Rogers Corp (ROG) 2004 Q2 法說會逐字稿

Good morning, my name is Michelle and I will be your conference facilitator. At this time I would like to welcome everyone to the Rogers Corporation Second Quarter Earnings Conference Call. All lines have being placed on mute to prevent any background noise.

After the speakers’ remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two on your telephone keypad. Thank you.

I would now turn the call over to Mr. Bob Wachob, President and CEO. Please go ahead sir.

Good morning ladies and gentlemen. With me and Rogers this morning are Jim Rutledge, Chief Financial Officer and Vice President of Finance, Bob Soffer, Vice President and Corporate Secretary, Jeff Granger, Director of Corporate Compliance, Ed Joyce, Investor Relations Manager and Paul Middleton, Corporate Controller.

Thank you for joining us. First allow me to commence with the formalities and then we’ll get right down to business. I’d like to point out to all our listeners, the statements in this conference call that are not strictly historical, forward-looking statements should be considered as subject to the many uncertainties that exist in Roger’s operations and environment. These uncertainties include economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those and any forward-looking statements.

For the third consecutive quarter we have achieved record sales in earnings and expect to make it four quarters in a row in Q3. All three of our business segments contributed to this success. The globalization of Rogers continues. We have completed the 120,000sq ft building in Suzhou, China and are assembling the new Poron polyurethane foam machine with productions expected in late Q4.

We’re starting the process of ordering busbar manufacturing equipment and hiring engineers and operations manager as we prepare for a Q2 2005 start up. The buspar opportunities in Asia continue to expand in a surprising rate, causing us to need more space than originally planned, fortunately, we still have some unallocated space in the new building.

We now have over 300 employees in Asia, up from 140 at the beginning of the year. The roller product line from our last American components business has being completed transferred and we’re beginning to manufacture the float product line, with the plan to have it fully transferred during Q4. Additionally, we have purchased a 12 acre parcel in Suzhou in preparation for expansion in 2006. The original site will be completely build out during 2005, when our high-frequency material facility is complete.

As stated in our news release, our printed circuit material segment achieved all time record sales. High-frequency materials continued to benefit from growth 3G infrastructure, especially in Europe and from growth in satellite television.

We expect this to continue although the seasonal ramp in LNBs for satellite television will occur later than last year due to some inventory build at the end users. We expect to make our first production shipment for a YMAX playstation application in Q3. Continuing expand our flex material business with six new cell phones design wins bringing the total to 46.

Our Taiwan joint venture has multiple cell phones win in several plasma-displayed television adoptions. We received an increase supply of polyolefin late in the quarter. Expect another increase in August, as one of our suppliers, ramps up their new production line.

Copper and polyolefin prices rose dramatically increasing by as much as 60% during the quarter. For the most part we are passing those increases to our customers on a dollar to dollar basis. Hard disk drive market experienced significant inventory direction which is now mostly behind us and our joint venture Rogers Chang Chung Technologies had another record quarter in both sales and progress. High performance phone growth continued to be fueled by cell phones, transportation and now consumer application. Clearly gaining market shares, as automotives sales grew almost 30% and cell phones sales grew over 50%. Additionally we now have multiple adoption with a major athletic shoe company.

We will not transfer all the polyolefin foam business to Carol Stream until August to assure we continue to deliver in a timely fashion to our customers. During the quarter, we eliminated the remaining issues with the new enterprise resource planning software Carol Stream. Our power and materials and components segment expenses are moving the last of our components division to China continued. The three will be impacted by the severance payments associated with work force reductions leading up ECD plan closing in Q4.

Unfortunately, Durell exhibited the volatility we have come to expect. Sales dropped even more than we projected this quarter as more monochrome cell phones applications reached in the light. The three new flexible key lamp adoptions ramped later than originally expected thus Q3 could see sequential 25% decline before sequential growth resume in Q4. Even with the sales decline in Q2, Durell remained profitable. We’re working many new keypad applications and expect new adoptions during the third quarter.

Buspar sales grew 21% including the DSL internet hardware applications and traching (p) motor rotors for trains.

In Q3 we will begin ramping production for the large disk drive array applications that we mentioned previously. As we said in the release there are some negatives, some positives as we look to Q3. The current outlook is for record third quarter sales and earnings between $87-$95 million and 59 to 67 cents respectively, which represents a 61% increase each at the midpoint compared to the prior year.

I now turn over to Jim Rutledge for closer look of the numbers and he will be happy to answer your questions.

Thank You Bob and Good Morning everyone.

Our second quarter’s net income was $11.8m, which is more than double the $5.2m of net income earned in the second quarter of 2003. This equates to68 cents in diluted earnings per share versus 32 cents per share last year. Our net income as a percentage of sales grew to nearly 12.6% this quarter from 10.6% in the comparable quarter last year.

Our net sales were $93.3m exceeding last year’s second quarter by $44.2m, a 90% increase. Although on a sequential basis our net sales were down from the first quarter by about $4min total, our weekly rate of sales actually increased 3% since the first quarter was a 14-week accounting quarter compared to the normal 13 weeks that we saw in the second quarter.

Our 350% owned joint ventures, had sales of $18.3m during the second quarter, this level of revenues for these joint ventures represents a 41% increase over last year’s second quarter. Turning to our wholly owned business segments, printed circuit material segment achieved strong sales of its high frequency laminates into the wireless infrastructure market as more 3G base stations are built, as well as continuing strength in the satellite television antennae market.

Our sales of flexible circuit laminates continue to strengthen particularly with the ramp up of several key cell phone programs. Overall the printed circuit material segment of our business brought in record level sales of $47.4m, more than double last year’s second quarter sales of 22 million.

The high performance phone segment of our business continues to achieve strong gains in most of its industrial market segments led by cellular handset and transportation applications. This segment continues to show solid growth in Asia. Overall high performance phones has record sales of $21.9m in the second quarter, which is a 28% improvement over last year’s second quarter.

Our polymer materials and components segment had sales of $24m during the second quarter, which is $13.9m higher than last year’s second quarter mainly due to the inclusion of the Durell business unit in the segment. As Bob pointed, Durell had experienced a decline of about 15% in its business compared to last year due to the expected end of life on certain monochrome cell phone programs.

And finally within this segment we have seen double digit increases in our last American components and power distribution buspar businesses compared to last year. Our overall manufacturing margin was nearly 34% during the second quarter, which significantly exceeded last year’s second quarter rate of 30%. While our margin benefited from the increased sales levels and continuing operational improvements, the rate remains adversely impacted by the duplication of operating expenses as we transition our polyolefin business to Carol Stream, Illinois, and move the last of our components business to Suzhou, China.

Selling and administrative expenses during the second quarter totaled $13.4m compared to $9.1m last year. This increase is due to the inclusion of Durell expenses this quarter in addition to higher sales support costs and higher incentive compensation and sales commission expenses. As a percentage of sales, selling and administrative expenses declined form 18.5 % of sales during last year’s second quarter to 14.4% this quarter.

Research and development expenses were $4.9m this quarter compared to $2.8m last year. This quarter’s figure includes Durell's research development and expenses; overall our research and development-spending rate was 5.3 % of sales during the second quarter.

Other income, which includes income from our joint ventures and royalties less other expenses amounted to $2.4m during the second quarter, compared to $4.1m last year. This decrease is due to the inclusion of Durell equity income in last year’s second quarter, which amounted to $1.1m and lower royalty income.

Our effective tax rate remains well positioned at 25%.

Our cash and short-term investment balance at the end of the second quarter was nearly $34m.

Capital Expenditures were $6.9m during the second quarter and continue to be funded by strong cash flow from operations.

Our balance sheet remains strong, we have no debt and our current assets exceed current liabilities by nearly 3 times.

Shareholders equity increased during the second quarter from $242m to $258m, that concludes my financial remarks and I will now turn the call back over to Bob.

Thanks Jim, at this time we will be happy to answer any questions.

At this time I would like to remind everyone if you would like to ask a question press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Our first question comes from Lee Zeltser with Needham.

Hey guys a few questions. First if you could talk a little about (inaudible) in the quarter I know you mentioned on weekly basis sales were up on average about 3% week to week, but how did that trend, kind of month to month so to speak. Were sales stronger on a week to week basis early on in the quarter and did they kind of dip down towards the end, how did that trend.

Lee, in the first month it was about $7.1m, a little over $7m in the second, maybe $7.3m in the third, so it did not change much, a little higher at the end.

Ok, pretty linear actually, only reason I ask is because some companies have kind of talked about a weakness in the month of June as you entered the summer seasonality a little bit earlier, but you had to have not really seen that.

No

and if you could give a little bit more detail on the inventory situations in on your urethane markets where do you feel it is positively problematic if at all, where do you feel it is pretty lean?

Ok, first we mentioned the disk drive area as in, lots of people have reported on that and that seems to be behind us at this point. In the handset area we don’t see any indications of inventories there. We do see inventories in the satellite television area. That as I mentioned is will delay the ramp, the traditional ramp in LMB by some amount. Playstation area this generally is built to order. The one thing we see that one supplier of Playstations believes that there second half will be much less than their first, but that supplier is not a participant in 3G as of yet.

Ok

and of course the automotive area it’s well known, they’ve built themselves a little bit of an inventory problem, for example I believe it is going to close for three weeks this summer instead of two. We should we expect to see a little slowing there. Some people have inventory and some are in good shape.

OK but overall not too grievous in terms of inventory bills. Ok, you look at the PCV laminate business and that business has been very strong for you, a part of that has been driven by market share gains in the last few quarters, what was the situation this quarter, do you feel you gained any share from (inaudible) or some of the other competitors?

Absolutely we believe we are continuing to gain share in the high frequency area and also in the flexible material area.

How would you estimate your work last year to be at this point in the segments that you target.

We are in e\excess of 60% market share and we are probably in the neighborhood of 10% maybe a little more in the flexible area.

And then lastly on pricing you mentioned that in the laminate are you did have the opportunity to raise prices due to raw material increases, how about (inaudible) or maybe you could talk more specifically on some of the other segments what pricing trends have been.

No changes in the other segments in our prices and we have, at least for the rest of this year and the other segments, our raw materials, the major ones are under contract, so we are not experiencing any price increases at least this year.

Ok Great, thank you.

You are welcome.

Again to ask a question please press star then the number one on your telephone key pad. Our next question comes from Steven McDoyle with Lloyd Abbot.

Yes good morning.

Good Morning Steven.

First with respect to flexible material and the satellite comments, obviously you are expecting a seasonally up quarter, what have you seen traditionally and how much may that be muted just by this inventory issue.

Traditionally the second half is twice the first half, I would expect to be 100% maybe it 85% increase, you really don’t know it until it happens. The thing everyone needs to understand is, there is an auction held every Friday and then we find out late Friday who got the orders and then they order and expect to have delivery by Monday morning and they make everything that week.

And the inventory bill that you are seeing is it across the board on particular.

No, we see it as one particular satellite T.V house that has changed ownership, maybe made some mistakes while they changed all their people.

Fair enough, and on the 3G side, well first what did that grow in the quarter again?

We don’t know exactly what 3G is because the exact same material is used for 2G, 2 1/2, 2 3/4 and 3. So that is always a difficult thing for us we think power amplifiers grew in excess of 100% for us. That’s a guess.

I guess I am going back to the first quarter where you may have commented 3G was up 50-60%, is that kind of an apples and apples?

That comment was the prediction by I believe - -maybe I can attribute that to Deutsche Bank who wrote a market study and said 3G would grow at 50 to 60% through the year.

Are your estimation is the content going into that end market demand is growing in the quarter at about that rate which you just disclosed, 100%?

Yes because we have more content.

Right and I’m curious - - obviously the strength has very much been driven by Europe to this point and yet - - I guess last week obviously we saw a rise and make a $5b announcement in the area. AT&T Wireless also I believe making soinge announcement with Nortel gear. Are we at the point where we are going to see some of the US spend benefit you folks?

I believe so.

‘cause we haven’t seen it in the US yet that’s all that much more rent?

That’s right.

And maybe just turning to high performance foam. You made the comment that consumer was the strength. I don’t know if I have heard you mention that before. What’s driving that?

One particular customer has made multiple adoptions. When we talk with this customer they generally tell us to just do it. There is a clue there I think.

A subtle one.

Yes.

This is a long standing customer?

No they are not.

Okay.

we’ve worked at this for years and years and had a little bit of success on and off but now we are having quite a bit of success in - - and actually they have put our Poron name on their website and have put it on our material in their shoes, which we think is a really big step forward.

And what percentage of their shoe line or type of shoes?

Very very small

With an opportunity for that to increasingly grow?

We think so.

Hmm, and any quantification in terms of associated dollars?

Well, we never - - we try never to talk about anything that isn’t more than $1m.

Okay and - - maybe just turning to Durell, obviously we’ve been working against this end of life monochrome issue here, seems maybe that the sales decline was a little bit more than expected. Can you just talk a little bit further about that? And I think in the past you’ve made mention that we have the nice opportunity here of Endolife on one end and yet FlexLamp possibly being a greater opportunity over time.

Yes, we still believe that and there is a lot of opportunity with the FlexLamp. First we’re - - we’re in production on, as I mentioned last quarter introduction on one - - one phone, which is a smart phone, with three keyboards and a couple of displays.

And we are beginning ramp - - beginning to ramp this quarter on one and then two others slipped which is not unusual for these guys. They never seem to get it quite when they want.

And then there are lots of other things going on, especially in Korea, where we don’t expect much in the way of lamps but we do expect to have a greater than 95% market share on the inverter side.

And again, the two new OEMs, they were expected in the third quarter so they’ve slipped?

Yes.

A quarter? More than a quarter?

They’ve slipped through the middle of the quarter to the beginning of the fourth quarter.

Okay, fair enough. And that’s obviously what gives you comfort in - - I mean, is that ramp significant enough to offset the monochrome decline? And when do we actually cycle that?

We believe that the monochrome is over during the third quarter. So, at that point everything we get is on the upside.

Right.

Now there is some monochrome business - - new monochrome business in India and Brazil, which happen to be the two fastest growing markets in the world, but they are not the largest.

And you hadn’t been serving those areas before?

No, no we had not.

And how large could you see that ramp be?

Well, I never believe the numbers they tell us ‘cause they don’t really know ‘til they sell them. But a market study I read said that India should go from 16 million phones last year to 25 million phones this year.

So, thinking of a few million would be my best guess here and Brazil is smaller than that.

And are those new OEM relationships that are allowing you to enter those countries.

No, no, these are long term customers who are just addressing those markets in a more vigorous way as the get larger.

Good for you. And on the Durell side, could you talk about the progress you may be making in automotive? I know you had talked in the past of hiring some individuals there and trying to be a bit more proactive. An update there would be helpful.

I believe last quarter we mentioned that we had a design win for 2006 and one for 2007. There has really been no changes in that area. As you know these things take a very long time, 2 to 3 year gestation period and we generally know several years ahead of time.

Hmm.

Then it’s - - all the funds gone long before we actually get the sale.

And Buspar continues to exceed my expectations, where is the strength coming from?

In Asia, the strength is coming from trains, as our European customers man contracts for trains, we of course get more business and they’re getting a lot more contracts than we thought they would. We also have a relationship in Japan, where someone is going to exit the business and they have chosen to work with us to transfer their customers.

mmhmm.

We’ll see what happens there – how much of it just goes behind the light and how much actually gets transferred, that’s an opportunity that didn’t exist before.

Great, and maybe just turning to the income stream here. I mean gross margins in the quarter, 33.9%. Could you – could you – now did you see the expected effect again from the Carol Stream transition and the move to China.

Our (indiscernible) transition did not occur during the quarter, so we’re still experiencing the double expense.

Right.

Although – I shouldn’t say it didn’t occur, we have one – there’s really two product lines. One of them is mostly in Carol Stream, and the one is still – at the end of the quarter it was still completely in St. John’s Ville, but it didn’t allow us to do much in the way of reduction of expense, but we’re going to finish that this quarter, and we’ve decided to go a little longer – about a month longer than we had previously thought in St. John’s Ville, just to make sure we don’t run into a situation where we can’t deliver to our customers, because our view here is it may be a little short term pain but if we don’t satisfy the customers in the long run, we’re going to lose the business, so that was our choice, go just a little longer.

Okay. And I –

China is moving along as we expected, there just turns out to be a lot of work and it’s never easy moving things.

Okay, and so to the extent that we saw the duplicate cost issue the first quarter, and I believe it was going to be a higher level in the second quarter, have we trusted that, do we see a decelerating margin issue on this?

In Carol Stream certainly in September, we’ll see a deceleration in those expenses, and with the ElasWare (ph) components business, we’ll not see any change, if anything it may rise as we begin to ramp floats in China. Our experience has been, new people, new equipment, very inefficient and you make a lot of scrap.

mmhhmm. So what sort of basis point impact are we talking about?

Higher –

I think – I think in total here it all just stays about the same, I believe Jim, you have mentioned about our 100 basis points.

So combine ElasWare move to China and the 250 cost in Carol Stream about 100 basis point impact in the quarter?

Yes.

Okay, and again we have to expect that to decelerate through the year?

I would expect it in total, probably stays the same, as one goes up one goes down in Q3.

Okay.

Then, pretty rapid deceleration in the fourth quarter.

And, I’ll just add Bob that we had said that we expect it to be at a run rate margin of 35% by the end of the year.

And that still is our expectation.

That was my next question. Less than an eighth, you’ve obviously done a very nice job there to bring that down as a percentage of sales. How much can that conceivably go lower?

Bob, I’ll take that one. Steve, we’re at about 14, as I described, you know14 ½% we want to keep that in that area and make sure that even as sales go up that we try to maintain that percentage. 14% would be our goal, but somewhere between 14 – 14 ½%. Oh, and also, I’ll point out that research and development currently about 5% - below the 5%, we expect that the tax going as high as 6%, we’ll like to be in that range with our commitment to technology.

Okay great, thanks. I assume that’s more on the development side?

Yeah, that’s right.

Okay great, thank you.

Your next question comes from the line of Mark Keiler (ph), with Paradigm Capital Management.

Morning. Looks like you’re facing some pretty good end markets and that’s certainly great. Bob, you know, on other calls you talked about relative to print at circuit materials in some new capacity that’s coming on in Belgium, I think, another press that’s supposed to be there in September, is that still online?

Yes, we - there’s actually two presses, we firmed one up in the April – May time frame an there will be another press and it come son stream in September – October. Then we expect that we will be building a new trainer next year as we prepare for the capacity which – pressing capacity which we’ll be putting into China in next year.

Okay.

The trainer will either be in – we haven’t decided whether it’s going to be in Belgium or the U.S., but it will never go to China, that’s where our technology is.

Right. Could you just review for us your capacity utilization across some of your segments?

Yes. Our performance formed – we’re anywhere dependent upon the various product lines anywhere between 65% and 85% capacity utilization. That’s -- in our high frequency area we are anywhere between 90% and 100% capacity utilization. There are polymer materials in components and plenty capacity there.

Yeah. OK. Alright that is all I have, Thank you.

Your next question comes from the line Daniel Walker with Calmar Investments (ph).

I’ve been listening for so long I almost forgot what I wanted to ask.

Oh Dan, I know better than that.

But it is helpful to hear the process being worked through. Can you talk more about what you are seeing interest wise in the flexible keypad? I believe three months ago you described how a combination product which didn’t have very meaningful volume was the first to commit --

Dan, that was a smart phone. That is a smart phone application with the three keypads and the two displays.

What type of commitment are you seeing form whom at this point and how would you describe interest level more broadly?

We have four different manufacturers who have committed apparently to the flexible lamp and we expect once they are in production which is coming up relatively soon, that several others will commit also. And of course the first commitments are never for their highest volume programs because they want to be sure that the technology works and then they make the next step going to some of the higher volumes. We see this most like a snowball, growing overtime.

Are you seeing anything in either your reaction to what you have done or their reaction to what you have done that suggests limitations in terms of share of market in assets?

No. We think we will be at the mid, upper end of the mid-range to the high end, because that is where they are looking for the best cosmetics, the best look, and at the lower end, we don’t expect to be there which of course is where the huge volumes are.

If the numbers are right though, were there 600 million hand sets sold per annum, what proportion of the market that you have described would you address?

Well I think we can address at least 20%. There is quite a large opportunity.

And my recollection is your average selling price is close to…

75 cents to $1 for a lamp and 50 to 60 cents for an inverter (ph).

There were a variety of expenses that were talked about in the quarter that you will face in Q3, some of these being Sarb Ox some others. Can you talk about the materiality?

I would say, Sarbanes Oxley thing – in total this year, it’s going to be somewhere between $1.3 and $1.8m that we would have to spend to satisfy the auditors. Certainly not all of it, but a significant portion of that occurs in the third quarter as we are doing our testing and they do their testing and we pay the consultants to do testing and to help us.

So that is not Red Sox tickets and stripper bills?

No. I finds this a very irritating thing, because we have gained nothing from this, but we are spending an unbelievable amount of money, all because someone decided this is how it has to be, who has just clearly has never ran a business. And now the auditors have taken the position that if you don’t have a piece of paper with initials on it, then no one checked it, which is a little difficult in this day and age where we use lots of computers. But we will get through this.

Yes most of this involves documentation of good practices that we perform already, but as Bob pointed out, unless that initial is there on the document, then it is as if it didn’t happen so you have got all these new procedures coming in and they should have (inaudible)

Was that 1/3 to 1H would you expect that to be an annual tab or does it moderate?

It moderates. Probably turns out to be half of that each year. You know the winners here, these audit firms. It is amazing, and they have quite a little attitude of, well this is our hourly rate, yes it is much higher than what we charge you for the audit, but that is too bad. Oh and there is no fixed price, it will be whatever it will be, because we are going to charge you by the hour.

Forward look at your selling and admin costs, comparing Q2 to Q1, does the fact that it is a 14 versus 13 week comparison matter?

There is some effect, not as much though.

What are some of the other moving parts?

It still is a percentage of sales. I am sorry I didn’t catch that last part of your question Daniel.

Well. Selling and admin in Q1 was a fair amount higher than it was in Q2.

Yeah, we expanded one of the items in there is the stocks expenditures. We had a bit of that coming through in the first quarter in SG&A. The effect of bonuses in accruing based upon our projections starting that off and those are probably the biggest drivers.

Alright. How about a discussion about the polyolefin availability and how you are making further strides to differentiate you flex product versus other offerings?

Right. There are two items here, one I believe we have mentioned this before. Our product that we are selling the most of is called Crystal and the fabricators like it because it drills better and it has better dimensional stability than the other products out there on the market and therefore they get higher yields. They of course like that. That helps us a lot because they then are our allies in working with the OEMs.

On the polyolefin side, one supplier has brought on a new machine, and we have managed to get a reasonable increase in supply from that supplier and the negative part is that the price of the film went up 60% and its not just the new stuff it is the stuff we were already getting also and we are in the midst of negotiating any new long term contract, meaning a year, with the other supplier and he is asking for a similar price increase.

When you pass that through dollar for dollar as you have described, I presume that has a deleterious effect on gross margin even thought it doesn’t hurt you gross profit dollars.

That is right

What would you suppose the Q1 to Q2 effects might have been in basis points? Quarter magnitude.

This all just occurred at the end of Q2, so there is really nothing there. If that is mostly a Q3 event.

Let’s see. Moving toward finishing here, Polyolefin now that you seem to have a production equation all but in place, can you talk about your expectations for demand build?

We have – we are currently working on a set of projects, you have to know you never get everything. The set of projects we are working on has the potential to double the business. At this point we don’t know yet, but there is quite a bit of stuff going on there in the polyolefin.

Those projects would have financial statement relevance in your judgment in ’05 or later than ’05?

’05. Some of those would be ’05. And of course some are longer term. Certainly the automotive stuff is always longer term. There’s every once in a while an opportunity for running change but not very often. They really have to have a serious problem to do a running change. So it’s mostly 2007 kind of thing (indiscernible).

That business is it roughly the same size as it was at the time of acquisition or has it declined.

It’s declined. It’s turned out to be our experience in most things we purchase that they experience some decline during the first year and two, where they began to rise. And part of this is we used to make what they call bund stock in which you molded it and we really determined that that wasn’t a business we wanted to be in so we exited it. And of course that reduced the sales some what but did not negatively affect profit.

Two last quickies I’ll sign off, can you bring us up to speed on what’s new with Zydex Liquid Crystal Polymer and Jim perhaps you can talk directionally about where you hope gross margin will trend in ’05?

We don’t have a name for the liquid crystal polymer because I think we must have had 4 different names and each time we eventually found that some one had that name already. And the Zydex (ph) name is owned by software company in Texas who threatened to sue us so we didn’t think that was worth keeping.

For the liquid crystal polymer?

We’re involved in several things all associated with high speed and some are in the automotive area, wireless. And we’ll just have to wait and see what the evaluation look like of course we have the power amplifier for the cell telephone application which we expect to be ramping in the fourth quarter or the first quarter of 2005.

We’re also -- we’re making progress here, it’s slow, not nearly as fast as we might as hopes some time ago.

And gross margin?

Yes and to your second point there although we don’t typically go beyond a quarter in looking forward, I will tell you directionally it should show improvement. I mean we’ve got some very good six sigma projects there and rates reduction, capacity improvement and those types of products that do reflect themselves in the gross margin. So I would say up.

Thank you very much.

Thank you.

Your next question comes from the line of Lee Zeltser with Needham.

Hi guys just a follow up on Durell (ph) what was the approximate sales contribution this quarter for Durell? And then you mentioned Q3 will probably be the last quarter of kind of a product transition and going forward will probably be a growth business. Can you talk about what you feel a sustainable growth rate is for Durell going forward?

Yes Lee in the second quarter Durell was $11.9m. As we said that could drop by another 25% down to the $9m range in the third quarter. And then I would expect it to begin growing at a 20% kind of rate. But as you know this is a different because of the component. It easily can have a 25 to 35% change in either direction quarter to quarter.

Would you expect that same level of volatility though – you know once you get past that current transition because I would think you know with the adoption of new products would be more of a secular growth business.

It will probably have the same volatility only we would hope it would be up.

Okay fair enough and if you can just give us an update on your current and market mix?

The – I don’t think I can answer that one right now. We generally do that just once per year.

Okay.

I think I tried to explain before it’s really hard for us because we don’t actually take the orders from the OEM. So we have to go back and have a lot of people spend a lot of time to try and approximate what’s going on.

Okay so we’ll tune in at the end of the year for that one.

Thanks.

Okay thank you.

Your next question comes from the line of Shawn Severson with Raymond James. Sir your line is open.

Hello can you hear me? Good Morning

Yes. Good morning Shawn?

Yes I have a couple of quick question for you here. As you go out and look to guarantee some supply contracts, you know, especially with polyolefin and such I mean what’s the term of these things – we’ve had -- issues that in the past during the bubble where companies get kind of locked into these high price contracts and weren’t able to get out of them. Just what’s your approach to it?

I believe one year.

(indiscernible) does that seems to make sense as far as pricing is today. There isn’t lot of supply coming on or any thing that will cause those prices to drop dramatically you know in the second half of – or first half of ’05 or anything like that?

Well first the supply contract does not necessarily obligate us to buy any fixed amount.

Okay.

You have to be careful about that – it’s – you may think of it -- I hope they are not listening you know. It’s always a problem here we do have customers and competitors and suppliers who listen to us here.

Right, Bob – that’s fine. And what about from the ability to supply in the second half of the year just in general. I mean from your perspective. You know a lot of your, obviously it was pretty tight in polyolefin’s and even in rigid dielectrics…I mean -- can you –do you have the capacity or the ability to facilitate seasonal demand in the second half?

Yes the – on the high frequency side the tightness there is both in copper and in glass. I mean both our copper supplier and our glass supplier guarantee that we’ll have all that we need.

Okay.

And we believe part of that is we were the only guys who were growing and trading in fairly when things are bad. Now we see the benefit of that. And that --.

And then polyolefin -- you usually give a pretty good read on some of the you know economical sensitive parts of your business. I mean what’s your take on the over all economy both here and at home as well as abroad in some of your more economically sensitive product lines?

We think that the rate of growth is probably slowing, which shouldn’t be unexpected at this point -- come off the bottom of the recession with a surge. And then you have to settle down to some thing which is more sustainable. And I think that’s where things are headed now – some kind of sustainable growth.

And your sense that out there in the market place as well as within your business inventories are pretty much in line. There haven’t been big bills of inventories that we’re going to still have to work through correction you know to get through the first part of the selling period here at the second half or anything like that?

That’s right I think that in the cases where people have build inventory they are extremely sensitive in that they make very dramatic corrections in the short term. And the best example of that is the disc drive guys. They pretty much shut every one off in the month of June. And then prepare a -- I think what I read was they cut their inventory down to 6 ½ weeks and the optimum they think is 6. So they are pretty much where they want to be. This is different than a couple of years ago when people seem to not pay much attention for a while until it was a serious problem. Now they have been sensitized to that and they see it and they react quite quickly.

Thank you.

At this time there are no further questions. Sir do you have any closing remarks.

I want to thank all of you for listening to us on the conference call and wish you have a – and wish you a good day.

Thanks ladies and gentlemen this concludes today’s conference call. You may now disconnect.