Earnings Call Transcript - ROG Q3 2025

Operator, Operator

Good afternoon. My name is Alicia, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Third Quarter 2025 Earnings Conference Call. I will now turn the call over to your host, Mr. Steve Haymore, Senior Director of Investor Relations. Mr. Haymore, you may begin.

Steve Haymore, Senior Director of Investor Relations

Good afternoon, and welcome to the Rogers Corporation Third Quarter 2025 Earnings Conference Call. The slides for today's call can be found in 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 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 made today. Please turn to Slide 3. The discussions during this conference call will reference certain financial measures that were not prepared in accordance with U.S. 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, which are available on our Investor Relations website. With me today are Ali El-Haj, Interim President and CEO; and Laura Russell, Senior Vice President and CFO. I'll now turn the call over to Ali.

Ali El-Haj, Interim President and CEO

Thanks, Steve. Good afternoon, everyone, and thank you for joining us today. I'll begin on Slide 4 with the key messages for the quarter. First, since taking on this role in mid-July, I have engaged extensively meeting with Rogers' employees and customers in Asia, Europe and the United States. These meetings and discussions have reinforced Rogers' core strengths and the key growth opportunities ahead. They have also shown the areas where we must improve to achieve renewed growth and sustainable operating performance. To capitalize on these opportunities and to deliver greater returns to shareholders, we are executing on a plan with several critical focus areas. I will cover these in detail and share the progress we have made thus far. Turning to our Q3 results. Our sales, gross margins and adjusted EPS results were all at the upper end of the guidance and exceeded Street consensus. Sales increased by 6.5% from the prior quarter, led by improvements in portable electronics, industrial, aerospace and defense end markets. Compared to the prior year, sales increased by 2.7%. Q3 results benefited from delivering on cost and expense reduction actions. For the fourth quarter, we expect sales and earnings to improve versus the prior year, while typical seasonal factors will lead to a sequential decline. With expense reduction actions completed, adjusted EBITDA margin should improve around 300 basis points versus the prior year. Laura will cover both the Q3 financials and fourth quarter outlook in more detail. On Slide 5, I will discuss the critical initiatives we are advancing in the near and midterm. First, we are committed to improving Rogers' top line growth potential. To achieve this, we are intensifying our customer focus with actions underway to better anticipate their needs and improve service levels. As we work to delight our customers, we will leverage our global manufacturing capabilities to increase our competitiveness and market share in each region. We have recently expanded this capability as we have started production in the new curamik facility in China. With a localized supply chain and a regionally competitive cost structure, we are positioned to compete effectively. Delivering innovative new products is also key to achieving our growth objectives. There are compelling opportunities in the technology pipeline and significant future potential applications. In the coming quarters, Rogers will be introducing new products in all business units, targeting new and adjacent market segments. The next critical priority is to maintain a lean and efficient cost structure. Expense reduction actions and footprint optimization efforts that were started in recent quarters are taking hold, improving EBITDA margins and cash flow. We are making significant progress on the previously announced restructuring of curamik operations in Germany. Cost savings from this initiative will begin in the fourth quarter with $13 million of annualized savings targeted by late 2026. We will continue to evaluate our global footprint and make refinements as needed. This may include selective investments to support growth opportunities that meet certain return criteria. These investments will be carefully balanced with vigilant cost control. Operational excellence will remain a top priority, focused on creating a more flexible and dynamic organization. Actions already completed include changes made to the commercial, R&D and operations organizational structure in both business units. These changes were implemented to increase the speed of execution, improve accountability and simplify how we operate. We already are seeing results with significantly reduced lead times, some by as much as 60% while reducing inventories and improving working capital. Our revised operating model will continue to drive these types of improvements. As we reshape our structure into a customer-centric organization, we expect to see more consistent performance and improved returns to shareholders. Lastly, we are also intensely focused on critical initiatives to grow and strengthen Rogers over the long term. While these objectives are not part of today's discussion, we will share our plans at the appropriate time. On Slide 6, we'll discuss our sales for the third quarter by end market. Beginning with industrial markets, sales were higher versus the prior quarter in both AES and EMS business units. In Q3, the improvement was broad-based with sales increasing across all regions. This marks the third consecutive quarter of higher industrial sales and on a year-to-date basis, we have continued to show growth. Aerospace and Defense sales also improved sequentially. EMS sales increased driven by stronger commercial aerospace demand in the North American market. AES defense sales remained strong and were in line with the prior quarter. On a year-to-date basis, total A&D sales have increased at a low double-digit rate. EV and HEV sales were relatively unchanged versus the prior quarter. AES sales increased from improved power substrate demand. Year-to-date, sales remain well below the prior year. We anticipate further growth in this market, supported by the recent curamik expansion in China and the recovery in demand from the Western power module manufacturers. As anticipated, ADAS sales decreased sequentially. The sales decline tracked lower light vehicle production in Q3. Year-to-date sales remain solidly ahead of 2024. Lastly, portable electronics was the largest driver of the sequential improvement in revenue. The double-digit increase versus the prior quarter was in line with expected seasonal patterns. I will now turn it over to Laura to discuss our Q3 financial performance and Q4 outlook.

Laura Russell, Senior Vice President and CFO

Thank you, Ali. Starting on Slide 7, I'll begin with a summary of our third quarter financials. Q3 results improved meaningfully from the prior quarter with all financial metrics at the top end of guidance. Sales increased across most end markets with the largest increase in portable electronics and industrial. AES revenues increased by 5.2% and EMS revenues were 8.7% higher on a quarter-on-quarter basis. GAAP EPS of $0.48 improved significantly from the prior quarter, mainly due to lower restructuring-related expenses. Adjusted earnings per share in Q3 increased to $0.90 from $0.34 in Q2, a result of the improvement in sales and gross margin and reductions in G&A expenses. Turning to Slide 8. Q3 adjusted EBITDA was $37.2 million or 17.2% of sales. The 540 basis point improvement from the prior quarter was driven by multiple factors. First, gross margin increased 190 basis points to 33.5% due to higher volumes, favorable product mix and reductions in manufacturing costs. Late in the third quarter, we started production in our curamik facility in China. Cost for the initial factory ramp had only a slight impact on Q3 margin. The impact of tariffs on gross margin was minor in Q3. This was a result of continued mitigation efforts and the agreement between the U.S. and China to delay tariff rate increases. Next, adjusted operating expense, excluding stock-based compensation, decreased by $2.5 million quarter-on-quarter. The lower OpEx resulted from reductions in professional services and global workforce restructuring. Lastly, other income improved $2.6 million due to favorable quarter-over-quarter changes in foreign currency transaction. Continuing to Slide 9, I'll discuss cash utilization for the quarter. Cash at the end of Q3 was $168 million, an increase of $10.6 million from the end of the second quarter. Cash provided by operations was $20.9 million and improved due to higher sales and operating income. In addition, we improved working capital, particularly inventory through continued focus. Uses of cash in the quarter included share repurchases of $10 million and capital expenditures of $7.7 million. For the full year, we forecast capital expenditures in the range of $30 million to $40 million. Returning capital to shareholders will remain a priority. Our current view is that share repurchases in Q4 will exceed Q3 levels. Following our purchases in Q3, we have approximately $66 million remaining on our existing share repurchase program. Next, on Slide 10, I'll review our guidance for the fourth quarter. Beginning with sales, we expect Q4 revenues to be between $190 million and $205 million. The midpoint of the range is a 3% increase in sales year-over-year and a 9% decline quarter-over-quarter. The guidance reflects the normal sequential decline in portable electronics sales from Q3 to Q4 and slower order patterns across most end markets as customers manage year-end inventory. We are guiding gross margin in the range of 30% to 32%. The midpoint of this range is 110 basis points lower than the prior year with an 80 basis point headwind from the ramp of our curamik factory in China. Compared to the prior quarter, gross margin is 250 basis points lower due to volume and mix. We expect adjusted operating expenses to decrease from third quarter levels, primarily from lower start-up costs, which have moved into gross margin following the start of production at the curamik facility. EPS is projected to range from breakeven to earnings of $0.40. The adjusted EPS range is $0.40 to $0.80 of earnings. We expect adjusted EBITDA margin between 13.5% and 16.5%, a roughly 300 basis point improvement versus the prior year at the midpoint of the range. The margin and EPS guidance assumes that tariff policies in place today remain unchanged for the quarter. Adjustments to arrive at our non-GAAP EPS and adjusted EBITDA are mainly comprised of restructuring costs related to the curamik actions in Germany. As communicated last quarter, the restructuring costs associated with this action will be incurred from Q4 of 2025 to Q3 of 2026. We anticipate savings, albeit small to start in late Q4 of '25. The program is still anticipated to deliver $13 million of annual run rate savings. Lastly, we project our non-GAAP full year tax rate to be approximately 35%. The higher expected tax rate is mainly due to certain loss jurisdictions where no tax benefits can be realized. I will now turn the call back over to Ali.

Ali El-Haj, Interim President and CEO

Thanks, Laura. In summary, there is a clear focus on the key initiatives to grow the top line, improve the cost structure and further operational excellence. Combined with a renewed customer focus and new product introductions, we see significant opportunity to improve Rogers' performance over the near and long term. That concludes our prepared remarks. I will now turn the call back to the operator for questions.

Operator, Operator

Our first question comes from Daniel Moore with CJS Securities.

Dan Moore, Analyst

I'll start with the top line and just kind of general revenue trends. Guidance for Q4 implies 2% to 3% growth at the midpoint year-on-year. Just talk about the confidence in demand continuing to build in those key end markets that you called out like industrial, aerospace and defense and some of your larger end markets. And as we look out to the first half of '26, would you expect similar, if not improved year-on-year growth, particularly given some of the easier comps that we have in the first half of the year?

Ali El-Haj, Interim President and CEO

Dan, it's Ali. We're confident in the range we've provided based on our current outlook. Assuming no significant macroeconomic changes, we are optimistic about our Q4 projections. We anticipate continued strength in all market segments, although we remain cautious about the recovery of the EV market. This concern is already factored into our guidance. For the first six months of 2026, we are confident in achieving better performance and sustained growth across all business sectors.

Dan Moore, Analyst

Very helpful. And maybe for Laura, the gross margin recovered to 33.5% this quarter. Obviously, mix helps. It's a seasonally stronger quarter. But as we look out, two questions. One, the 80 basis point headwind in Q4, how should we think about that kind of dissipating as we move into the first half of next year? And two, what in your mind is sort of a baseline for gross margins on an annualized basis? And what could an upside scenario look like? And I'll jump back in the queue with any follow-ups.

Laura Russell, Senior Vice President and CFO

Okay. Sounds good. So let me address the first half of your question, Dan. So the 80 basis points headwind that we're going to face in the fourth quarter associated with the ramp of the curamik facility in China is pretty typical of what we would anticipate as we begin production in that facility. I think as Ali mentioned in the prepared remarks, we have activities ongoing with many customers, and we're looking to qualify and ramp those customers into full manufacturing production volumes, which will facilitate us getting ahead of that headwind and turn into return from that facility, which correlates with the investment we undertook to build out our regional capability and capacity and allow us to be far better positioned to compete locally in that market. So what I would anticipate is it will take time to fully ramp the capacity through 2026, not necessarily because of our readiness, but because of the time it takes to qualify the customers' product and their solution directly from our factory. So those activities are ongoing. And we would anticipate as we reach the back end of next year to not be facing the same extent of headwind to the margin from that operation. In terms of thinking about the potential for the business and the margin optimized, Ali spoke about the initiatives and the objectives that we have. A lot of them will crystallize and improve financial results as we embed the new operator model and deliver improved operational effectiveness and grow the top line. I spoke previously about our current investments and the capacity being in place. So now we're turning our attention to optimizing that capacity and utilizing it to serve the demand and the potential that we see.

Operator, Operator

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

Craig Ellis, Analyst

Laura, I'll just start on the theme that Daniel is on and just take the cost and margin dynamics a step further perhaps. So my sense from your characterization as you walk through some of the slides and the cost savings, which I think are targeted at $25 million this year with a $32 million run rate, and then we've got $13 million coming from the German facility next year. Is that there may be other cost benefits that could be executed against beyond things that are in progress and the German facility benefit, one. Is that correct? And two, how material could those things be? And when could they start to be things that would be actionable as we look at where profitability and cash conversion can ultimately go for the business?

Laura Russell, Senior Vice President and CFO

Let me begin, and Ali can add any comments he wishes. Regarding our previously outlined plans, you can currently see the $25 million savings reflected in the P&L according to our guidance. Last year, our total OpEx was approximately $210 million, and based on our update for 2025, we expect it to be $18 million to $20 million lower. This is evident as the majority of the $25 million savings will come from OpEx, with the remainder coming from gross margin. Annually, as you mentioned, this should translate to about $32 million in benefits across both P&L geographies by 2026. Additionally, we announced last quarter that the restructuring in Germany has started. This program is on track to deliver $13 million on an annualized basis, though I want to clarify that this amount is a cost of goods sold saving, not an OpEx saving, and we will not see the full impact until later in 2026 as we reduce capacity and ramp up service for customers in our new geography in China. Beyond that, I want to emphasize our focus on enhancing operational efficiency. We are committed to optimizing the financial performance of the business on a month-to-month basis with greater intensity and a structured approach. We will continuously assess business and market opportunities as they arise and make the necessary investments or savings. Currently, we are focused on the plans we have shared and discussed.

Craig Ellis, Analyst

That's very helpful. And I think the execution on cost and other things have been quite notable over the last 3 to 4 quarters, Laura. So it will be nice to see those continue. Ali, I'll turn my second question to you. You noted in your prepared remarks that the industrial end market, which is our biggest, was an area of strength. My question is, as you look at the dynamics in that end market, what is it that drove that strength? And as you think about growth in that large end market, what are the opportunities specifically to drive growth? And do you think that we're at a point where supply chain inventories are no longer a headwind to that business?

Ali El-Haj, Interim President and CEO

Yes, thanks. I'll answer the question kind of backwards from inventory and supply chain issues, I think that's way behind us now. So that's all kind of cleared up. I think we're looking forward and the potential for growth. So we have 3 elements that we're targeting or we're working on. One is we're capturing more market share from products and customers that we already have and customers that we didn't have in the past. So increasing market share, this is key for us. And again, this is for assets that we have. So we can utilize these assets. We have the capacity to supply these types of products. In addition to that, and this is significantly important, I think our customers started to see our improvement in response and service and for their demand and needs. So we're seeing a lot more demand and a lot more of these volumes shifted back to us. The third element is introduction of new products. So as I indicated, we would be launching. We actually started this in Q4 of this year going forward, several new products that will allow us to even penetrate markets that we have not participated in, in the past. So I think all those 3 elements were really giving us a lot more confidence that we will continue to grow the top line.

Craig Ellis, Analyst

That's very helpful. And if I could just ask a clarification on the heels of those 3 drivers, Ali. As you've interacted with the internal team, as you've interacted with partners and customers, do you feel like pricing is at the right level for the high value that Rogers products bring to market? Or is there opportunity to do things tactically with pricing so that more of the functional value that Rogers provides come home to the top line and down to the bottom line?

Ali El-Haj, Interim President and CEO

I think the simple answer is a combination of both. So I think Rogers' brand name and quality commands obviously a premium pricing. In certain markets, certain applications, that's been key for us. However, there's other markets and areas where really the market commands the pricing. And in this case, what we're doing internally is we need to make sure we're focused on the cost structure that we have today to be able to compete effectively in these markets and be able to realize the margins and the returns that we expect to get.

Laura Russell, Senior Vice President and CFO

Just one point of clarification just before we jump off, Craig. Naturally, what I was discussing in the OpEx bridges was adjusted OpEx.

Operator, Operator

Our next question comes from the line of David Silver with Freedom Capital Markets.

David Silver, Analyst

First question is for Ali. In your opening remarks, you mentioned that your initial task as interim CEO was to meet with several key customers globally. The industry has been facing a prolonged period of softer demand, inventory challenges, and recently, tariff issues. Do you believe the relationships with your key customers are still as strong as they were about 18 months ago? Given these challenges, does Rogers need to take further steps to enhance alignment with key customers and collaboration partners to achieve your goals? What is the current status of these relationships amidst the ongoing reduced demand? Additionally, regarding the significant efforts you've made to cut costs and strengthen alignment, are there any further tactical or strategic steps that you need to consider?

Ali El-Haj, Interim President and CEO

Thank you for the question. The relationship with our customers is very strong and solid, backed by a lot of history, especially with our key customers. My goal has been to gain a deeper understanding of their needs, listen to their concerns, and grasp their expectations from Rogers, ensuring we pay attention to and address those issues. This communication has greatly enhanced our understanding of what they expect. Some challenges we faced in the past few years, like supply chain interruptions and raw material shortages, caused minor disruptions and some difficulties for our customers. However, our understanding of their needs is now clear, and we've aligned the organization internally to continually address these issues across all areas, not just sales or R&D, but also in service. We've implemented improvements, such as reducing lead times significantly. We aim to set the benchmark in the industry for service level and quality by the end of 2026. Regarding your second question, our commitment to continuous improvement is ongoing. We will keep enhancing our operations and processes, whether in manufacturing, customer service, sales, or development. We are focused on reducing engineering development time to launch products faster and meet our customers' demands proactively, ensuring we are ready and responsive when they need us. Much of this is within our control, and I am confident we will accomplish these goals.

David Silver, Analyst

Okay. I did want to maybe ask a question about your philosophy about share buybacks and returning cash to shareholders in general. But the funds, I guess, over the past few quarters, including the current one, I mean, the funds allocated to buybacks have increased significantly over, let's say, the trend over the past several years. And I think Laura indicated there'll be further repurchase activity in the fourth quarter. Just philosophically, is this a decision by management to act opportunistically because of maybe where the share price was earlier this year? Or would you say it's more programmatic and share repurchases are likely to continue at a higher level than has been the typical levels over the past several years?

Laura Russell, Senior Vice President and CFO

David, so let me start with that. So yes, it would be fair to say that it's been somewhat opportunistic. It's an indication of our belief in our potential with the share repurchases that we had undertaken this year when our stock price was where it was. We did do a further $10 million in Q3, and I had indicated in our call that we would likely do a little more than that in the fourth quarter. What I think is critical, though, is you asked about the philosophy around share buyback. And really for us, it's about looking for optimizing returns to our shareholders as part of our capital allocation structure. And what we had seen through '25 is whilst we were still active in evaluating M&A and potential opportunities, there hasn't been presented opportunity or target that met our investment and return criteria. And we had already explained we were largely through the organic investments that we saw for expanding the company in its existing structure with its existing technologies. So that's what resulted in the pivot to the share repurchase activity. Now as with every quarter, we'll continue to evaluate the investment potential and seeking to optimize those returns, and we'll balance what we do on a go-forward basis between all 3 legs of the capital allocation structure.

Operator, Operator

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

Dan Moore, Analyst

First couple of questions, more high level looking out to next year. But just in terms of Q4, you came in at the top end of the range this quarter. Guidance for Q4 again implies a pretty wide range. Just talk about the puts and takes that could cause you to come in toward the lower or higher of that range this quarter.

Ali El-Haj, Interim President and CEO

Do you want to take that?

Laura Russell, Senior Vice President and CFO

So Dan, it's Laura. Let me start. We provided guidance based on our current visibility. In our prepared remarks, we described what we typically experience and what we've incorporated, specifically the slowdown in portable electronics as we move into the fourth quarter compared to the third, along with how our customers are managing their inventories. There may be some changes in inventory management. We have significant exposure in the industrial sector, and if we see shifts in those indices and an increase in investments, we are prepared to respond to demand as it arises. Conversely, if we experience any weakness, which is not expected according to our guidance, we will manage our activities on a week-to-week and month-to-month basis. Therefore, based on the visibility we currently have, our guidance remains as stated.

Operator, Operator

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

Craig Ellis, Analyst

I was hoping to go back and just get a real long-term perspective on what the view is with the China curamik facility, both with respect to the diversity of customers that you think you can have in that facility? How you're thinking about being able to ramp up that facility beyond the very near-term gating factors like the specific customer and program costs that would start product? But what are the strategies the company has to engage with customers and grow both domestics and internationals that might need manufacturing autos there? And then anything else that would help us form an insightful view on what you think is possible over the next 2 to 3 years with that facility?

Ali El-Haj, Interim President and CEO

Yes, we did not build this plant initially. We were already engaging with customers before the facility was constructed and restructured. The potential for customer activities is available to us. I can assure you that we have several programs sourced and committed by some of our customers. We are currently going through product and process qualification with our customers, which is the main gating item. Once these qualifications are approved, we will launch because the demand is present. We have multiple customers, including existing clients and some new ones, with new applications. The outlook for the curamik facility in China is very promising. We anticipate significant growth in both the facility and the overall curamik business. We remain confident that growth there is robust, and we can project it.

Craig Ellis, Analyst

And to follow up on one of the points that you made and understand it more deeply, if the gating factor near term is just the quals that we're doing, whether it be product or process, what are the levers that the company has to maximize the speed at which that can happen, whether it be how you're staffing the facility, the shifts that may be running or just technical things that need to be done? Just any further color there would be helpful.

Ali El-Haj, Interim President and CEO

Yes. I mean the facility is already staffed for the current volume and for the expected forecasted volume for the next quarter. With regard to the expertise and experts and all the staffing that we need in the support functions, the functions, they're already available and it's already staffed. I think some of the issues that I've mentioned are these types of qualifications are really at the customer's end. We've done all the work internally for most customers. And now the next phase is their own qualification of the product itself. And we're trying to assist some of those customers actually doing some testing for them to speed up that process. So I think overall, we believe we're on track to hit the numbers that we are forecasting for 2026.

Operator, Operator

Thank you. There are no further questions at this time. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.