Good day. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Second Quarter 2021 Earnings Call. [Operator Instructions] I will now turn the call over to your host, Mr. Steve Haymore, Director of Investor Relations. Sir, you may begin your conference..

Thank you, Todd. Good afternoon, everyone, and welcome to the Rogers Corporation Second Quarter 2021 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 today.

On Slide 2, note that before we begin, there are statements in this conference call that are not strictly historical, but 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 could include economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement.

Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with generally accepted accounting principles.

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 is posted on the Investors section of our website. Turning to Slide 3.

With me today is Bruce Hoechner, President and CEO; Ram Mayampurath, Senior Vice President and CFO; and Bob Daigle, Senior Vice President and CTO. I will now turn the call over to Bruce..

Thanks, Steve. Good afternoon, everyone, and thank you for joining us today. Please turn to Slide 4. In Q2, Rogers delivered revenues of $235 million, an increase of 2.5% versus the prior quarter and at the midpoint of our guidance. Demand was strong across much of our business and especially in the EV/HEV market, where sales grew rapidly.

Rogers was not immune to the global supply chain challenges experienced by many manufacturing companies in the second quarter. These conditions were more significant than anticipated and tempered our top line growth and resulted in margins and EPS that were below our guidance.

The specific issues we faced included supply constraints, labor shortages, and raw material cost increases, which we're proactively managing through commercial and operational actions. Our operational excellence and capacity expansion programs are on track and as supply conditions improve, we expect to achieve our 40% gross margin target.

Turning to a review of our markets. In the second quarter, growth was strong in several of our strategic focus areas. Sales in the EV/HEV market continued to grow at a rapid pace with Q2 revenues increasing at a mid-teens rate compared to the prior quarter.

Led by a rebound in solar and wind demand, clean energy sales grew at a double-digit rate sequentially. Defense market sales were again strong, and revenue improved at a high single-digit rate. Industrial market sales were relatively flat following a sharp rebound in the first quarter.

ADAS sales declined relative to the prior quarter due to inventory adjustments after three strong quarters of growth. We believe this is a temporary situation as the ADAS market outlook is robust, which I will detail in more -- in a moment. And our leading market position remains extremely strong in ADAS.

Our sales in the portable electronics market decreased slightly in Q2 over Q1 due to the manufacturing disruption at our UTIS facility. Excluding UTIS sales, portable electronics revenue increased 5% quarter-over-quarter, reflecting the ongoing strength of the portable electronics market.

Overall, we are very encouraged by the healthy demand across much of our portfolio and especially in the EV/HEV market. Our competitive positions continue to be strong, and we are seeing the benefits of our strategy to leverage our innovative and high-performance solutions in markets with long-term secular tailwinds, such as advanced mobility.

Turning to Slide 5. I'll provide an update on the longer-term growth outlook for advanced mobility. I'll begin first with ADAS before discussing the EV/HEV outlook. In ADAS, we continue to expect a mid-teens growth opportunity in auto radar units over the next five years, driven by further market penetration and increasing levels of vehicle autonomy.

Next-generation radar technologies are essential to the future of autonomous vehicles, and Rogers is helping to drive innovation in this space. We continue to strengthen our leading position in this market with design wins in both current and next generation programs. Moving next to the EV/HEV market.

The long-term outlook continues to be very robust with an expected annual growth rate of more than 30% over the next five years. Recent trends continue to support this strong outlook. For example, year-to-date sales of plug-in EVs and HEVs in Europe accounted for 15% of the market.

In China, electric vehicle sales reached a new milestone in the second quarter, exceeding 10% of the market. Third-party analysis also points to an acceleration in EV/HEV adoption, driven by growing consumer preference for non-ICE vehicles and supportive policy changes.

Our recent E&Y report highlighted that combined plug-in EV and HEV sales in the U.S., China, and Europe are now expected to surpass sales of all other powertrains five years earlier than previously anticipated. In addition, growth expectations for full electric vehicles also continued to accelerate.

For instance, the latest projections from IHS estimate that full electric vehicle production will reach close to 40 million units globally over the next four years. This is an increase of 25% or about 8 million vehicles compared to their forecast from only two years ago.

Reflected in these estimates are the growing number of automakers who have announced plans to transition their entire fleet to full EVs within the next decade. To take advantage of the strong growth outlook in advanced mobility, we are investing aggressively in new capacity and capabilities.

We plan to double our capital spending this year in order to invest in new capacity to support growth in the EV/HEV market. I'll next highlight Rogers strong portfolio of products for this market and how we are positioned to benefit from both the acceleration of the market and the trend towards rising degrees of electrification.

Please turn to Slide 6. Both our AES and EMS business units are focused on the significant growth opportunities in advanced mobility. For EV/HEV manufacturers, reliability, safety, and performance are critical design elements and Rogers solutions address these needs.

In the AES business, we have content opportunities with both our ceramic substrate and power interconnect products. Increasingly, EV and HEV designs are incorporating wide band-gap semiconductors to improve vehicle efficiency and range. These semiconductors require high-performance packaging that our ceramic substrates provide.

Our substrate content increases with higher degrees of electrification and is more than 5x higher in a full EV as compared to a mild hybrid. We are encouraged by our success in this market and design -- and recent design wins are adding to our growth. Power interconnects provide an additional content opportunity in EV/HEV.

They are critical components that distribute power and are essential to the performance and reliability of the vehicle. We have secured design wins with several leading entrants to the EV market. This opportunity is expected to grow as these customers ramp up volumes in the coming year.

In our EMS business, we have leveraged our expertise in polyurethane and silicone materials to develop innovative solutions that improve the performance and reliability of EV batteries.

Our content opportunities include battery compression pads for plug-in HEVs and EVs and other solutions, such as vibration dampening pads and battery pack sealing systems, which can be used across all battery types and sizes. Battery compression pads have a larger content opportunity, which increases with battery size.

Sales of our other EV battery solutions have increased significantly this year, driven by a number of important design wins. In addition to the opportunities in advanced mobility, there are also compelling growth opportunities in other areas of our market portfolio, such as clean energy, portable electronics, and defense.

These markets comprise approximately 30% of Rogers total sales, and we expect these markets to grow at a high single-digit rate over time. In clean energy, we have exposure to both solar and wind energy markets with our ceramic substrates and power interconnects.

Year-to-date growth has been strong, and the combined solar and wind market is expected to grow at a 10% CAGR over the next five years. In the portable electronics market, sales of 5G smartphones are expected to nearly double this year as the overall market grows at mid-single-digit rate.

The higher performance and advanced features of 5G smartphones means that our content can range from 10% to 30% higher versus the previous generation of phones.

Our near-term portable electronic sales are tempered by lower UTIS capacity, but we expect 5G demand to remain robust for the next several years, which provides Rogers with a good growth opportunity, especially as we rebuild our UTIS capacity.

The longer-term outlook in the defense market continues to be promising as funding of technology programs such as missile defense and radar systems is expected to drive increasing demand for Rogers advanced circuit materials. Turning to Slide 7. I'll recap the key messages from today's call.

We are encouraged by the strong market demand that we continue to see across much of our business. This includes faster-growing markets such as EV/HEV, but also in other attractive market opportunities like clean energy and defense.

Near term, we are not isolated from the current global supply chain challenges, but we are making progress managing these issues, and our operational excellence programs remain on track.

We continue to add to our strong competitive positions with new design wins, and we are seeing the results of our strategic focus on growth opportunities in our market portfolio and especially in advanced mobility.

We are moving forward rapidly with our investments in new capacity and related capabilities to help ensure our leadership in the EV/HEV market and to take advantage of the significant growth ahead. Now I'll turn it over to Ram to discuss our Q2 results in more detail..

Thank you, Bruce, and good afternoon, everyone. I will begin on Slide 9. As Bruce mentioned in his overview, we continue to grow our top line. Q2 revenue improved 2.5% sequentially to $234.9 million, which was at the midpoint of our guidance range.

Gross margin of 38.2% and adjusted EPS of $1.72 were below our guidance range, primarily due to the impact of raw material shortages and cost increases in the quarter. In the slides ahead, I will review our second quarter 2021 results in detail, followed by our third quarter guidance. Turning to Slide 10.

Rogers delivered Q2 revenues of $234.9 million, 2.5% higher than Q1. Volume increased 2.8% and was slightly offset by unfavorable currency rates of approximately 0.3%. Q2 sales growth was tempered by raw material supply constraints and disruptions to our UTIS facility.

AES revenue increased 6.5% to $140.4 million due to strong demand in power semiconductor substrates and RF solutions. EV/HEV applications revenues accounted for 15% of the segment revenues and increased 34% sequentially.

Ceramic substrates used in power semiconductor devices had a very strong quarter, and revenues for the business grew over 40% sequentially. Clean Energy sales accounted for 17% of AES revenues and grew 11% sequentially. We believe that renewable energy demand will have a meaningful long-term momentum.

Within our solutions, the Aerospace and Defense business was 19% of the business segment revenues and grew 8% versus Q1. Wireless infrastructure revenues grew mid-single digits sequentially and accounted for 16% of the segment revenues. ADAS was 15% of PES revenues and declined modestly versus prior quarter due to customers adjusting inventory levels.

The EMS business finished the quarter with revenues of $89.3 million, 3% lower than the first quarter. Market demand continues to be very strong, but sales for the quarter were impacted by the raw material shortages and lower UTIS revenue. EV/HEV sales, which represents 11% of EMS revenues were relatively flat compared to Q1 due to order timing.

Q2 general industrial sales, which made up 4% to 6% of the segment revenue were also relatively unchanged versus prior quarter. Lower UTIS production resulted in a 7% decrease in portable electronics revenue. Our plan is to restart production of certain UTIS products by the end of 2021 with full capacity ramp-up from the first half of next year.

Turning to Slide 11. Our gross margin for the second quarter was $89.8 million or 38.2% of revenues, 80 basis points lower than both Q1 and the midpoint of our guidance range for the quarter. Our operational excellence programs are on track, and we benefited from the higher volume in the quarter.

However, higher-than-forecasted supply chain constraints resulted in the lower Q2 margins. Gross margin for the quarter was negatively impacted by 130 basis points due to raw material shortages in EMS. Additionally, raw material cost increases in both AES and EMS unfavorably impacted margins by 70 basis points.

Although the raw material supply situation has since improved, we expect some challenges to continue into the third quarter. As mentioned previously, we have taken commercial actions to mitigate increasing commodity and other raw material costs. These actions will have a positive impact on our Q2 results.

Also on Slide 11, we detail the changes to adjusted net income of $32.5 million in Q2 compared to adjusted net income for Q1 of $36 million. The adjusted operating income for Q2 of $40.8 million or 17.4% of revenues, was 160 basis points lower than Q1.

Adjusted operating expenses for Q2 of $49.1 million or 20.9% of revenues, were 80 basis points higher than Q1 expenses. The higher adjusted operating expenses were mainly due to increase in performance-based compensation cost based on a stronger outlook, timing of certain expenses as well as reinvestments in the business.

Other income expenses was $1.8 million unfavorable compared to Q1. Although the copper hedging portfolio gains were positive in Q2, it was meaningfully lower than Q1 due to steep decline of copper prices at the back end of the quarter.

The higher adjusted operating expenses and lower other income just described were the primary reasons for the decline of net income and EPS versus prior quarter. Turning to Slide 12. The Company generated free cash flow of $11.9 million in the second quarter and $44.8 million due year-to-date.

We ended the quarter with a cash position of $203.9 million. In the quarter, we generated $29.7 million from operating activities, net of an increase of $13.9 million in working capital. We repaid $4 million of our credit facility and ended the quarter with no outstanding debt. In Q2, the Company spent $17.8 million on capital expenditure.

We continue to guide our capital expenditure of $70 million to $80 million for the full year 2021. The Company continues to have a very strong balance sheet and generate robust free cash flows that provides us the flexibility to accelerate the investments necessary to support organic and inorganic growth opportunities.

Turning now to third quarter guidance on Slide 13. We see continued sales growth across most of our portfolio in the second half of the year, led by EV/HEV. However, this will be tempered by the lack of availability of certain raw materials.

Based on these factors, we are guiding our third quarter revenues to be in the range of $235 million to $245 million. We expect Q3 gross margin to improve sequentially, driven by higher volume, continued operational excellence initiatives, and ongoing commercial actions.

These items will offset the impact of certain supply chain challenges that will continue into Q3. For these reasons, we guide third quarter gross margin to be in the range of 38.5% to 39.5% with a midpoint of 39%.

Q3 operating expenses are forecasted to increase sequentially, mainly due to a $3 million one-time cost to support strategic growth initiatives. We are guiding GAAP Q3 earnings in the range of $1.50 to $1.65 per fully diluted share, we guide fully diluted adjusted earnings in the range of $1.70 to $1.85 per share for the third quarter.

The effective tax rate for the full year is guided to 24% to 25%. I will now turn the call back to the operator for questions..

[Operator Instructions] Our first question comes from Daniel Moore of CJS Securities..

I'll start with beyond the $4.6 million impact on gross margin that you called out.

Do you have any guesstimate or sense of how much higher revenue would have been were it not for general global supply chain challenges and semiconductor shortages? Just trying to get a sense if that was a meaningful impact and is there any continued impact embedded in the Q3 guidance..

We would have exceeded the top end of our guidance range without revenue -- without supply chain constraints. We probably would have gotten more than $6 million to $7 million at least in the top line..

Yes. And just to add to that, I think as we look forward, we're a bit constrained in the Q3 outlook as well, and we're taking that into account. But as I opened the call today, the demand remains extremely strong in our markets, and we're working through the supply chain side of this..

No doubt. And maybe just a little bit more color on the $3 million in one-time costs you expect to incur in Q3 to support growth. And I'll leave it at that..

Yes. So this is really an investment in analyzing growth opportunities for the corporation and making sure that we're taking full advantage of the opportunities that are out there, making sure that we're applying our resources appropriately..

Perfect. And maybe one more I'll sneak in really quick. Just industrial. So it gets a little less attention, but still 20% of your business. It flattened out in the quarter.

Is that largely on supply chains? What's your sense for just general underlying growth and/or direction of the recovery there?.

Yes. We saw a good recovery in the first quarter of the year in industrial. And I think there are supply constraints that are impacting the general industrial business overall. And we expect that to return to growth as we move through -- as the global industries move through the supply chain issues. So as we move into second half of the year here..

Our next question comes from Jed Dorsheimer with Canaccord Genuity..

I guess, maybe if you could just help in terms of how you're looking -- you're spread out over multiple different segments.

And I'm curious how you're looking at the business from a return on invested capital versus lifecycle of each one of the segments? And the reason I'm asking this and perhaps is a bit of the segue to the follow-up is you seem to have such a great opportunity in some of the businesses that you call out, particularly in advanced mobility, but the CapEx for -- that you're putting -- the money that you're putting towards that -- I'm just wondering why it's not more and whether or not it's because it's being spread too thin..

So I'll take the first part of that, and Ram will comment maybe a little bit more on the ROI side. We continue to make those investments and monitor where we see these markets going.

And I think specifically in the EV/HEV side, in both businesses, both the ceramic substrates as well as the battery pads, we are making significant investments in plants around the world to ensure that we've got the right capacity in place.

And of course, that's done against the backdrop of the profitability and the return on investment that we think is extremely compelling at this point. Ram, you might care to add to that, if you like..

Yes. So the CapEx -- just to give you a scale here, we have doubled our CapEx in our '21 forecast compared to '20, and we will continue to invest. Our plan is to continue to invest at these levels as we prepare for the demand ahead.

And if you -- majority, more than 50% of our investment is going towards supporting advanced mobility product lines across both our business units, AES and EMS. And I'll just say one more thing, the investments in the business go beyond CapEx. We are also actively investing in areas where we need to invest to improve capabilities across the business.

And the 40% target we have put out there for gross margin for us to achieve takes into account those investments. So it's not only Capex, but we are preparing for overall capabilities and innovation across the P&L and making up those gaps..

Got it. Maybe just as a follow-up, if you don't mind, there's -- within two of the advanced mobility segments, there's some negative issues in terms of at least some embarrassing publicity within auto OEM that uses pouch with recalls. And then on just the volume side of things, there's obviously the chip shortage, which is affecting total volumes.

I'm just wondering how much of those two types of situations are affecting the potential of that business? Is it kind of cascades back to Rogers?.

So I'll take the chip one first. And we're seeing on vehicle electrification, which is the electrification of ICE engines. And we think that there's been some impact there because of chips.

And of course, we heard from some of the auto manufacturers, the EV auto manufacturer that we all know saying that there is some impact -- there could be some impact on chips on their volume. The volumes are still very robust, right? So we think that while there is maybe some effect, it's not really going to dampen down the growth that we're seeing.

It might not be as great as we had anticipated, but it's still very high. And I'll ask Bob to talk about the battery..

Yes. So the question around battery, Jed, and I think around the long term reliability, that actually -- when you think about what we do in terms of our products to improve reliability and lifetime, yes. I don't see -- I think it should help us. I don't see any disruption. I think the technology is sound with pass/fail.

I think they're working through issues. But in general, the kind of challenges the industry is facing, other type of challenges that we're -- we solve those problems. So I wouldn't view -- all in, I would view it as a net positive for us as a company in that. We solve those kinds of problems with our products..

We'll take our next question from Craig Ellis of B. Riley Securities..

I wanted to start with two-parter, just on ADAS. The first part of it is more in the near term. And it's -- what's your sense on where we are in the titration cycle that's going on and how broad-based is the titration that's occurring in the more longer-term part of that question? This one might be for either Bruce or Bob.

As we look at other opportunities beyond radar and imaging -- I think a lot of people are looking at LIDAR.

To what extent could investors look at that type of technology and think that Rogers has an opportunity -- you have the same kind of share in say LIDAR that they would have in radar, what would be the pluses and minuses for doing equally well in that tool that looks like it's a necessary component for level four and level five longer term?.

So I'll take the ADAS inventory adjustment. As we move through Q3, we think there's still an adjustment going on in Q3 here. But as we move into Q4, we think things should be relatively in balance. There was a lot of early buying in the first part of the year by some of the makers of the radars.

And I think probably of the mindset, semis chips, trying to make sure that they had supply. So they're working through that. And like I said, I think fourth quarter, we'll see it get in balance. Bob, you can talk about LIDAR..

Yes. Just in general, I guess I'll frame it as the industry has basically come to the conclusion, you're going to have multiple technologies that contribute to autonomous vehicles. Typically, the platforms that we've seen evaluate would have 9 to 11 radar sensors, basically creating that envelope around the vehicle in addition to LIDAR and cameras.

So I'd say, as we move towards full autonomous, I think Radar content continues to rise. I think the wild card, which would be a strong accelerator for us is really all the work that's going on into high-definition radar these days. We've got a lot of activity....

You're talking about 4D, Bob? Or which....

Yes....

Or which classifies or characterizes 4D. Yes..

Yes. Creating basically a radar image with the advantage, frankly, over LIDAR being it's not susceptible to weather conditions. Radar penetrates box, no main versus LIDAR. So for true level five autonomous vehicles, there's a belief in parts of the industry that high-definition radar, basically, radar imaging will play a pretty significant role here.

And I'd say that's the bigger opportunity for us long-term is in the high destination radar..

Yes. That makes sense given the more you've been with radar. The second question is on one of the points that you referred to in characterizing the current market dynamics.

Pretty sure it's great to see that there's that 30% CAGR for EV and HEV, but I think that's unchanged from the growth rates that were out there, at least six, if not nine months ago. And subsequently, we've had all of the electrification pull-ins from seemingly automaker after automaker.

And so the question is, is your sense that all those pull-ins really mean that that growth rate is really more durable beyond 2025 and maybe into the 2027 to 2030 time frame? Or does it maybe mean that while we've got a 30% CAGR, we've just got a lot more visible momentum underneath that CAGR? Is it something else that you would point to?.

So we think it solidifies that growth rate. I mean it's very believable these days. I think two years ago, people would be talking about those kinds of growth. It still would be a challenge to imagine that. I don't think anybody is imagining it anymore.

I think what we will see, though, with the announcements of the various OEMs going to full EVs over the course of the next 10 years or so, an extension of that growth rate is going to continue.

So your point about a 30% growth rate beyond '26, '27, '28 is not unreasonable given the acceleration that's going to happen as these new models come out and the consumers really get tuned into it. And of course, the networks get built out for the chargers, which is certainly something that we're looking at as well as opportunity..

And how big would the incremental opportunity in the charger network be to what we see in the automobiles, not to Rogers?.

We're assessing that right now because there's various folks who are out there. Certainly, the large West Coast OEM has their system out there, and it's of interest to us. And beyond that, as the other OEMs come in and other third-party players, there's a lot of work going on in that space right now..

Okay.

So part of the answer is in the point about the $3 million OpEx bump up in the quarter maybe?.

That's a good assumption. Very good..

Thanks so much..

Yes, Craig I think this is an important point. We are looking at opportunities that in adjacencies and so forth to build them on our strong market position today, and that's really the -- why we're making those kinds of investments to understand and execute against it..

It really is remarkable to see how you guys have done a lot of hard work to get the business positioned where it is, but the market really is coming to you now. So absolutely, you have an opportunity to seize..

We'll take our next question from Patrick Ho of Stifel..

This is actually Brian on for Patrick.

Maybe -- I think the supply constraints in terms of the revenue outlook and what you saw in 2Q, perhaps what's happening in Korea, that might linger into next year, but through strategic buffering or perhaps other remediation activities, do you think you might be -- these constraints might be behind you as we get into 4Q?.

So the team has been working through this. And certainly, this is an industry-wide situation, particularly this is in the EMS side of the house in the resins and those materials. And so it's not just one supplier, but we're working across the board looking at alternatives as well. But the real issue is upstream from even those suppliers.

The Gulf Coast issues have had an impact. And I think as we work through Q3, we'll see this starting to improve. And certainly, we're seeing it already. And when we get into Q4, we anticipate a bit smoother sailing there. And by the end of the year, things should be in good shape.

I'll say that, but there are always issues that pop up, floods, disasters, freezing, and so forth, and we're working to make sure that we have robust supply chain capabilities as backups as well..

Okay. Yes, that's fair. Won't have you calling it black swan events in the forecast.

For industrial, in terms of the impact in Q2, did you call out any particular markets that were maybe more effective within industrial?.

No. It was -- we saw pretty much -- we're a number of submarkets. They were all relatively quiet in the quarter, not a lot of demand. And as we said earlier, I think some of that had to do with some of the supply chain constraints that our customers had in terms of then -- the pull on our materials..

Got it. Okay. So that's the range, up and down the food chain, everyone dealing, grappling with the same things. And maybe lastly, I heard the commentary around sort of the ADAS, strong growth of late, maybe a near-term plateau, it doesn't last for too long here.

But I'm just curious, is that -- when you kind of go by geography, do you find that was concentrated to maybe any particular geographies in terms of this dynamic? Or is it pretty uniform?.

I think it's pretty uniform. We didn't see any specific geography that was lagging or ahead. So we think there was within the supply chain, the board shops and so forth, some overbuying or some holding of extra materials, and they're just working through that..

We'll take our next question from Josh Silverstein with Wolfe Research..

You talked about strong demand for your products. I know that you're facing some logistics issues. But how have been the conversations on price? Have you been able to push through any sort of increases because of the challenge in this environment? I'm just kind of curious on that..

Yes, Josh. This is Ram. So yes, we are pushing through -- passing through our commodity and raw material cost increases. We started that in Q2. We'll see much more of that impact -- favorable impact coming through in Q3. And some of those actions will continue into Q4. But majority will -- you'll see in our Q3 numbers..

Is that the -- well, just kind of taking the $5 million uptick in terms of revenue sequentially, is that mostly related to pricing then?.

No, there's probably about 40% of that in pricing, quarter-over-quarter increases..

Okay. Got you. Got it. And then maybe just another financial question. You guys continue to run with one of the best and cleanest balance sheets out there and in that cash position.

What is it that you guys are looking for to deploy the balance sheet strength? Or like can you take advantage of it in this environment, build up some working capital, try to get through some of the hurdles right now? Are there other companies that are in the same position as you that are kind of struggling that you guys could look to pick off? I'm just kind of curious what you guys are looking for or waiting for to deploy this because it's clearly a strength for you guys relative to what I imagine as other companies out there that use leverage..

Yes. Sure, Josh. This has been a core part of our strategy. And as we all know, the year of COVID didn't really help on the M&A side.

But as we move into 2021 here, there's a lot of activity, and our focus is in our core businesses, looking at opportunities in both EMS and AES for bolt-ons and so forth and other technologies that would fit into our portfolio and align with our market focuses as well. So we've got targets. We're working through that.

We're also looking at geographically how to position ourselves from a market position in geographies around the world from an M&A perspective. So there's multiple things going on, and we believe that there's opportunities. It's just a question of getting them to execute. But they're there. Go ahead, Ram..

So just to add to that, in addition to the balance sheet, you've seen the cash generation as well, right? Our free cash flow generation is pretty robust, and it has been for some time now. So if you look at the organic investment opportunities ahead of us, we have been financing all of that from our free cash flow.

And as those needs increase, we will certainly look at balance sheet options to look at that funding. So like Bruce said, inorganic and organic investments are our primary options and they look at everything else on the table to return cash to shareholders as we grow the business..

[Operator Instructions] We will take our next question from Daniel Moore of CJS Securities..

The balance sheet and capital allocation update discussion was just covered.

So just on UTIS, is the expectation, and I mean, Bruce, to be up and running about the year-end? Any change to that timetable from prior expectations and your confidence around that? Any thoughts there?.

So we certainly are confident in starting to produce towards the end of the year, some of the UTIS products. What we've seen is a bit of a push out to fully get back capacity into the first quarter of next year. But we'll be producing this year, but full capacity early next year..

Got it. And then one more on the margin front.

Given the pricing or commercial actions that you've taken as well as copper prices starting to back your way a little bit toward the end of the quarter, if they did continue to come over, is there -- not roll over, but more favorably, is there -- do you see an upside opportunity within the guidance range that you gave for Q3? I guess, what sort of raw material price movements from here are embedded in that guide?.

So the upside to Q3 will come more from the supply constraints. If we could get the raw material, we needed, we could probably grow sales to another 3% to 4% and gross margin by 50 to 100 basis points. So the upside in Q3 will come more from any additional availability of raw materials than from cost increases or price..

Thank you. At this time, we have no further questions. I would like to turn the call back to Bruce for closing remarks..

I'd like to thank everyone for joining us today and have a safe and enjoyable evening. Thanks, everyone..

This concludes today's call. Thank you for your participation. You may now disconnect..