have some room there. And as we talked about some of the factory footprint changes and charges that we took on in the quarter, I think those moves will help us going forward as well. So I think some of those could be on top of that.

Great. That’s helpful. Bruce, I wanted to turn to a couple of your comments. So real helpful to get some of the color around what’s happening with the secular drivers. I’ll start with the PES business and some of the near-term strength we’re seeing with 5G smartphones. And the question is this, if we look back at Samsung’s commentary last night on the smartphone market for next year, I think they believe it can be a 400 million to 500 million unit market, so 2 to 2.5x versus this year. So given that Rogers has that nice 15% to 30% content addition, how do we think about the potential growth early in 5G uptake when we’re getting some of the explosive numbers that we’re hearing from big suppliers like Samsung?

Yes. So as you point out and as we said in the prepared remarks, we see our content in almost all categories in 5G smartphones to be increasing. And so depending on how fast the 5G handsets go into – get into the market and continue to grow, I think it reflects – it will reflect very well for us moving forward through next year.

And so as long as we’ve got unit growth in the market and reasonable high and midrange and low-end growth, we would expect that business to continue to grow nicely. I guess the risk would be that at some point, you might get much more dramatic low-end growth versus high end decline, but certainly on – so there might be some mix dynamics. But it seems like you’re set up for at least 2 to 3 years of very strong growth in that subsegment, is that true?

Yes. We certainly look at next year as being a nice – give us some nice tailwinds in the portable electronics, and we’ll see how it then flows through into 2022. But certainly, we are given the design wins that we have and our knowledge of where our materials are being used, we feel very good about the outlook there.

That’s helpful. And then, Mike, I wanted to turn back to some of your commentary on general industrial. I think for the most part, our checks with the broader supply chain showed that it continues to be an area of weakness. It’s hurt by things like energy extraction and other sub-segments of the market but we are seeing signs that orders are starting to improve in that market we heard from one equipment company dried that was the case in their calendar fourth quarter. If I use 2009 as a guide where the broader industrial end market globally recovered 2 to 3 quarters behind the initial recovery for things like PCs, do you think that’s a reasonable guidepost to use as we think about what can happen off of a COVID bottom in 2Q and 3Q? Or for some other reason, would there be a more protected duration to recovery for the general industrial businesses?

Yes. This is Bruce. Our view is this is going to be dependent on a couple of things. First, whether there’s a resurgence of the virus and the effect that, that has particularly on consumer market, which then leads back into capital investment capacity and so forth, which impacts our general industrial opportunities. So it is not necessarily directly tracking back to 2009 as you saw sort of that recovery come, not straight line, but pretty well moving forward. There could be setbacks here, and that’s what we’re concerned with. It’s really hard to project.

That’s fair, Bruce. Probably fair. That’s all I have guys. I will hop back into the queue.

Thanks, Craig.

[Operator Instructions] Our next question will come from the line of Patrick Ho with Stifel.

Thank you very much and congrats on a nice quarter. I appreciate the slide you have in your quarterly deck on the automobile opportunities for your different businesses. What I wanted to find out, Bruce, maybe from your end is can you talk a little bit about the stickiness of your products? And what I’m getting by that is my coverage on the semiconductor side, they test every device because of safety protocols and the need to ensure that everything works within a car, all the way down to the smallest MLCC? I was just wondering from your end, is that stickiness something that you also, I guess, experience for your products? And especially as these markets grow, that allows less of the ability to displace your materials for others?

Yes. So I’m going to ask Bob to comment on this because I think it has a lot to do with our technology.

Yes.

Yes I think, Patrick, the way you characterized it, I think, is valid really in the various segments of our business. We are working typically with either the OEMs or very directly with the chip packaging – with semiconductor guys in the chip packaging area. And our products are unique. So when we get a design win, we’re – we’d be on the print in that case. And our experience has usually been, we’re into the life cycle of those platforms, so that’s the nice thing about automotive. The negative, it takes a lot to get designed in. The positive is once you’re designed in, it’s very sticky in our past experience.

Great. That’s helpful. Maybe, Mike, just to follow-up on some of the gross margin comments. Again, obviously, performed very well given the current environment and the revenue levels you’re still at. But given some of the manufacturing changes and the footprint that you talked about, how much flexibility is there now for you to adjust from different products, different materials at different places? I know you reduced the footprint and not all materials are the same. But how much flexibility do you have that can help margins potentially stabilize over the longer term, if you’re able to move from place to place depending on demand?

Yes, good question, Patrick. And in fact – and thanks for the recognition on the gross margin, right, the team has done a fantastic job. And I think the thing I would say about that is the changes that we made are very, very sustainable. So we are happy for that. The question you asked, so the answer would be, our – certainly, within the different business units, we have areas in manufacturing sites that is very fungible in terms of its ability to handle different product lines. I would say that’s more so within the specific business units as opposed to across business units. But I think that fungibility and ability to move products and to be flexible really has helped us initially through some of the COVID challenge, and we think will continue to be an asset for the company going forward.

Great. And maybe final question for you, Mike, as well. Just on top of the gross margin question. One thing that as revenues start to grow with the improvements you have made on the overall cost structure and expense lines, cash generation is likely to improve as well. What are your thoughts as cash begins to come in? If 2021 happens to be a recovery year for the industry, how do you look at cash that’s going to be building up at higher revenue levels?

Sure. Yes. And I would say, again, happy with the cash generation that we had to date in 2020 even with the lower revenues. So – but yes, I think going forward, again, I am encouraged by the amount of cash that we are generating this year and expect that it will continue to increase with increasing revenues and increasing efficiency with our working capital. So yes, I do expect that. So when we think about capital allocation, going forward, I would still say that the number one priority is to spend that on growth. So – and again, we think we have very good growth opportunities in EV/HEV, ADAS, defense and so – as well as portable electronics. So from that perspective, we are going to make sure that we use that money for capital to allow us to build the capacity that we need to address these growing markets. Secondly, and as you saw, we continued to pay down debt. And I think even going forward, certainly, I think more constructive conversation around potential share repurchases. While we have not committed to do that, we are certainly getting – it’s getting more dialogue within the company. And certainly, at certain price points, we might be more aggressive about that. And of course, the other area around growth that we are continuing to look at is M&A.

Great. Thank you again.

Thanks, Patrick.

Our next question will come from the line of Daniel Moore with CJS Securities.

Good afternoon gentlemen. Thanks for taking the questions. Just wireless handsets just remind us of your typical content for device so we can put a range of dollar content on 5G that you described earlier?

Hi, Dan, this is Bruce. It is in the range of, per unit, I would say, about $0.07 to $0.10 depending on the application. Some might be lower. High end would be at the higher end of that range.

Perfect. And then Q4 typically, or at least historically, is a little seasonally softer in portable electronics, but you’re seeing that as a continued area of strength. Is it specifically 5G? Is it the content that’s keeping that up and giving you the confidence in the Q4 outlook?

Yes. It’s interesting. It’s – you are right. The history is Q3 is the build-out for the holidays, but we are seeing it continue into the quarter, into the fourth quarter. And it has to do, we believe, with the 5G filling of the supply chain.

Got it. And it sounds like you are already baking in some, if not incremental, some potential for industrial softness into that guide. Am I hearing that correctly?

Yes. It’s – we see it as remaining soft. I mean there is we have a wide variety of applications right in industrial. But generally, we see it flat to maybe slightly down. And we really have not seen anything that would indicate it’s going to recover in the quarter.

Okay. Maybe one or two more, I have covered a lot of ground. Wireless infrastructure is down to 11% of total revenue, presumably less in Q3 and still gets kind of Gartner’s outsize attention. Do you anticipate that piece returning to growth in ‘21? And I only ask because even if it’s flat or down modestly, it shouldn’t really detract significantly from your growth potential given the other drivers?

Yes. Our view, again – we have reoriented the company towards advanced mobility, defense, portable electronics, and we see those growth vectors really taking off. Our view on wireless infrastructure is that it’s – it will be sideways flat to slightly down as we move forward into next year, and we don’t see that. Certainly, wireless is part of the portfolio of the company. But certainly not the growth vector that we had seen it probably 1.5 years, 2 years ago for us.

Got it. And then last one for me. A lot of color, thanks, Mike, on the gross margin, the prior 40% goal, even at the new mix, it sounds like we can get back there – if we are already back there on 2019, demand levels are at 39%. It seems like that is insight. Any commentary there?

Well I think you are right. When you talk about it, and we have said going forward that at similar mix, right, every $10 million, $11 million could add up to 100 basis points of gross margin. So certainly, I think we are within the ability to do that here. And I think with some of the additional opportunities we have to continue on the manufacturing improvement front, I think there’s a chance to maybe even press that number. But we will see how the – we will see – it is going to be very much volume dependent. We will see how that plays out.

Understood, okay. I appreciate the color once again.

Thanks, Dan.

And our next question is a follow-up from Craig Ellis with B. Riley Securities.

Thanks for taking the question. Bruce, I wanted to have a follow-up on the comments that you made around the defense-related businesses because it seems like there, overall, the business is moving to a higher level of growth. And I think you commented that a lot of defense programs are tilting more towards being radar intensive, which favors you. But to what extent, as you have been working with the business over the last 12 to 18 months, does Rogers either changed its approach with how it looks at existing or new customer opportunities, different types of opportunities that might be part of a radar-based system and done things in your own control to expand your spam in various ways?

Yes. It’s a very good question. And exactly right about two years ago, we changed our sales approach in the sense that we put more resources, more tech support resources and intensified our discussions with our – the OEMs. And through those efforts, and they have been multiyear efforts, we have been able to see more opportunities. Our engineers, our sales folks, our technologists in with those defense contractors, identifying ways to use more broadly the Rogers technology in a lot of these defense areas and as we mentioned in the prepared remarks, you see the technologies in defense moving towards radar systems, guidance systems, and it really plays to our strength. And when you look at the growth, the really explosive growth that we have seen over the last 12 to 18 months in this market, we also see this moving forward, knowing what the funnel looks like. And we should continue to see some nice robust growth in defense.

That’s helpful. The follow-up is really looking out further, and I am just going to clarify right upfront. I am not looking for specific guidance. I just want to understand what you may be seeing as you look at backlog and other things. So there was a question earlier about PES’ fourth quarter seasonality. I am really focused more in the first quarter. I think that would typically be a period of softness for the supply chain generally, but we are coming up at a pretty low base with 5G adoption, pretty big numbers for next year. Any thoughts guys on how PES might perform relative to seasonality as we look at the first quarter of next year?

Yes. I think it’s really what we were talking about is EMS on the handhelds, right? That was what was driving.

Yes, yes, sorry.

No problem. So we – as we talked about earlier, we see continued strength moving forward on the 5G handsets as we get into 2021. Other areas in EMS that would have growth – I mean 25% or so of that business or more is general industrial. And how well that market recovers, I think, will have an impact. Certainly, we see continued strong growth on the EV/HEV side with our battery pads and sealing solutions. And that we think will continue, and we are really thrilled with what we saw even during the pandemic here, the strength of EV/HEV sales. And as we project forward with any kind of recovery, we believe we will see some real strength in that – in the EMS business. And our – we have very unique solutions that we believe give us some stickiness to that application.

Interesting. And indeed, it’s nice to see them come back so quickly. Last one, Mike, for you just regarding OpEx, the team has done a great job bringing OpEx down as we’ve gone through the crisis period. As you look at where operating expense is today, how much of the gains that we have seen are really more structural and more durable if we get a rise in sales more broadly? And how much of it might be just more tactical when things that might unwind a bit if we get a more normalized environment sometime next year?

Yes, a good question, Craig. So as we talked about, the operating expenses, including R&D, were just over 20% of revenues this quarter. If you look at sort of where we were a year ago, at the higher revenue levels, it was more – it was closer to 19%. And I would tell you that even at the 20%, we probably have some – certainly some benefit with respect to some of the operating expenses because there certainly have been less travel-type – travel-related expenses due to COVID, so probably a small piece there. But I wouldn’t say that is terribly significant, but it has contributed. So I would say that the majority of what we have done is structural and that – if we start thinking about revenue levels that were, again, pre-pandemic levels, I still believe that we should be thinking about operating expenses below the 20% of revenue. And that includes R&D probably at 3.5% or maybe slightly – could be 3.5% to 4%, which is not terribly far off from where it is today. So, I think a lot of what we have done is structural. I expect it to be sustainable and again, I think you will see that as revenues continue to increase.

That’s really helpful. Thanks for all the assistance team.

And our next question is a follow-up from Daniel Moore with CJS Securities.

Yes. Just quickly in EV/HEV, can you talk about the number of platforms you expect to be on in 2021 versus 2020, either a number of OEMs or a number of total platforms or just the level of increase, trying to get a better sense of the cadence and trajectory of potential growth there?

Yes. I mean going to have Bob answer that one for us.

Yes, Dan. I think the answer is – it’s pretty broad in the case of – let me start with CS and the power semiconductor substrates in that. We’re working with a pretty much broad group of module makers or the converters for EV/HEV. So there’s a high level of activity really across the full spectrum of OEMs and the various platforms that they’re developing and plan to launch over the next few years. In the case of EMS, we tend to be more concentrated on the – it’s really the OEMs that are working on, what are called, the pouch cell battery, the battery pad technology that we’re bringing to market is really primarily tailored. We do some in prismatic. And we are doing other applications in some of the broader battery technologies. But I would say the focus there is really with the OEMs that are in the pouch cell area. And if you look at what’s happening, particularly Europe, and to some degree, Detroit, a lot of that technology, a lot of the new vehicles that are being announced are using the pouch cell technology. So I think – the way to think about it is kind of where our – our momentum is really tied towards the breadth and momentum you’re seeing in the marketplace in terms of the number of new electrified vehicles, OEVs and plug-in hybrids in particular that are being announced. We are kind of – our tailwinds are kind of aligned pretty well with that.

Got it. That’s helpful. Appreciate it. Thanks again.

Thank you. I will now turn the conference to Bruce Hoechner for closing comments.

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