Good afternoon. My name is Joe, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Q1 2023 Earnings Conference Call. I will now turn the call over to your host, Mr. Steve Haymore, Director of Investor Relations. Mr. Haymore, you may begin.

Good afternoon, everyone, and welcome to the Rogers Corporation First Quarter 2023 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 earlier 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 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 statements made today. Please turn to Slide 3. The discussions during this conference call will also reference certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. A 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. Turning to Slide 4, with me today is Colin Gouveia, President and CEO; and Ram Mayampurath, Senior Vice President and CFO. I will now turn the call over to Colin.

Thanks, Steve. Good afternoon, everyone, and thank you for joining us. Before I discuss the results for the quarter, I'll touch on the progress we are making related to our key priorities, which we outlined at our recent Analyst and Investor Day. I'll begin on Slide 5. As highlighted last month, our plan is to achieve breakthrough growth and profitability as we restore, accelerate and elevate our performance. This includes driving immediate improvements in our near-term profitability, taking actions to strengthen the organization and maximizing the opportunities in our sales funnel and innovation pipeline to drive growth. We continue to make good progress in all of these areas. Specific to our Restore efforts, as we discussed on the Q4 conference call in February, we've taken a number of actions to improve our cost structure, including implementing a 7% reduction in Rogers' global workforce, divesting a noncore natural rubber product line, driving manufacturing and yield improvements, and optimizing our laminate circuit materials manufacturing footprint. As part of our continuing footprint optimization efforts, we have decided to exit a smaller manufacturing location in Asia. This decision is expected to improve utilization levels and further reduce operating costs. This action is in addition to the decision to sell the Price Road facility, which we communicated previously. We are beginning to see the results of these recent actions in our P&L. Ram will provide detail around the one-time charges associated with these decisions when he reviews our Q1 results. Additionally, we continue to bolster the organization with new talent. As announced, we recently hired Mike Webb as Senior Vice President and Chief Administrative Officer and Jessica Morton as Vice President, General Counsel and Corporate Secretary. We are delighted to have Mike and Jessica join Rogers and both bring significant experience and expertise to the…

Thank you, Colin, and good afternoon, everyone. I will review our first quarter 2023 results in detail and later discuss our guidance for the second quarter. Let me begin on Slide 8. As Colin mentioned, our results for the first quarter were a positive start to the year. Q1 sales of $244 million and gross margin of 32.7% both exceeded the high end of our guidance range. On a GAAP basis, we had a net loss of $0.19 per share for the quarter. This was mainly due to the $11.9 million of restructuring, severance and impairment costs and $7.6 million of non-routine shareholder advisory cost. However, on an adjusted basis, Q1 earnings were $0.87 per share, also exceeding the high end of our guidance range. I will discuss the restructuring and other non-GAAP items in more detail later in the presentation. Our Q1 results are a step in the right direction, and we remain focused on realizing the full benefits of the cost and productivity improvement actions we have announced, which we expect will continue to drive additional financial improvements. Turning to Slide 9. Q1 net sales of $244 million improved 9% versus the prior quarter. Most of the improvement was from higher volume, but we also benefited from favorable foreign currency fluctuations of $6 million. On a reportable segment basis, we had sequential improvements in both AES and EMS business units. AES sales increased 8.4% to $135.9 million. The higher revenues resulted from a strong double-digit sales growth in ADAS and renewable energy markets and improved industrial sales. Sales in the wireless infrastructure market was lower versus Q4. Foreign currency fluctuations benefited AES by $4.1 million versus Q4. EMS sales increased by 9.1% to $102.2 million led by double-digit sales growth in general industrial and aerospace and defense markets.…

[Operator Instructions] And our first question comes from the line of Daniel Moore with CJS Securities.

Let me start with just kind of talk about your expectations for the cadence of EV/HEV related revenue for Q2 and into the second half. I appreciate the color on the push out of the production ramp of that one customer. Any additional color by -- in terms of your visibility? And maybe talk a little bit further by product line would be great.

Dan, I'll start with that and then maybe Ram might have something to add. So what I'd say in general going into Q2 is that we feel like we continue to do well with design wins in the EV space, and our momentum continues. Recall that Q4 '22 was a very strong quarter. So for Q1 '23, it's somewhat of a difficult comparison. And as we said in our comments, there was some timing element as some ROLINX power interconnect customers' production ramp schedules were pushed out, and we're seeing some lumpy demand. But one point I want to bring out is at Rogers, we're happy to have sales into many diversified end segments, which can help with that lumpy demand and help pull up results in other areas when there is that type of situation. But as we go forward, we feel like the EV space will be robust. It's a great place to be. And we've got technology that participates across many different places in the EV automobile or light vehicle from all 3 business units. So we feel very good in the long term. Just trying to navigate through some of these macro environmental challenges, which seem to be impacting most companies these days.

Very helpful color. I appreciate it. In terms of the design wins, you gave great color. Beyond that, just in terms of the sort of 3 focus areas within EV/HEV, where are you seeing the most opportunity in terms of that funnel for additional potential new design wins as we look out over the next 4 to 8 quarters?

Sure. So again, it's very balanced I feel across our main product lines. So we see a lot of growth and excitement in our ceramic business, which is our ceramic substrate material that's going into power modules that go into inverters and those types of technologies. So the design wins in that space remains strong. Our ROLINX power interconnect business is also doing well in terms of where we participate in EV and also, I should say clean energy projects as well. Same for the ceramic business I might add. And then, finally, in our elastomeric materials business, we're still growing with design wins in a couple of key areas for us. It's used as battery separator pads in certain form factors of batteries such as pouch and increasingly in prismatic. We also have a good base of business around battery sealing technology with our silicone products. And then in terms of cooling plate pads and things of that nature, we also have program wins. So I would say we're really participating across large chunks of the EV automobile and light vehicles, as I said, with all of our product lines. And the cadence is very good in all those 3 areas.

I'll sneak one more in and then jump back in queue. But in terms of the gross margin guidance, consistent, obviously. But if you think about low end and high end of the range, what are some of the factors that would drive toward either end? Is it just absorption on volume and revenue?

Yes. So Dan, I'll take that. Like we have said before, the actions we control will get us to the 34%. And what will get us to the higher end of that range is if we have a better mix in our revenue. That will help us get closer to the top end of that range.

Our next question comes from the line of Craig Ellis with B. Riley Securities.

Congratulations on the execution. Colin, I'll start with a more qualitative than quantitative question. As you kicked off your prepared comments, one of the things you noted is the progress in the Restore phase. So there's clearly good things happening with cost improvement, margins and the organization. But the question is this, from where we are today, what do you think the biggest opportunities are between here and year-end in your Restore phase?

So I think what we talked about is -- what we've already talked about is some of the bigger opportunities. So EV/HEV remains to be our significant growth segment, where we see the market growing north of 25%, and that continues. There are some economic headwinds, but it's certainly a macro trend that we think will continue for many years. But we're also getting good traction, and our biggest opportunities from a market perspective remain clean energy such as solar and wind. ADAS continues to be a great staple for our growth. And then for portable electronics, it has been weak this first quarter. But then as we look to the seasonality pickup of portable electronics in the third and fourth quarter as we get into end of year and holiday buying and then later on in the first quarter Chinese New Year, we see a pickup there. So it's still -- we are still watching it closely. And even though the overall handset market might not grow that quickly, we still have good positions in 5G phones, which grow faster than the typical handset, and also foldable phones, which are also gaining traction faster than your standard handset. So that's where we see the most opportunities, I think, from a market perspective.

And if I were to focus instead on some of the company controllable things, you mentioned some pretty senior executives, but one of the things that was declared at Analyst Day is there's also an operational organization building out. How do you feel about the way the ops organization is building out in some of the efficiency and operational gains you're seeing there?

So I would say I feel very confident. So Larry Schmid, who introduced at Investor Day is a seasoned operator coming from some significant manufacturing companies. He brings in 30 years of experience, global experience and I can already see the difference in terms of the changes he's making around inserting improvements that are helping operational execution, really focusing on the right metrics and driving a cultural change because we think there's some -- still a ways to go. But we can already see progress in terms of all the things we said we were working on around yields, scrap improvement and quality. So this will be a big thing for us over the next 12 months, but we feel very confident with Larry and the team he's bringing in behind him. So that is an opportunity as well, and that will be a piece of -- a big piece of what we can control over the next, I'd say, 12 to 18 months.

And I'll use that as a segue to ask a question or 2. Ram, on gross margins, a clear message on where we are in the second quarter and what gets us to the high end of the range. If we flip forward to the back half of the year in the 35% target, what are the specific factors that take us from 34% to 35% later this year?

So continued operational excellence programs that we touched upon in building out the ops team, staying focused on making sure that the improvements we have made stick. The cost actions have already been taken and the seasonality that we talked about earlier, Craig, on the portable electronics that drives better mix for us showing up in the second half. Now the mix part is about 50 basis points, I would say, to get us to 35%.

And then if you could just provide some color on OpEx. I'm not looking for specific guidance, but maybe just the contour of what we can expect. It looks like we're low 50s here in the second quarter for operating expense. As we go through the back half of the year, what are the gives and takes there?

So OpEx tends to be heavier for us in the first half. We are running about 22% in the first half. Overall, for the year, I would think we'll get back to between 21% and 21.5%, closer to the 21% number. So second half of the year tends to be lower on OpEx.

[Operator Instructions] Our next question comes again from the line of Daniel Moore with CJS Securities.

A lot of good color, obviously, just a line item we don't spend a lot of time focusing on. In terms of just the JVs, how are those performing? And what are your expectations in terms of contributions as we look out for the balance of the year? And what's a more normalized level of contribution over time?

Thanks, Dan. I'll start, and maybe Ram could finish. So the JVs continue to function as we anticipate. I've been involved heavily in those JVs since they're mostly involved with the EMS business and our partner INOAC in China. We have 2 JVs, one for business in Japan and then the other 4 business in China. So we focus on sort of the key end markets that Rogers itself focuses on. We've got good cooperation. It's a manufacturing JV, and I would say things run smoothly there. And in terms of financial performance, they're coming in as anticipated. But maybe Ram might want to add it more.

Yes.

It's not a large part of our P&L, but it's one we do focus on.

That's right. I mean it is below our operating profit, what we get from them. But just to add to what Colin said, this year, they have been impacted like us with the slowdown in China, and we are carefully watching how second half shows up. So the first half JV performance kind of aligns well with our elastomer division. And we have not seen a huge lift from Q4 yet.

And then any specific quantifications about the additional small manufacturing facility that you're looking to shutter in Asia just in terms of impact as far as shutdown costs, but what the run rate cost savings might look like?

Yes. So there is not a big cost there, Dan. It's actually shifting products to our larger facility in Asia in close by in the region in Suzhou. So most of the costs associated will be with the impairment of equipment and fixed assets mostly. There's not much huge restructuring involved with that several place.

Our next question comes again from the line of Craig Ellis with B. Riley Securities.

I believe it was in the investor deck that one of the things that was noted is that there is some easing and logistics costs. And I wanted to use that as an opportunity just to check in on the broader operating environment. How are things going with input availability and cost, logistics? And any issues there? And just operationally, how would you characterize today's environment versus what you might have seen 6 months or 9 months ago? And as you look ahead, any notable positives or negatives that we should be aware of as we look through 2023?

Craig, maybe I'll take that to start with. So in general, if you wanted to compare where things are today versus logistics challenges or supply chain challenges, I would say things have improved in general. When you think about last year and some of the challenges that arose from the COVID shutdowns that really stopped a lot of the operations in China, those have certainly eased. And we see, in general, a bit of a pickup in terms of raw material availability. But there's still pockets where people are still not able to supply. And then when we look at our downstream customers, there's a lot of stuff in the press around production being held up, in some cases due to lack of semiconductor chips. That's what OEM came out with the other day. And so we still see a bit of that and choppiness in terms of perhaps not a one-off, but in general, supply chain disruptions, but maybe less so than it used to be. So it's still there, but it feels like it's continuing to clean up. I think the bigger question that's raised is the overall macro environment in terms of consumer inflation, consumer confidence. If you look at the PMI indices, both in the U.S. and in Europe, they're both below 50, indicating a contraction. So we're closely watching those and taking the steps that we can control to make sure we remain competitive and keep our costs under control.

And on that last point, Colin, looking at the business globally, but more on the top line rather than on the manufacturing side, I know they're closely related because you want to manufacture close to your customer. Are you seeing any notable trends that would be divergent as you look at your Asia region versus the U.S. versus Europe? Anything stand out either accelerating or maybe decelerating?

I would say at this point, nothing is changing significantly from our current expectations of growth in the region. I mean, you can see some growth in China around a more positive GDP, but they're still talk strongly in other regions around potential recessions and everything you read every single day wonders if today is the day when it would start. So we still see a lot of uncertainty in all 3 regions. And I don't think we're alone in observing that.

Yes, absolutely not. No question. It's an unusually uncertain environment. I'll pose my last question to Ram. Ram, it's great to see operating cash flow to the positive this quarter year-on-year. As we look through the year, what should we think about the business' ability to continue to improve working capital and other things to drive operating cash flow and free cash flow expansion?

So the biggest impact will come from gross margin improvements, Craig. And as we see our gross margin improve, you will see the direct impact on our cash flow as well. Our CapEx is now in the $65 million to $75 million range, and we have some opportunity to make improvements in working capital, which we are working on. It is tied somewhat to being cautious on how much inventory levels we should carry, given that we are not fully out of the supply chain situation. But having said that there is some improvements we can make in working capital to impact cash flow. But again, the biggest impact will come from our ongoing gross margin improvements in this top line recover.

Thank you. Ladies and gentlemen, there are no further questions at this time. And this will conclude today's conference. You may disconnect your lines, and have a great rest of your day.