Good afternoon. My name is Shamali and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Q3 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 third 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'd 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 demand, 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. Reconciliations of those non-GAAP financial measures, 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 to everyone, and thank you for joining us today. Before we turn to the next slide, I'll give a quick summary of our performance during the quarter. In Q3, we again made good progress towards the cost improvement targets we set for this year. Gross margin was 35.1%, which was above the high end of our guidance range and exceeded the target we set in Q1. This margin expansion and lower adjusted operating expenses drove adjusted EPS to the high end of our guidance range and contributed to the stronger cash flow generated in the quarter. We achieved these margin improvements despite continued global economic headwinds impacting market demand. Later in the presentation, I will elaborate more on these market headwinds and our Q3 results. But first, I want to highlight the progress we are making to strengthen the company as we execute on our restore initiatives introduced during our Q1 Investor Day. Please turn to slide 5. Rogers has a history of capitalizing on secular trends in fast growing markets. We do this by leveraging our core technology and product strength in existing markets and applying it to new growth areas. One example of this is the EV market. where our sales have increased rapidly over the past several years. With significant growth ahead, we are adding new capacity in our curamik power substrate business to support our customers. We have secured many design in wins for curamik this year, and our momentum in this space continues. For example, last quarter, a major power module supplier designed in our advanced substrate technology in their high performance silicon carbide power modules. This technology will be used in the main inverter of a major European automotive OEM. This win is one of the largest in our history…

Thank you, Colin, and good afternoon, everyone. Building on what Colin stated earlier, despite difficult market conditions, we have accomplished a great deal over the course of this year. We have kept our focus on improving profitability and cash flow. We're also committed to making the investments necessary to prepare the business for long-term growth. These improvements include driving gross margins higher by 350 basis points compared to Q3 of 2022, achieving an adjusted EBITDA margins of nearly 20%, a 375 basis points improvement over the same time period. Higher cash generation that has allowed us to invest in capacity and capabilities for growth while paying down debt. Let me now review our third quarter 2023 results in detail beginning on Slide 8. Q3 sales of $229 million declined by less than 1% versus the prior quarter and were slightly below our guidance range. Gross margin of 35.1% improved 60 basis points versus Q2 and exceeded the high end of our guidance expectation. On a GAAP basis, earnings per share was $1.02, slightly below the range, due to the timing of the expected sale of an asset held for sale. Adjusted earnings per share of $1.24 increased by 15% sequentially and was at the top end of our guidance range. We have made good progress in 2023 with our margins and adjusted EPS. We remain intently focused on driving further profitability improvements. Turning to Slide 9, I'll discuss Q3 net sales in greater detail. The slight decline in total sales was due to lower volume of approximately $900,000 and unfavorable foreign currency fluctuations of around $700,000. On a reportable segment basis, AES sales decreased from the prior quarter by 2.9% to $126.4 million. The less than $4 million decrease was related to lower EV/HEV, aerospace and defense, and ADAS sales.…

Thank you. And at this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Good afternoon. Thanks for taking questions. Congrats on margin progression. Maybe I'll start with EV. There's obviously been a lot of noise lately around EV sales slowing and you saw a little bit of slowdown in Q3, but it sounds like some winnings of very significant new orders and platforms. What are your customers and you expect to return to growth sequentially at least in Q4? So what are your customers telling you about their plans for production and expansion as they look out to ‘24 specifically and any color by geography if you could break it down kind of North America, Europe, Asia, that would be very helpful? Thanks.

Sure, Dan. Colin here. Thanks for calling in. So you're right, there has been a lot of information in news lately about EV from a lot of different companies weighing in. What we hear from customers in general would be there was always anticipated to be some choppiness as EV scaled up. And it comes back to the fact that some of these supply chains and getting these vehicles into the market, it just hasn't been developed as the ICE engines have been. I mean, these the ICE materials or ICE products have been in the market for more than 100 years and the supply chain here is are still pretty nascent. So overall, even though there may be a quarter or two of an issue, most of our OEMs feel in all the regions that the growth will be there for EV, HEV. I think there was some recent comments from Toyota around how they feel like maybe plug-in hybrids will be more effective in growing in the marketplace. But we also hear that pure battery vehicles are also going quite strong. So while there's some bumps in the road initially, we certainly feel like long-term there's still a good decade of growth ahead for both platforms.

Very helpful. And in general industrial, appreciate all the commentary there and obviously very consistent with what we are seeing in the macro. Maybe would you describe it as incremental slowing or just kind of continue to remain choppy overall? And one of your customers telling you about their expansion of CapEx plans beyond Q4, maybe for the next several quarters? Thanks.

Sure, Dan. So I would describe it mostly as incremental. Within that bucket of general industrial we have a lot of different end markets, such as capital equipment, semiconductor appliances lighting. And it just feels like it's coming to the end of the year. It's part of the issues of the overall general economy impacting our sales into these end markets. And we'll continue to watch it closely. Certainly high interest rates are not helping in terms of new home sales, and that would probably roll back and impact our HVAC business, which is also in the general industrial end segment. So that's how I would look at it. Ram, I don't know if you wanted to add anything different to that.

No, I agree. I think we are seeing it slower, go weaker in Q4, Dan. So it is increasingly slowing. I hope that's the bottom of it, and we'll start some recovery. But for now, we don't see any recovery insight.

Okay. Second and a half question, and I'll jump out. But I appreciate the color on the ‘25 targets, I think it's very helpful. Would you kind of expect to be in a better position to provide an update when you report your full-year results in February or just it's fluid and we'll kind of continue to monitor it for here? Thanks again.

Thanks, Dan. Yes, we're working on that, and we'll share what we have as soon as we can.

Our next question goes to the line of Craig Ellis with B. Riley Securities. Please proceed with your question.

Yes, thanks for taking the questions. And guys, I wanted to say congratulations on the cost and margin execution in a real tough environment. It's not easy out there and nice to see gross margins hitting 35%. Colin, I wanted to start with a couple of clarifications really for you on the product side. So starting with the EV business and the plans for the China power substrate facility that you're ramping up. Our checks are showing that there's within China local manufacturers that are partnered up with other international entities a real significant ambition to grow silicon carbide output next year by pretty dramatic levels. And so the question is this is as you look at ramping up your facility, how would that facility size compare to the one that you have. I believe in operation now in Germany, and how quickly would you expect to ramp capacity there? And is it possible if demand came in early that you'd able to get to higher volume before calendar ‘25?

Sure, I’ll start and then anyone can jump in to help me, Ram or Steve. So the way we're looking at this factory, Craig, is that we're putting it in different phases. So this first CapEx spend that we're putting into this factory is Phase 1. But what we're doing is, while we're bringing up the entire production to be able to produce, we're putting in the infrastructure so that we can add additional phases without having to add more large infrastructure spend. So we're trying to think ahead and bring it up mindfully to match demand. But we'll have a much larger infrastructure built out so that if demand goes faster than we think, we should be able to ramp up and get to Phase 2 much more quickly is how we're thinking about it.

And how would Phase 1 or Phase 1 plus Phase 2 compare to the capacity that you already have in place over in Europe?

We're not really talking at this moment the size of the capacity, but what we believe is we've got it with the production improvements and operational efficiencies we're driving out of our Eschenbach Germany plant. And with the phased approach for the curamik facility we put into China, we think we can match the ramp curve we have from our customers for the next several years. And we've also built in an upside case where we think we can meet that also. So ultimately, we'll talk about capacity in terms of how much we have, but we're not prepared to do that specific thing at this moment. Yes, so what we've shared publicly, Craig is that it's about a $32 million to $35 million investment. And we look for about a three year payback on our investments.

Great. That's really helpful, guys. I'm sorry.

So I said that should give you an idea.

Yes, that's real helpful. Second product related question for Colin. Colin, on the slide that you had that showed the longer-term drivers you talked about -- you talked about personal electronics and the smartphone inventory issues that are out there. We're hearing that while certainly iOS has been very strong over the last couple of years, obviously Android went into correction two years ago, but checks suggests that that's finally starting to bottom out and we could start to see more normalized product cycles next year. So the question on that side of your business, what sense are you getting from customers about reengagement for new product activity next year?

That's a good question where we are now with the portable electronics. It really is a 10 year low in terms of handset cells below $1.2 billion. So what we hear from a lot of companies is that they're anxious for that to end. And we're fortunate in terms of how we're positioned in China that we can call on all the local OEMs and also Western OEMs who produced in the region. And while we feel reasonably optimistic about our design wins for 2024 and '25, we're working closely with them to understand how they're protecting things to go. One thing I'll mention that's helped us a lot is that we had that UTIS fire several years ago, but that facility now is up and running and we're seeing a lot of design wins coming from that team with that technology. So that helps us in terms of what we think about growth in portable electronics for next year.

Now that's very encouraging. And then, Ram, if I could, just a couple for you quickly. You mentioned the new CapEx guidelines for this year. The change versus prior, is that really just the timing of growth that's related to some of these macro factors that everybody's dealing with or were there efficiencies that the team found that are just allowing you to do more with a little less CapEx than what you had expected?

Yes, that's a good question, Craig. So certainly by increasing throughput and removing some of the bottlenecks, particularly in our curamik facility in Germany, we have been able to lower our overall CapEx spending. And in terms of the guidance for the year, that's mostly just cash flow timing. The expansion plans in the curamik facility in China and the others we talked about are as planned and scheduled, going on as scheduled. The timing of the cash flow as we manage cash has brought down the CapEx slightly lower. But also to say that we are targeting a 7% to 8% for the next couple of years in CapEx.

Very helpful. And then finally for me, before I hop back in the queue, the team did a great job this year executing on drivers to gross margin expansion and hitting the 35% target a quarter earlier than I certainly had expected. The question is this as we look ahead. Ram, I think you've historically said that the path to the target model gross margin is about 30% efficiencies and other things that could be cost related and then 70% volume and mix. Is that still the right way to look at the path from here to that 39%?

That is still the right way to look at it. Now, needless to say, we will continue our operational excellence, manufacturing procurement, and design improvement efforts to lower that cost as fast and as efficiently as possible. But the big step change will come from volume returning. And once you correct that cost line, as you know, once we see that volume, you can see much more quicker improvement of the margin.

Absolutely. Thank you very much, guys. Appreciate that.

Thank you.

[Operator Instructions]. And it appears that there are no further questions. And this does conclude our question-and-answer session. Therefore, I'll now turn the call back over to Colin Gouveia for closing remarks.

I just wanted to say thanks all for joining and look forward to talking with several of you over the next several weeks.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.