Prepared remarks
Good afternoon. My name is Diego, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Second Quarter 2026 Earnings Conference Call. I will now turn the call over to your host, Mr. Stephen Haymore, Senior Director of Investor Relations. Mr. Haymore, you may begin.
Good afternoon, and welcome to the Rogers Corporation Second Quarter 2026 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'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 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 also reference certain financial measures that were not prepared in accordance with U.S. generally accepted accounting principles. A reconciliation of those non-GAAP measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call. With me today are Ali El-Haj, President and CEO; and Laura Russell, Senior Vice President and CFO. I will now turn the call over to Ali.
Thank you, Steve, and thank you, everyone, for joining us today. I'll begin on Slide 4. We delivered another quarter of solid progress as our commercial and profitability initiatives continue to gain traction across all business units. Sales were at $216.8 million, up 6.9% from the prior year and above the midpoint of our guidance. The stronger top line reflects both improving demand and share gains. Adjusted EBITDA increased to $38 million or 17.3% of sales and adjusted EPS of $0.92 was significantly higher than the level we reported a year ago. The results mark another quarter of meaningful year-over-year improvement in growth and profitability. Over the last several quarters, we have focused on creating a more agile, customer-focused organization while improving our operating efficiency. We are making progress and continue to focus on driving actions that will translate into further improvements in our financial performance and position Rogers for sustainable value creation. While the overall results reflect improvements, adjusted EPS was below the midpoint of guidance, primarily due to supply chain headwinds and a onetime facility event. The outlook for the third quarter is strong with sales expected to increase 10% versus the prior year. We expect sales to grow in all end markets with particular strength in A&D, industrial and electronics and communication end markets. Adjusted EBITDA margins are projected to reach 20% and increase year-over-year by 250 basis points. On Slide 5. Industrial remained our largest end market at approximately 37% of year-to-date sales and delivered high single-digit growth compared to the second quarter of last year. Performance was driven by continued improvement in AMS general industrial demand in both the United States and Europe. This growth was led by our Silicon Solutions business, which is experiencing healthy demand and gaining market share. Mass transit was also strong, led by rail applications in the United States. The broad-based nature of this growth is encouraging and reflects both improving market conditions and the benefits of our intense commercial initiatives. Automotive represented approximately 25% of sales during the quarter. Revenue increased at a low single-digit rate year-over-year, supported by higher sales of ADAS and ICE vehicle applications. Sales into the EV market were flat versus the prior year as improved power substrate revenues were offset by lower orders of materials for EV batteries. On a sequential basis, EV and HEV battery sales improved. Helped by recent design wins, we expect stronger second half EV sales as the new programs continue to ramp up. Electronics and Communications accounted for approximately 18% of sales and was one of our strongest performing end markets during the quarter. Revenue increased at a double-digit rate year-over-year from higher sales into the wireless infrastructure and smartphone markets. Smartphone sales increased versus Q2 '25 from a favorable mix of higher-end devices and continued benefits from customer share gains. Lastly, aerospace and defense sales accounted for 15% of revenue and decreased slightly from last year. Defense sales were lower due to normal variability in customer ordering patterns and were partly offset by improved commercial aerospace sales in the AMS business. We expect defense sales to improve significantly, while commercial aerospace demand remains strong in the second half of the year. Overall, we are pleased with the progress across our portfolio. The 3 largest end markets delivered year-over-year growth during the quarter, and our third quarter outlook reflects growth across all end markets. Next, I will update the progress we are making on the new products in our R&D pipeline. First, testing and validation of our microchannel cooler technology for high-power AI and data center applications continue to advance with multiple customers. We are making substantial progress with our customers and feedback on the differentiated performance of our solutions remains highly encouraging. Customer evaluations continue to provide independent validation of our ability to address the demanding thermal management requirements of next-generation computing platforms. Second, we made significant progress during the quarter with our high-frequency circuit materials for data center applications. We are now actively sampling these materials with multiple prospective customers and initial feedback has been very positive. Interest continues with an expanding list of customers evaluating our materials. This growing engagement reflects the increasing need for advanced circuit materials capable of addressing the signal integrity challenges associated with next-generation AI server architectures. Alongside these programs, we continue to advance other high potential opportunities in other markets, including EV and industrial. Turning to Slide 6. We are pleased to announce that Rogers will host an Analyst and Investor Day on September 30, 2026, in New York City. This event will provide a comprehensive update on our strategy, growth opportunities and innovation initiatives. We will also outline our value creation framework, including capital allocation priorities and long-term financial planning. Additionally, we will provide greater detail on how Rogers is positioned to accelerate top line growth from opportunities tied to AI data centers, vehicle electrification and other attractive growth markets. I will now turn it over to Laura to discuss our Q2 financial performance and Q3 outlook.
Thank you, Ali, and good afternoon to everyone. As Ali mentioned, we are seeing solid momentum in our top line results for Q2 and our third quarter guidance. We are also encouraged by the meaningful year-over-year improvement in our results as we continue to execute our critical initiatives. Starting on Slide 7, I'll review our Q2 financial results. Second quarter sales were $216.8 million, increasing 6.9% from the prior year period and exceeding the midpoint of our guidance range. Approximately two-thirds of the sales increase was driven by stronger demand and mix, with the remaining attributed to foreign currency benefit. AES sales increased 7.8% year-over-year. By end market, electronics and communications sales increased as did automotive sales. The improvement in automotive sales resulted from higher ceramic power substrate sales for electric vehicles. EMS sales improved by 6% versus the prior year. By end market, sales increased in Industrial, Electronics and Communications and A&D segments. This was partially offset by lower automotive sales. Gross margin was 32.5%, up 90 basis points year-over-year. Adjusted EPS was $0.92, up 171% from the second quarter of 2025. Adjusted EBITDA was $37.6 million or 17.3% of sales, an increase of 550 basis points versus the prior year period. All three metrics were within our guidance range. Adjusted EPS was below the midpoint of the guidance range due to supply chain headwinds, a onetime facility event and higher operating expenses. The cumulative impact of these items was more than $0.10 of earnings per share. Turning to Slide 8. Second quarter adjusted EBITDA increased to $37.6 million from $23.9 million in the prior year quarter. The largest contributor to the 550 basis points year-over-year improvement resulted from higher sales and improved product mix. Similar to the prior quarter, reductions in manufacturing costs and operating expenses also contributed to the higher adjusted EBITDA. We had a $1 million headwind in EBITDA versus the prior year from the ramp of our new China factory. Continuing to Slide 9, I'll discuss cash utilization for the quarter. Cash and short-term investments at the end of Q2 exceeded $211 million and increased $15.6 million from the end of the first quarter. Cash provided by operations was $24.4 million compared to $5.8 million in Q1 '26. Free cash flow was $18.3 million. The improved cash flow was primarily driven by higher sales and adjusted EBITDA. Overall, working capital increased mainly as a result of higher sales, which drove an increase in accounts receivable and inventories. Capital expenditures in Q2 were $6.1 million. We expect the full year 2026 capital expenditure range between $30 million and $35 million. We repurchased $3 million of shares in the second quarter, which partially offset the dilutive effect of annual share issuances. We will continue to balance returning capital to shareholders with other priorities. We continue to have a strong balance sheet, which provides us with strategic flexibility. Consistent with historical patterns, we expect cash flow to improve further into the second half of the year. Next, on Slide 10, I'll discuss our guidance for the third quarter. Consistent with our Q2 results, we expect all Q3 financial metrics to improve versus the prior year. We are guiding Q3 revenues to be between $233 million and $243 million. The midpoint of the range is a 10% increase in sales year-over-year. The guidance includes an expectation for growth in all four of our major end markets with significant strength in aerospace and defense and general industrial. We are guiding gross margin in the range of 33.2% to 34.2%. The midpoint of the range is 20 basis points higher than the prior year. We are realizing improved margins due to higher volumes and our cost structure improvement actions. However, these are partially offset by the underutilization during the ramp of our Ceramic China factory and increased commodity costs. We expect Q3 adjusted operating expenses to remain approximately flat sequentially. Adjusted EPS is forecasted to range from $1.10 to $1.30. The $1.20 midpoint compares to adjusted EPS of $0.90 in Q3 of 2025. Adjusted EBITDA is anticipated to range from $44 million to $50 million. This equates to 19.7% EBITDA margin at the midpoint of the range, which would be a 250 basis point improvement versus the third quarter of 2025. Lastly, we project our non-GAAP full year tax rate to be approximately 32%. I will now turn the call back over to Ali.
Thanks, Laura. In summary, we continue to make progress towards our growth and profitability initiatives in the second quarter. Revenue exceeded expectations, profitability improved substantially year-over-year, and our outlook points to continued momentum in the third quarter. I also want to thank our employees around the world for their commitment, agility and focus on serving our customers. Their efforts continue to make a meaningful difference in our performance and future opportunities. That concludes our prepared remarks. I will now turn the call back to the operator for questions.
Questions and answers
And your first question comes from Daniel Moore with CJS Securities.
Maybe just a quick review and then we'll go forward. But can you just elaborate a little on the supply chain challenges as well as the onetime event that you called out during the quarter and whether those issues have been largely resolved at this point as we look into Q3?
Yes. Thanks, Dan. On the supply side, we are still experiencing some raw material shortages as well as logistics challenges. From a freight perspective, transit times have lengthened due to the situation in the Middle East. Typically, transit took four to six weeks in the past; now in some instances it has taken over 12 weeks. On the onetime event, we experienced a small fire in one of our plants that suspended manufacturing for a few days. Between that and some cleanup costs at the facility, the issue has been resolved and, thankfully, there were no safety issues and our employees were safe. The freight delays and freight expenses as well as the lead time have not been fully resolved and remain ongoing issues. On the raw material side, we still see some tightness in silver and copper markets; however, we see light at the end of the tunnel. I hope that answers your question.
And then kind of looking forward, the Q2 guide implies, as you called out, 10% top line growth at the midpoint, a very nice acceleration. Gross margin was improved significantly year-over-year, but the guidance implies relatively moderate improvement. So maybe talk about kind of or give more color on the impact of the underutilization in China as well as in the new facility as well as some of those input cost margin pressures and just trying to get at like what gross margin might look like as we roll a little bit forward with that type of revenue and volume once we get beyond those headwinds.
Dan, let me start by giving you some color and perspective on the guidance. You're right that at the midpoint of the guidance the gross margin expansion is fairly modest on a gross margin basis — roughly 20 basis points. If you look further down the P&L, we continue to see substantial improvement in EBITDA and EPS expansion. The movements in gross margin are primarily associated with continued underutilization as we ramp our factory in China. We are starting to build momentum, but it will take time to ramp fully. As a result, we incorporated approximately an 85 basis point headwind in the third quarter guidance. In addition, Ali referenced commodity cost pressures and supply impacts that affected our Q2 execution. We expect some of that pressure to continue into Q3, which will weigh on gross margins. That said, we continue to manage our global supply contracts, the timing of purchases, and our copper program. We also have engineering initiatives underway to reduce consumption. We will continue to work to mitigate these pressures. We also pursue contractual approaches with customers to pass through some incremental commodity costs when necessary, but there is typically a lag between when costs are incurred and when pricing adjustments with customers take effect.
I'll stick to the two questions and jump back in queue, but certainly look forward to hearing more about the accelerating opportunities in AI and data centers in September.
Your next question comes from Craig Ellis with B. Riley Securities.
The first question, I'll just make it a high-level one. Ali, the business has done a very good job of showing accelerating growth over the last couple of quarters and into the third quarter, we've gone from 5% year-on-year to 7% year-on-year and now 10%. So we're seeing some nice acceleration in the business. Can you talk about from your vantage point, what are the biggest contributors to this increasing growth? And as we look at some of the drivers in the third quarter to the 10% with all end markets growing year-on-year, to what extent are the programs underneath that really longer life programs versus things that might be just much more seasonal or short term?
Thanks, Craig. The credit goes to the team; the organization has performed well. Our performance is helping us gain market share in existing markets, which is improving our top line. We have also won new programs that will launch in Q3, Q4 and into early 2027. The momentum will continue based on design wins, improved operational performance, shortened lead times, responsiveness to customer needs, and rapid design changes and adoption. This growth is broad-based and not limited to one industry. I view it as sustained momentum rather than seasonal.
That's really helpful. And then going back to the comments on the data center opportunity, I believe you mentioned that the microchannel CR product and Cool Power Plus you're seeing very good engagement with customers. But I think you also said that there were some other opportunities that the company was engaging with beyond those two. And I was hoping you could elaborate on that further and give us some insight as to what could happen.
Thanks again, Craig. We plan to share a lot more details at our Investor Day on September 30. The other programs I referenced include several initiatives in the EV and automotive market. Those are high-potential programs identified through our strategic initiatives and are currently in motion. We expect substantial interest from potential customers as these programs progress.
Your next question comes from David Silver with Freedom Capital Markets.
I just want to maybe follow up on, I guess, Craig's comment about accelerating growth. But if I was looking at Slide 5, where you do go sales by end market, you mentioned aerospace and defense was down a little bit due to timing, and you are looking for a bigger sequential bump from 2Q to 3Q. So I was just wondering, is the nature of the timing of orders in aerospace and defense, which I guess I consider one of the strongest end markets in the current environment. I mean, is that a big part of the sequential acceleration in sales growth? And then secondly, I was just hoping you could level set. But on the cost-cutting program, $13 million that was supposed to be realized by the end of this year, I believe. Can you just set us up for that or level set us where are we along those lines? And what would be the pace of the remaining cost saves there?
I'll take the first half and turn it back to Laura for the cost saves. With regard to aerospace and defense, the first half of the year has been soft on the defense side, while commercial aerospace has been strong. If you look at the two major aircraft manufacturers and their build rates year-to-date, our sales to those organizations have been in line with or slightly higher than their build ratios. Defense sales were lower than we expected due to timing, but we expect improvement in Q3 and Q4 based on our backlog, which shows significant growth compared to the first half of the year.
David, on the cost side, you're referring to the $13 million restructuring program for the Cami facility. That restructuring is on track to deliver the savings we committed to, and some of those savings are already materializing in the P&L. However, we've also experienced pressures related to volumes, utilization, and the timing of ramp-up in our China operation for that same product line. Overall, the program remains on track.
Okay. Great. And my next question would probably be asking for some commentary about maybe your customers' behaviors. But you did mention raw material shortages. You did mention freight delays. And it speaks to kind of an uncertain environment that you're navigating here. But also just with the geopolitics, the macro issues, how would you characterize your customers' willingness to move forward on various programs? So in other words, comparing your customers' expectations or actions now compared to, let's say, January 1, have your customers become more cautious or likely to pause progress due to one or another of the issues that you mentioned there? Or would you say it's still kind of steady as she goes and moving forward on the programs as you expect?
As of today, everything is proceeding as expected. We have not seen a major shift in customer sentiment or interaction on the new programs. If anything, some customers are working with us to shift production or sourcing to be more local, which could be a positive for Rogers. We have global manufacturing capabilities and can supply customers regionally from Europe, North America, or Asia, which is an advantage. We have not seen negative changes, and our projections remain positive.
And your next question comes from Daniel Moore with CJS Securities.
Two quick follow-ups. One, the guide for Q3, 10% growth at the midpoint. Could you maybe break that down at least directionally between end market growth, share gains and FX? Just trying to get a sense for how much of your new products and initiatives are gaining traction.
Dan, on FX, there's still a slight benefit in the guidance year-over-year, but we expect a deceleration in FX benefit relative to what we experienced in Q2. The guidance is primarily a function of business growth driven by share gains from improved operational performance and continued focus on innovation, plus strength in several markets where we have exposure. So the 10% guidance reflects a combination of end-market strength and share gains, with a modest FX tailwind that is smaller than in Q2.
I would add that aerospace and defense is an area where we see significant growth in Q3 and Q4. We also have a couple of meaningful design wins that will begin to launch toward the end of Q3 and into Q4 and Q1 of 2027, which will contribute to growth from both market expansion and share gains.
Really helpful. And I realize I may be front running your Analyst Day a bit, but just trying to put some of these commentary together, the incremental opportunities around EV and auto, those comments very intriguing. So is it ceramic? Is it technologies that Rogers has been associated with for a long time, like battery protection, thermal management, power distribution or are these sort of newer technologies that we're alluding to beyond what we've maybe talked about so far?
Simply put: all of the above. It's a combination of ceramic technologies and the AMS business capabilities across battery protection, thermal management, power distribution, and other technologies. We will provide more detail at Analyst Day.
Your next question comes from Craig Ellis with B. Riley Securities.
It's really just a clarification. Laura, I think I heard you say that the combined impact of the supply chain issue and the facility issue in Q2 was about $0.10. What was the relative impact within the $0.10 of those two items?
Yes, that $0.10 was the total impact. In addition to the supply chain and the one-time facility event, there was also a small OpEx timing impact that I referenced in the prepared remarks. Roughly speaking, raw material and freight headwinds plus the OpEx timing and investments represent about 70% to 80% of the EPS impact, and the residual is the onetime event that Ali referenced related to the small fire.
And our next question comes from David Silver with Freedom Capital Markets.
Just a clarification. I can't read my own writing here. But Laura, I believe you talked about a 32% tax rate. And I was just wondering if you could specify, is that the third quarter only? Is that full year? And then just again on the tax rate, I believe this year's rate is running a bit above some historical years for the company. Should we expect a lower rate for 2027?
Yes, the 32% rate is our full year non-GAAP outlook. On a year-over-year basis we are seeing some expansion in the rate, which is due in part to valuation allowances in certain jurisdictions based on recent business performance. Under Ali's leadership and with the team's progress, we expect business performance to meaningfully improve, which should help address some of those tax challenges. The tax team is also evaluating actions to improve our tax performance, so we are working toward a lower effective rate for future periods.
Okay. And then last one for me. Laura, I think you talked about use of cash and you used the term balance, which can cover a lot of ground. But just to my eyes, it is a very volatile publicly traded market. And my sense is that private owners of assets that might be interesting to your company might become available in a more volatile market for valuations. So just if you could just comment on the opportunity funnel that you're seeing here. And in your view, are there more likely to be some better opportunities here in the near term than, let's say, over the past couple of years?
Yes. We are continuing to evaluate potential opportunities and have been active over the last few months. Timing is important, and valuations must make strategic sense for the business. Given current market conditions, there may be more opportunity now than a year ago. The work is ongoing, and we hope to be able to share something with you in the next quarter or so. This is right about now, and we are actively pursuing select opportunities.
Ladies and gentlemen, and with that, we have no further questions at this time. So we will conclude today's conference. Thank you all for your participation. All parties may now disconnect.