Rogers Corp

NYSE:ROG

Earnings Call Analysis

Mixed Performance in Q3

The earnings call conveyed a mixed picture for the company's third quarter. Revenue reached $210 million, a 2% decline from the previous quarter. This drop can be attributed to decreased sales in the EV/HEV segment, which saw lower demand due to inventory corrections. However, the gross margin improved to 35.2%, exceeding expectations and driven by an enhanced product mix and operational efficiency. Notably, adjusted earnings per share (EPS) stood at $0.98, up from $0.69 the previous quarter, reflecting significant improvements in profit margins and a reduction in operating expenses.

Revenue and Market Segment Insights

Concurrently, the firm faced challenges in multiple market segments. Sales from the Aerospace & Defense (A&D) and wireless infrastructure sectors provided some support but were not enough to offset declines, particularly in ceramics, which were down over 35% year-to-date as customers corrected inventories. Interestingly, the company has shared optimistic sentiments regarding future growth potential, especially with the expected recovery in demand for power modules and a ramp-up of EV/HEV battery customers, signaling a potentially brighter outlook for 2025.

Cash Flow and Capital Strategy

On a positive note, the company generated a strong free cash flow of $25 million in Q3 and increased cash reserves to approximately $146 million. Capital expenditures were down slightly, projected to range between $50 million and $60 million for the year, indicating prudent management of resources through challenging times. The management expressed a commitment to maximizing cash generation while remaining agile to seize potential growth opportunities, including organic ventures and opportunistic share repurchases.

Guidance for Q4 and Factors Affecting Projections

Looking ahead, the company expects Q4 net sales to be in the range of $185 million to $200 million, which represents about an 8% decline on the midpoint compared to Q3. Expected decreases are primarily driven by reduced demand in wireless infrastructure and a typical seasonal decline in portable electronics. Moreover, the guidance reflects anticipated challenges in E/EH sales due to customer inventory management and ongoing contraction in global manufacturing activity.

Long-Term Growth Potential

Management showcased optimism regarding the future, especially with the new ceramic power substrate factory in China, expected to produce samples in Q4 and ramping into mass production by mid-2025. The market for this substrate technology is anticipated to grow at a remarkable CAGR of 20%, primarily fueled by increasing adoption in the EV/HEV and renewable energy markets. This positioning indicates a strategic approach to capitalize on emerging trends and customer expansions in Asia.

Overall Strategy and Focus

The company is focusing on driving improvements through securing design wins and investing in regional manufacturing capabilities. Key growth segments, along with strategic capacity expansions, highlight an intent to navigate through current headwinds while setting a foundation for long-term growth. Despite the noted industry challenges, the management team is prioritizing profitability and cash flow optimization, with the expectation that rising demand for power modules post-2024 would significantly contribute to revenue growth.

Earnings Call Transcript 2024-Q3

[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 2024 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.

[Stephen Haymore, executive]

Good afternoon, everyone, and welcome to the Rogers Corporation Third Quarter 2024 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 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 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.

Turning to Slide 4. With me today is Colin Gouveia, President and CEO; and Laura Russell, Interim CFO. I will now turn the call over to Colin.

[Randall Gouveia, executive]

Thanks, Steve. Good afternoon to everyone, and thank you for joining us today.

Before I discuss the results for the quarter, I want to welcome Laura Russell as our Interim CFO. As we announced last August, Ram Mayampurath, our prior CFO, left the company to pursue another opportunity. Nevertheless, we are fortunate to have someone of Laura's caliber and skill set at Rogers. Laura brings more than 20 years of experience in the semiconductor space with more than a decade in senior financial roles with companies like NXP and Wolfspeed. She is already making a positive impact in our new role at the company. Our CFO succession planning is continuing, and we will provide an update on this process when we have made a final decision.

Now turning to Slide 5. I'll highlight the key messages for the quarter. Our results were mixed in the third quarter, with earnings exceeding our guidance forecast, while revenues fell below the low end of our estimate. The improved earnings were a result of a 35.2% gross margin, which surpassed the high end of our expectations and lower operating expenses, which we continue to carefully control. Revenues for Q3 were lower than expected due to softer order patterns in the EV/HEV segment and a lower seasonal peak in portable electronics. Overall, we are not yet seeing consistent indications of improved demand, particularly in our 2 largest markets, general industrial and EV/HEV. Ongoing contraction in global manufacturing activity continues to weigh on industrial. Global automotive production has been slowing in recent months. And while EV/HEV is growing, it is behind last year's pace. However, despite the current headwinds, we do continue to see good growth potential in these and other market segments going forward. As such, we continue to make measured investments in capacity and capabilities to position Rogers for long-term growth. One capacity highlight is the recent ribbon-cutting ceremony for our new ceramic power substrate factory in China. I'll provide more details on this event later.

Turning to Slide 6. I'll review our third quarter results. Revenues of $210 million declined 2% from the prior quarter as lower EV/HEV and ADAS sales more than offset higher portable electronics, industrial and aerospace and defense growth. Highlighting our key markets, I'll begin with EV/HEV. In AES, we've not yet seen meaningful demand improvement from our ceramic power module customers. In the EMS business, after 2 consecutive quarters of record sales, we saw softness in Q3 due to customer inventory management. Portable electronics sales saw a strong increase from Q2 due to normal seasonal demand patterns. However, sales were below our outlook as build rates at one of our leading OEM customers were not as strong as anticipated. Aerospace and defense registered good growth in Q3, led by AES. Although quarterly sales do fluctuate on program timing, we expect A&D sales to grow in the mid- to high single-digit rate for 2024. RFS ADAS sales declined in the quarter, reflecting both softer auto production and increased competition at different points in the value chain. In response to these competitive dynamics, we are continuing to drive product innovation improving our cost structure and diversifying our customer base, particularly with emerging Asian players. Our innovation includes new copper clad laminate technology that will be launched in Q4 and development of next-generation advanced radar solutions beyond laminates. EMS saw a slight increase in industrial sales in Q3, led by the semiconductor segment. As I'll discuss more in a moment, overall industrial sales are still below the prior year due to the ongoing downturn in global manufacturing activity. Wireless infrastructure sales were again strong in Q3 and improved slightly from Q2. As mentioned last quarter, this strength is driven by a specific project in India, which concluded in the third quarter. We are closely engaged with this customer on the next phase of this wireless build-out, which is currently in the design end stage. There were clear positives in our Q3 results with improved operating margins, higher earnings and good free cash flow generation. At the same time, we are disappointed with the Q3 sales results and the top line Q4 outlook. The lower sales reflect persistent macro challenges and some customer-specific issues. We are intently focused on driving improvement in our top line. And in the next 2 slides, I'll expand on the improvement actions underway.

Starting on Slide 7, I'll cover the industrial end market, where sales are roughly $10 million to $15 million lower per quarter versus the first half of 2023. The decrease is primarily due to the broader macro environment, which has impacted Rogers. In our AES business, we are experiencing lower demand in industrial markets for our power substrates due to lower levels of capital investment in factory automation and other equipment used in automotive and semiconductor manufacturing. The EMS industrial market is extremely diversified with roughly 15 submarkets. Demand in these markets correlates to global manufacturing activity levels, which in the U.S. and the Eurozone have contracted for most of the last 2 years. Despite the downturn, we are seeing growth opportunities in certain segments, such as medical devices, data centers and battery energy storage systems or BESS. The opportunity in BESS spans both business units. In AES, this includes ceramic power substrates and rolling busbars to enable efficient conversion and distribution of power. In EMS, our urethane and silicone materials offer solutions to improve battery efficiency and life. In medical, our EMS materials, seal and protect medical devices such as CPAP and dialysis machines and provide solutions to improve vaccine manufacturing and transport. Semiconductors is another of the faster-growing opportunities in industrial. We have seen improved year-over-year sales in 2024, but demand has yet to return to 2022 levels. Growth in these markets won't come immediately, but we are seeing traction with the recent design win in data centers where our silicone adhesive films will be used in a server power supply system. Our AES business also has opportunities targeted to AI data centers. These projects are still in the early stages, but are focused on leveraging our capabilities in thermal management and signal integrity.

Turning to Slide 8, I'll provide an update on the EV/HEV market, where our 2024 sales have been approximately $5 million to $15 million lower per quarter compared to the first half of 2023. As we have discussed on prior calls, the main driver is the inventory correction ceramic customers have been managing since late Q1 of this year. The decline in AES sales has more than offset a greater than 50% growth in EMS EV/HEV sales year-to-date. In anticipation of a recovery in the power substrate market and the compelling future growth opportunities in EV/HEV, we are making measured capacity investments in 2 new manufacturing facilities in China. These investments include the new ceramic power substrate facility and a new BISCO silicone production line. We also continue to work aggressively to secure new design wins. As we've highlighted in prior quarters, we have secured several significant wins in our AES business this year with both Western and Asian power module customers and EV OEMs. In Q3, we were awarded another design win for our AMB power substrate technology that will be used in an 800-volt silicon carbide inverter for a leading Asian OEM with deliveries beginning in Q1 of 2025. In our EMS business, we continue to have a healthy opportunity funnel and have also secured important design wins this year with several key OEMs that serve the U.S., Asian and European markets.

Turning to Slide 9. I'll expand on the compelling long-term opportunity we see with ceramic and the EV/HEV market. 2 weeks ago, I was in Suzhou, China for the ribbon-cutting ceremony of our new chronic power substrate factory we welcomed local government officials and dozens of customers representing both Western and Chinese headquartered companies. This new factory will complement our existing manufacturing facility in Germany. And importantly, will support our regional capacity strategy, enabling us to better support our customers who are expanding in China. This new factory will manufacture AMB substrates. Third-party market research expects that the market for this latest substrate technology will grow at a 20% CAGR over the next several years, driven by the increasing adoption of silicon carbide power modules in the EV/HEV, industrial and renewable energy markets. We expect to begin shipping the first customer samples from our new factory in Q4 with mass production scheduled in late Q2 of 2025.

Now in closing, I'll recap today's key messages. First, we had mixed Q3 results with good earnings growth and a softer top line, which was below our expectations. This software ordering is carrying through into our lower Q4 guidance, and we are working aggressively to drive improvement. We are intently focused on securing design and wins, pursuing regional manufacturing strategies and prioritizing higher growth segments to drive improvement in the coming quarters. We expect that these actions, in combination with demand recovery in power modules, further ramping from our EV/HEV battery customers and improvement in global manufacturing activity will provide the opportunity for meaningful growth in 2025. As we focus on the top line growth, we will, as always, continue to manage costs and CapEx investments as we prioritize maximizing profitability and cash flow.

Now I'll turn it over to Laura to discuss our Q3 financial performance and our Q4 outlook.

[Laura Russell, executive]

Thank you, Colin. Let me first say that I'm excited about the opportunity to serve in the interim CFO capacity, and I look forward to the opportunity of working with Colin and the rest of the executive team to drive execution on our key strategic initiatives.

I'll begin on Slide 10 with the highlights of our results for Q3. As Colin shared, our performance in the third quarter was mixed. Our top line sales of $210 million were below our outlook. However, gross margin of 35.2% and adjusted EPS of $0.98 both exceeded guidance expectations. The improved margins in our working capital management enabled us to generate $25 million in free cash flow during the quarter.

On Slide 11, I'll discuss our third quarter sales in greater detail. Net sales of $210 million declined by 2% from the prior quarter on approximately $4 million of lower volume which was slightly offset by favorable foreign currency fluctuations of approximately $300,000. On a reportable segment basis, AES revenue decreased 3% versus the prior quarter to $112 million. Lower EV/HEV, ADAS and industrial sales were partially offset by higher A&D and wireless infrastructure sales. Of the major product lines in AES, ceramic sales have declined most significantly versus the prior year as a result of customer inventory correction and a lack of demand recovery that Colin discussed. Total ceramic sales are down more than 35% compared to the first 9 months of 2023. We do expect this market to recover in the coming quarters. And with our new facility in China, we will be well positioned to grow with both Western and Chinese power module customers. EMS revenue decreased by less than 1% to approximately $94 million. This decrease resulted from mainly lower EV/HEV sales. This decline was in part offset by seasonally higher portfolio electronic sales and improved industrial sales.

Turning to Slide 12. Q3 gross margin was 35.2%, an increase of 110 basis points from the second quarter. The sequential improvement in gross margin was primarily due to favorable product mix which more than offset the lower volume and underabsorbed costs. We continue to drive operational excellence initiatives such as yield and throughput improvements, procurement savings and manufacturing footprint optimization. The progress we've already made in these areas has been a key enabler of improved margins over the preceding quarters. Similar to Q2, we still carry a small amount of excess cost in the third quarter, primarily in our ceramic operation to ensure that we have the ability to respond to power substrate demand when it returns. Adjusted net income increased to $18 million in the third quarter from $13 million in Q2. Q3 adjusted earnings per share was $0.98 compared to $0.69 in the prior quarter. The higher Q3 adjusted net income resulted mainly from the improved gross margin and lower adjusted operating expenses. These items were partially offset by an increase in other expense. The decrease in OpEx versus the second quarter was due to lower variable compensation costs and continued efforts to reduce professional services.

Continuing on Slide 13. Cash on September 30 was approximately $146 million, an increase of nearly $27 million from the end of the prior quarter. As a result of improved gross margin, lower operating expenses and management of working capital, we have generated $93 million of operating cash flow so far this year with $42 million of this in Q3. Capital expenditures were $41 million year-to-date and $17 million in the third quarter. We expect full year CapEx to be in the range of $50 million to $60 million, $5 million below our previous range. As we move forward through the year, we will continue to prioritize actions to maximize cash generation. With no there and an increase in cash position, we have increased agility to allocate capital to our allocation priorities, consistent to our stated strategy of funding organic growth, pursuing synergistic M&A and returning capital to shareholders in the form of opportunistic share repurchases. We will continue to evaluate the best use of this capital based on the needs of the business and current circumstances.

Next on Slide 14, I will discuss our guidance for the fourth quarter. Net sales are expected to range between $185 million and $200 million. The midpoint of this range is a decrease of about 8% from Q3 sales. The main drivers of the sequential decline are lower wireless infrastructure demand as shipments to a significant project in India have concluded, the typical seasonal decline in portable electronics sales and deferred ordering as customers manage sheeting inventory levels. At the midpoint of our guidance, EV/HEV sales are expected to increase slightly in Q4. General industrial sales are expected to be more display lower. We are guiding gross margin to be in the range of 31.5% to 33% for Q4 with a decrease as a result of the lower volume and also more product mix. Product mix is typically strongest in Q3 related to portable electronics sales. This guidance range also incorporates some headwind from the start of production of our new silicon manufacturing line which will continue until we reach a more normalized utilization rate. Fourth quarter adjusted operating expenses are projected to increase $2 million versus Q3, primarily related to incrementally higher start-up costs. EPS is expected to range from a loss of $0.15 to $0.15 of earnings. The adjusted EPS range of $0.30 to $0.60 of earnings. Our Q4 EPS range includes $0.32 of restructuring-related expenses, with most of this associated to the wind down of our AES operations in Belgium. Lastly, we project our full year tax rate to be approximately 27%.

With that, I will now turn the call back over to the operator for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Daniel Moore with CGS Securities.

[Dan Moore, analyst]

I guess starting with the guide, it sounds like it's fair to say the sequential decline in revenue implied in the few -- Q4 guide, primarily due to kind of that lower wireless with that project running off and portable electronics? Or are there other areas of incremental weakness that you're seeing? .

[Randall Gouveia, executive]

Dan, Colin, I'll start with that. Yes, you're right. The #1 reason would be that wireless program ending in Q3. And I would also say that normally, the fourth quarter is typically our lowest quarter in the year for what you mentioned about portable electronics, where Q3 is our highest quarter and then things decrease a bit as we get towards the end of the year. We also don't really see a recovery in ceramic in the power module space. We're paying close attention to what our customers are saying, and they've not signaled an improvement coming at this moment. So that's also included in Q4. And then finally, we anticipate customers in general destocking for the end of the year as they try to hit inventory targets and deliver cash. So those would be the main factors impacting Q4.

[Dan Moore, analyst]

That's helpful. And then looking beyond into first half of next year, are there still pockets of your business where inventory management is likely to remain a headwind? Or do you -- once we get through the end of this year, revenue should be more 1 for 1, if not seeing maybe some potential restocking at some point?

[Randall Gouveia, executive]

Yes. What I would say on that is -- and I'll start is that even though we're not guiding ahead to next year, we do see potential for some meaningful improvement based on a couple of key assumptions. The first is that would be the return of the growth in chromic substrate market. It's unclear when this exactly will happen based on what I said earlier about the customers not coming forward, but we think it's quite possible it will happen next year. We also have the new ceramic factory in China to produce AMB technology. And that technology goes directly into SiC power modules, and we've got good design-in wins with both Western and local Chinese OEMs for power modules. And we see the CAGR for that business going in at about 20%. So we think that will also make an impact as we get into in '25. Also, we see the work we have with EMS with EV battery producers continuing to ramp. That has been a good year for -- that has been very good for us this year. It's far ahead of last year's pace, and we'll see that continuing to ramp. And then the industrial demand could return. Right now, the macro is quite tough. The monetary policy and the election uncertainty. But by 2025, that election uncertainty will be passed. Everyone will know what's happening. So we anticipate a bit of an uptick in industrial demand. I'd just say, overall, we're focused on growing our business, growing the top line. We think we're well positioned for the medium and long term with the work we're doing in terms of self-help, capital expansion and skilling up the team. And we would be ready when some of these things happen so we can begin growing.

[Dan Moore, analyst]

Sneak one more in and jump back in queue. But on the margin side, if you look obviously don't have segments this quarter yet. But if you look on the performance year-to-date, AES obviously remains low, but operating margins have dropped the most from kind of 20% range last year into the single digits this year despite relatively modest revenue declines. And just trying to get a sense what's going on there? Was it mix, pricing pressure incremental investments, all the above? What are kind of the key drivers and what gets us back to mid-teens margins or higher in that business?

[Laura Russell, executive]

Sure, Dan, it's Laura here. So what I would say is yes, your observations are great. We are seeing some suppression on a year-on-year basis within EMS. Some of that, frankly, is a little bit on an allocation strategy. But all of our businesses are softening a little bit in terms of our utilization level. So we do have some headwinds there, which, as you've seen with the margins we're posting. We're managing to control what we can and execute our margin expansion opportunities by leveraging operations excellence and procurement savings. So we're certainly doing what we can there. But really, we will see some -- or the benefit, the accretion is going to be realized when we start to see improved utilization on our top line recovery.

[Randall Gouveia, executive]

And Dan, I might just add there is certainly fresh off the press here, but in the appendix to the slides, we do have the adjusted operating margin by segment. And you can see for the third quarter, EMS was 17 -- just over 17%. So there's some information you can reference there.

[Operator]

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

[Craig Ellis, analyst]

I appreciate the additional detail on Slide 7 and 8 on the industrial business and EV and HEV. And I wanted to start my questions on the former. So can you just help us understand as we think about your comments with the industrial business, are you just on Slide 7 really characterizing the market? Or are you trying to convey a message that there's a refocusing and a reprioritization of efforts, whether it's as you engage with customers as you're looking at the types of design wins you'd be shooting for. And as it relates to the specific opportunities that you mentioned with battery energy storage systems, medical, semi and data center, how should we think about the potential for those specific opportunities to make material contributions to revenues next year?

[Randall Gouveia, executive]

Sure. And so I'll start by saying that General industrial, as we highlighted in relation to Rogers is a catch-all for a lot of end markets that are less than 2% or 3% of our total sales. But within that, bucket. There are some really interesting end markets that we think we can grow and expand. And actually, the intent is to move them out of general industrial. A good example is portable electronics, where years ago, it was a small percentage of sales. but then we really began to develop technology that worked well in the hand device market and other areas such as smart speakers and tablets. And now that's a big part of our business. So we have been working really hard on design-in wins, pushing the teams and they're very aggressive in going out and trying to fight against the headwinds of the slow macro. And what we've really come to grips with over the past 6 months is that we really like all the products and technology we have in the company that can go into data centers. And we'll talk more about this in the future. But we have products from all of our business units that can work in there. It's gasketing and sealing and vibration dampening from EMS. It's high-speed digital from and it's cooling from the ceramic business. So we feel like we really have some growth trajectory there. Same for battery energy storage systems. We've been able to leverage our technology and our expertise that we brought into the EV/HEV battery space. And of course, it translates into the BESS space. So we figured -- we feel that's worth sharing because we also have high expectations for growth there. And finally, medical, we -- we have had some good success in medical, but now we've really been able to pick up some additional design wins that will begin next year. And we feel like that's also worth mentioning. I would say that Industrial is a big piece of our business. But within it, there are some exciting things that we wanted to tease out and share, and that is the message on today's call.

[Craig Ellis, analyst]

That's helpful. The next question maybe one that spokes for you and Laura regarding the power substrate ramp through 2025 in China. Can you just help us understand the magnitude of contribution that could make as we go from initial sample shipments to customers exiting this year to what I think the deck said was pull production exiting 2Q of next year? How should we be thinking about the revenue impact of that ramp in the business? .

[Randall Gouveia, executive]

So I can start on that. You -- first, I'll comment that we're very excited about that facility. And it's just a spectacular build. I was thrilled to see it up and running when I was in China a few weeks ago, and we had quite an interesting opening ceremony with a lot of folks in attendance from both the local government and customers. In terms of when we should be at full run rates, yes, that will probably be mid-2025. And right now, it's running and we're prototyping and qualifying this technology with customers. We haven't, at this moment, talked about the size in revenues that would be coming out of that factory. We haven't really shared even our total sales for ceramic. But I can say that roughly half of our business is in Western Europe and in Eastern Europe and the other half is in China. And this will allow us, I think, to link in more closely with our customers who produce in China with reduced supply chain, timing, quicker response time and local production. So I think it will make a big difference in terms of us being able to capture the growth that we have planned.

[Craig Ellis, analyst]

Got it. And if I could just sneak in one more. There was the very significant change in operating expense quarter-on-quarter, and it looks like some of it might have been an accrual reversal. So is that the case or -- and therefore, would operating expense absent that accrual reversal increased sequentially in 4Q. Reported OpEx just set to a structurally lower level in 3Q that will perpetuate.

[Laura Russell, executive]

So let me take that. So you're correct in saying that there was some adjustment for variable compensation costs. And in addition to that, we continue to manage our OpEx in the environment of having challenges on the top line. So we did see some benefit quarter-on-quarter in professional service with third parties. One thing I would also comment on, you heard us on the call that we do see some slight step up in our OpEx into the fourth quarter. But that's in support of the qualifications that Colin spoke about in qualifying our customers to be ready to run from our new facility. So it's a critical investment and one that will continue to undertake.

[Craig Ellis, analyst]

And Laura, for that particular item, does the expense associated with that actually rise as we get closer to full production of the facility? Or how do we think about the magnitude of that impact between here and full output?

[Laura Russell, executive]

Yes. So I think it's fair to say just as a general statement. But yes, as we get closer to full qualification of our customers, there is a upward pressure on that investment because before we get to a factory qualification, naturally, that's a cost of capital and facility and qualification of the facility and our equipment in it. But post that is we're working with customers to qualify and ramp on our lines, then we do face [ upward ] pressure in OpEx for our growth investments.

[Operator]

[Operator Instructions] Our next question comes from the line of Craig Ellis with B. Riley Securities.

[Craig Ellis, analyst]

Great. So keeping it going with 1 or 2 more.

[Randall Gouveia, executive]

We're ready. We're ready.

[Craig Ellis, analyst]

Yes, on personal electronics, Colin, you mentioned that there was one program that sounded like it had a lower peak than you expected. I just wanted to confirm that from 3 months ago, I think we were looking at multiple Android programs and an iOS program. It did, in fact, all of those programs ramp in the quarter? And then how do we think about the diversity of your customer base as we go forward from here? Would you expect those programs to be ones that come back in the various selling seasons, Android sometimes different than iOS. But how should we think about the stickiness of those engagements?

[Randall Gouveia, executive]

Okay. Yes. So here's how we're thinking about portable electronics. Key end segment for us, and we really feel confident in our differentiated technology for both high-end phones high-performing phones, phones that have AI capability and also foldables, which, although they're still a small part of the market, they require different technology. to work properly. So we feel like our suite of product offerings fit very well with this market. And we do have programs across the patch with all the different OEMs. Chinese, Western and South Korea. As we look at the market, how it's developed to this point in time, it is up overall year-over-year. Last year was, of course, a 10-year low and handsets sold. And we see the market up 4% to 5% this year. Where we see most of the growth coming though is from, I would say, baseline affordable models with mostly Android packages. And those seem to be growing the fastest. And where we participate more is in those high-end, high-performing phones at the top of the pyramid. And we're still waiting for, I think, the overall AI value proposition of these phones to really catch hold for those types of high-end phones to drive growth. And it's also related, in some cases to rolling out software packages that work with these phones. So when we say, "Hey, when we were planning this 3 or 4 months ago, we had anticipated that ramp to come faster, but due to things like software packages, it's been delayed a bit." And that's why the peak is down a bit for us in Q3, and that has impacted our results versus our guide. Did that answered the question?

[Craig Ellis, analyst]

That's helpful, Colin. Yes, that's helpful. As you work with customers and do your technology planning and road mapping, are there things that would onboard into phones as we get more AI capability and content that would drive up Rogers' content in phones, whether they be a traditional phone or a foldable or does the content outlook appear fairly stable as you look ahead at what's coming?

[Randall Gouveia, executive]

In terms of where we participate, our content is strong. And it's related to, I would say, a lot of things. It's our product performance, but it's also our response our quality and reliability. But I would say we're optimistic about where we go next in terms of phones because as they pack more circuitry and performance in these phones, they need thinner and thinner phone technology. And not only do we have our urethane branded porn foam, which is kind of the leader in this space. We also have another urethane type of home produced from our South Korean facility named eSorba. And we see that beginning to get more traction in the portable electronics space also because of specific characteristics around Ultra thin products that we can deliver with that type of chemistry. So we feel like we're strongly locked in with many of these high-performance phones sold by multiple types of OEMs, but we still see a bit of an upside there in portable electronics as well.

[Craig Ellis, analyst]

Got it. And then lastly for me, Colin. The business has done a very strong job paying down debt through the first half of the year. And as we go through the back half of the year despite just really tough macro headwinds with tough global PMIs. You're doing a really nice job building cash. So the question is how are you feeling about M&A, both the targeting funnel development potential targets and the ability to execute? And any color on how you would be thinking about your patients, your inpatients and executing something on that front?

[Randall Gouveia, executive]

Yes. Great. Good question about the patients piece. So how I would describe that is M&A remains a key pillar of our strategy. And Rogers has had a long history of really, I'd say, strategic synergistic bolt-on M&A, mostly in the EMS space, but building out our capabilities and also our product lines to better service our customers. That philosophy remains intact today, and we do have good cash buildup, and we're very keen to move forward with the right acquisition and regain that cadence of M&A. But I think we're also surprised as are many that deal space still has been quite slow this year. and that's primarily related to the fact we believe that sponsors are just holding on to their properties a bit longer because results haven't been what they had hoped for. So they really would like to see some of these results turn around to drive higher multiples.

Nonetheless, I'm very pleased with the work our strategic marketing and BU leaders have put into our M&A road map, along with our corp dev group. So we have 3 or 4 targets, which are moving towards becoming available. It would be a really interesting fit for Rogers. And we can't rush it. But when the right target emerges, we're prepared to move quickly, not only on acquiring it, but with our integration approach. It's going to be still an important piece of our strategy. But we don't want to -- we won't buy something just to buy it. It really has to be the right strategic fit for the company.

[Operator]

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

[Dan Moore, analyst]

Sorry about that. And my last question dovetails with Craig's last, which is Laura -- as Laura mentioned, your financial flexibility continues to increase borrowing M&A over the next few quarters? Maybe just talk about your appetite for returning cash to shareholders and how you're thinking about being opportunistic as it relates to buybacks versus somewhat more mechanistic.

[Laura Russell, executive]

Sure. Dan, so you're right in so far as opportunistic. As we've stated, we've got a very clear capital allocation strategy. And the first of that is ensuring that we're strongly positioned to execute organic growth opportunities. There's many of the [indiscernible] issue, as we've discussed, in flight with our investments and with our technology and pipeline expansion opportunities. will continue as we've stated on our M&A objectives. But thirdly, we will look at opportunistic share buyback and that's going to be contingent on how all 3 of those are interplaying at any point in time, in addition to the market conditions. So we'll continue to evaluate it and execute based on our priorities as we see fit.

[Dan Moore, analyst]

Very helpful. And last is just trying to pull at that string from an earlier question about the sizing the opportunity of ceramic for the new facility in China, not necessarily just revenue TAM, but how much of that perimental volume do you expect to be truly incremental to your business versus maybe shifting from one locale to another? Just trying to get a sense for what the -- how much of the incremental volume that will come out is actually a net benefit.

[Randall Gouveia, executive]

I think the way we're looking at it, Dan, is -- there is a baseload of business there already. And of course, there is because we've been selling into China for years. We sell 2 types of technology that goes all over the world for power modules. Part of it would be our AMB, which is our high-powered technology that goes into silicon carbide, we also have a large business in ceramic of a different technology. the technologies are different because it's really how you just stick copper on to chromic and that's called DBC. So for the time being, we'll still provide our DBC technology into China from Eschenbach, and there is a smaller amount of volume at the moment on AMB because the silicon carbide power module business is just building. So there's a small base load, but we see a lot of that business coming from China as being additional to what we currently have.

[Operator]

There are no further questions at this time. I'd like to pass the call back over to Colin for closing remarks.

[Randall Gouveia, executive]

Thank you, and thanks all for joining. And we look forward to several of the follow-ups we have coming up over the next several days. But again, thanks for taking time to join our quarterly call.

[Operator]

This concludes today's teleconference. You may disconnect your lines.