Rogers Corp (ROG) 2004 Q3 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 third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. Mr. Wachob, you may begin your conference.

Good morning, ladies and gentlemen. Congratulations to all of you Red Sox fans. With me this morning are Jim Rutledge, our Chief Financial Officer and Vice President of Finance; Bob Soffer, Vice President and Corporate secretary; Deb Granger, Director of Corporate Compliance; Ed Joyce, our Investor Relations Manager; and Paul Middleton, our Controller. Thank you all for joining us this morning.

First we will have Jim dispense with the formalities and they will get right down to business.

Thank you, Bob. I would like to point out to all our listeners that statements in this conference call that are not strictly historical are forward-looking statements which should be considered as subject to the many uncertainties that exist in Rogers' operations and environment. These uncertainties include economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements.

I will now turn it back over to Bob.

Thanks, Jim. For the fourth consecutive quarter we have achieved record sales and net income. Through the end of the third quarter our consolidated year-to-date sales and profits have already exceeded the results achieved in total in 2000, previous all-time record year.

During Q3, our Printed Circuit Materials business continued its pattern of year-over-year increases in sales and profits, even though we experienced less than expected growth both in the satellite television and base station amplifier applications for our higher frequency materials.

Looking forward to Q4, we expect a 15 percent year-over-year decline in satellite television sales as most of the historical seasonality of this business has now been eliminated by the OEMs. We have already adjusted our operations to reflect these reduced forecasts.

Our flexible materials business continues to expand both year-over-year and sequentially, achieving all-time record sales and profits. We expect this trend to continue in Q4. Our joint venture, Rogers Chang Chun Technologies, continues to expand dramatically and is contributing significant profits to our other income. In late Q4 we expect a second coating line to be on stream, effectively doubling our capacity at RCCT. We no longer have supply issues but our 2 main raw materials, polyolefin and rolled copper, and our main markets in wireless communications, disk drives and consumer electronics, remain robust.

High-performance Foams business segment continued to post record year-over-year sales due to strong growth in our PORON and BISCO product lines; in the wireless communication, transportation, and consumer markets. The costs associated with the transfer of the polyolefin business and the startup in feral stream caused a drop in profits for this business segment year-over-year. Now that the polyolefins are in one facility we will be concentrating on improving the yields and productivity which then will allow us to do more sampling and therefore build sales.

Development activities associated with more elastomeric polyolefin foams are progressing well and we expect a new product introduction within the next 12 months. Our polymer materials segment includes Durel this year but did not in 2003. This business segment has been undergoing significant restructuring to improve its sales growth prospects and its profitability. The costs associated with this continue to be absorbed as they are incurred. Most of the Elastomer Components Business was transferred to China by the end of Q3. This move will be completed by the end of Q4 and the U.S. facility closed and the equipment sold.

In Q4 we will concentrate on improving yields and productivity in China. We will use our finished goods inventories to buffer the transition for our customers.

Also in Q3 our bus bars activities in China accelerated with a view to a Q1 2005 startup. Durel sales for the quarter were better than forecasted as we had a more rapid than expected ramp up of a flexible lamp keypad application. However, the lower year-over-year volume and the ramp up expenses resulted in a loss for the quarter. We are now in production with 3 OEMs on the flexible lamp. In those applications, 1 appears to be transitioning from a specialty to the flagship product.

Besides working to make significant improvements in yields and productivity, we are adding new capacity in the U.S. to meet the anticipated volume increase in Q2, 2005. Work has begun on preparing one of our China facilities to also begin manufacturing EL lamps in late 2005. We adjusted to salaried workforce at Durel in early October to more closely match the current size of the business. We are now involved in 15 new cellphone keypad designs and have won a new automotive dashboard adoption for the 2008 model year.

Looking to Q4, we expect our sales commission expense will increase significantly as our incentive plan payout is proportionally higher the more sales are above plan. And this will be a record year of growth.

As we said in the news release, we will have completed much of our positioning for the future in Q4 and our expense levels will be reduced positioning us for continued growth in 2005. Our expectations for the fourth quarter are for sales of 82 to 87 million and profits of 40 to 45 cents per diluted share. This will give us a record year with sales about 360 million, a 48 percent increase from 2003 and profits of about $2.20 per share, a 37 percent increase over last year.

I will now turn it over to Jim for a closer look at the numbers, and then we will be happy to answer your questions.

Thank you, Bob, and good morning, everyone. Our third quarter's net income was 6.5 million, which is slightly more than the 6.3 million of net income earned in the third quarter of 2003. This equates to 38 cents in diluted earnings per share versus 39 cents per share last year. By the way, that 1 cent difference in earnings per share is due to the greater number of shares outstanding this year.

Our net sales were 86.7 million, exceeding last year's third quarter by 30.2 million, a 53 percent increase. Our 50 percent owned joint ventures have sales of 23.9 million during the third quarter, which exceeds their revenues in last year's third quarter by 10.7 million. This increase reflects record level sales in our flexible circuit materials joint venture, Rogers Chang Chun Technologies in Taiwan, with over 500 percent of an increase in revenues over last year, and significantly higher volume in our Rogers Inoac urethane foam joint venture in Japan.

Turning to our wholly-owned business segments, the Printed Circuit Materials segment of our business brought in sales of 45.2 million, a 51 percent increase over last year's third quarter of 30 million. Although we're still in the process of finalizing our segment profitability figures for the Form 10-Q, the estimated operating income of this segment was approximately 30 percent higher this quarter compared to last year's third quarter. While this 30 percent increase in profitability incorporates the effect of the 51 percent increase in sales, it is mitigated by the quality issue we encountered in our high frequency materials business, which was completely resolved during the quarter, as well as the higher costs of ramping up our production of flexible circuit materials to meet the higher market demand.

The High Performance Foams segment of our business had sales of 20.7 million in the third quarter, which represents a 20 percent improvement over last year's third quarter. This quarter's profitability however was relatively flat compared to last year, as it was affected by higher costs associated with the transition of our polyolefin business to Carol Stream which peaked during this quarter.

Our polymer materials and components segment had sales of 20.7 million during the third quarter, which is 11.5 million higher than last year's third quarter mainly due to the inclusion of the Durel business unit in this segment.

During the third quarter of last year, Durel's earnings were included in other income as equity income from the joint venture. This year it is a wholly-owned consolidated subsidiary. Durel was not profitable during this year's third quarter, in contrast to a highly profitable quarter last year given the reduced level of sales this year and the initial inefficiencies associated with ramping up production for the new keypad programs that Bob talked about. The net effect of these changes within Durel resulted in a negative swing in contribution to Rogers' pretax earnings of over $2 million quarter-over-quarter compared to last year.

Our overall manufacturing margin was 28 percent during the third quarter, which is below last year's third quarter rate of 33 percent. As I just described, this rate was adversely impacted by the transition of our polyolefin business, the lack of profitability in Durel, and the now resolved quality issue that we had in our high frequency business.

Selling and administrative expenses during the third quarter totaled 13.4 million, compared to 10.3 million last year. This increase is due to the inclusion of Durel expenses this year, higher sales support costs and commission expenses, and restructuring costs associated with the move of our last number (ph) components business to China. As a percentage of sales, selling and administrative expenses declined from 18.2 percent of sales during last year's third quarter to 15.5 percent this quarter.

Research and development expenses were 5.4 million this quarter, compared to 3.5 million last year. This quarter's figure includes Durel's research and development expenses. Overall, our research and development spending rate was 6.2 percent of sales during the third quarter, which is comparable to last year's rate.

Other income, which includes income from our joint ventures and royalties less other expenses, amounted to 3.1 million during the third quarter compared to 3.4 million last year. The decrease is due to the inclusion of Durel equity income in last year's third quarter and lower royalty income this year, partly offset by higher equity income from our Rogers Inoac and Rogers Chang Chun joint ventures.

Our effective tax rate remains well-positioned at 25 percent. Our cash and short-term investment balance at the end of the third quarter was 29 million. Capital expenditures were 6.4 million during the third quarter and continue to be funded by strong cash flow from operations. In addition, the Company made pension contributions during the quarter totaling 3.3 million and invested 1.5 million into 1 of our 50 percent owned joint ventures.

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 third quarter from 258 million to 265 million.

That concludes my financial remarks and I will now turn the call back over to Bob.

Thank you, Jim. Now we will be happy to answer any of your questions.

(OPERATOR INSTRUCTIONS) Lee Zeltser of Needham.

A few questions. First on the Q3 results, with regard to some of the quality problems you mentioned and the ramp up at Carol Stream, how much do you feel that cost you in Q3 in terms of earnings? In other words if you didn't have those problems, how much higher would the earnings have been?

At least $1 million.

This is after-tax?

That is pretax. I think more easily pretax.

All right, and then you have a reasonably wide revenue range for your guidance in Q4. Can you talk about some of the assumptions with the low-end and the high-end of the guidance in terms of what you are seeing on the inventory front and also what your expectations are for end market growth or lack thereof?

We see at our customers -- we see some inventory in the satellite and television area and a little in the base station amplifier area. We also have significant inventory that we built in anticipation of a large fourth quarter in satellite television and we will be working that down. One of the reasons for what is a pretty wide range is that we are now having customers at the end of the month changing their needs by as much as $2 million for the next month and they go both up and down. It is making it very difficult to forecast looking forward, and part of this is associated with Asia, where we have mostly -- we are mostly shipping out of inventory because it is 4 to5 weeks on the boat going there. So they can call up on Monday morning and have us ship on Monday afternoon. They are absolutely taking advantage of that.

That certainly makes things difficult, understandably.

We also, as you recall, some of our leadtimes are only 3 days and at the most, 2 weeks. Plus we have 4 to5 weeks of inventory on the water on its way to Asia both from Europe and the U.S.

Okay, if you can focus a little bit more specifically, do you feel that inventories were largely worked off -- at least at the customer level -- at your level but customer level in the September quarter? Do you feel that is going to be a fairly significant overhang?

I think largely they were worked off.

So it is really a question of what the end market demand looks like?

Yes.

And if you can talk about the progress flex mark (ph) is making at Durel a little bit more?

We are in introduction with 3 lamps -- with 3 separate OEMs. We will go into production in the first quarter with an additional lamp and then as I mentioned we are working on 15 different programs and one of the existing programs we have turned out to be much higher production already than we thought even though this product -- the OEM won't really introduce it in a broad way until November, but we are adding several new automated screenprinting machines because this product is forecasted to double its needs by April.

So just to get a sense from the trajectory that Durel is taking, are you still seeing declines in some of the more mature products at Durel or do you expect that in Q4? When would you expect meaningful revenue at least as a portion of Durel's revenues for flex lamp?

Would expect that Q4 is relatively flat with Q3 on the revenue side but we would expect a significant improvement on the profit side as we improve yields and of course we also reduced our expenses. And then expect some reasonable growth in Q1 and then as we begin to add capacity, pretty significant growth starting in Q2 and we would expect quite a few -- some of these programs, these 15 we're working on, will reach production in the Q3, so acceleration throughout the year.

Okay, great. Thanks very much.

(OPERATOR INSTRUCTIONS) Dana Walker with Kalmar Investments.

Good morning. Gross margin 28 percent in Q3, what is baked in your cake for Q4?

When we look at the -- there are a lot of strategic issues obviously that were going on during the third quarter that brought our margin down further than 30, mid 30s where we like to be. Going into Q4 you're going to see improvement in Durel, as Bob just pointed out. You're going to see improvement -- not all of the improvement in ECD. We are substantially through the relocation to China but we will be finishing that up in the fourth quarter, so you will see some of that coming through. The fact that we're out of St. Johnsville now -- there is improvement for that. The quality issue is gone. So if you take those factors into consideration and recognize that some of this is going to going into next year but some do drop-off in the fourth quarter, you're probably looking at our hitting the 30 percent mark again perhaps low 30s but probably around the 30 percent mark in the fourth quarter. We are confident that looking at next year, the full year, that we're going to be at that 35 percent rate as all of these things take the benefit into that year. A lot of the strategic things that I just mentioned.

I was watching CNBC this morning, not a financial question as a preface -- the CEO of Texas Instruments was on the horn talking about a chip they are providing that allows digital television type functionality on a handset. I am wondering what role your materials would play in that and to what degree would that be incremental from the role you are playing on today's handset profile?

This is the first I have heard of it, but the way to think about it would be that they will need many more interconnections than they did before, therefore you would assume that they will need more flex circuit material.

Is there a role for your high frequency products on the handset in translating some type of a more complicated signal, or would that not be the case?

Probably not, because they don't change the frequency which they are transmitting the information, but it could require more power out of the amplifiers in the base stations, which would then be a benefit to us.

Jim, what was the Durel revenue figure in Q3?

Yes, it was a little over 10 million, 10.4 million.

Did I hear you gentlemen correctly in saying that you expect that number to be essentially flat in Q4?

Yes.

On the satellite television matter, since you have been suggesting a fair amount of uncertainty as to where the tone of that business and where the inventory levels of your customers happen to be, how much of this description today would you consider to be -- I suppose it is after the fact but maybe you could help us better understand what your customers are telling you now and what you thought you understood about where they were two months ago? And how that affects '05?

What we have seen this year is a real push by the OEMs to eliminate the seasonality of their business and so what we saw was in the first quarter for example our sales to them increased by 50 percent from the year before and the same thing in Q2. But in Q3, which is normally a quarter where sales go up sometimes 2 to 3 times the previous quarter, we saw a 12 percent increase from last year and this year we expect that the fourth quarter actually goes down 15 percent from the year before. But the year before was at an unbelievable level. All told, that adds up to about a 20 percent increase for the whole year, which is pretty good news. We expect a similar kind of increase in 2005. To us the good news about all of this is that they are going to utilize our capacity in a more even way. That helps us out in the long run because we had been anticipating putting in capacity to deal with these huge spikes and now hopefully they are going to be going away.

Finally what other portions of your business compared to Q3? You mentioned satellite television at least compared to last year being lower.

Yes, but was higher than in Q2.

Understood but if we were to look at Q4 and your expectations, what portions of your business would you expect to be lower in Q4 versus Q3?

We expect the high frequency business is going to be lower. We expect flex materials to be higher. We expect the Polymer Materials and Components business in total to be lower. And the High Performance Foams relatively flat quarter-to-quarter.

Would you say that is a normal seasonal -- it strikes me that ordinarily you get some positive seasonality Q4 versus Q3. How would you describe the seasonality this year and to what degree are we just eating up some inventory market at this location?

Normally do see some pickup in the fourth quarter. It is generally all related to what happens in the last 2 weeks of December. In years where there's lots of momentum and everyone keeps running their businesses through the end of the year. In years where there's not a lot of momentum, business falls off dramatically in the last 2 weeks of the year. We can only guess. Our guess is it is going to fall off in those last 2 weeks of December, which is very different than last year.

I will get back in the queue. Thank you.

(OPERATOR INSTRUCTIONS) Shawn Severson with Raymond James.

I was wondering if you could give a little more color on the capacity expansion at Durel? You said you were going to China as well and if you are expanding capacity -- if I recall correctly your last peak revenue number from Durel was somewhere around 20 million or so. So it is that the expectations are that under the new keypad applications that you could exceed prior records at Durel?

We expect -- a little background. The new flexible lamp requires many more passes onto screen printers than the previous lamp, so we get less units per unit of production capacity. Additionally we expect most of the growth to be occurring in the lamps and not inverters and therefore -- of course inverters we purchase from others and with the growth being in the lamps then we need to add capacity, as we have some expectations that the lamps will exceed the previous peak.

What will be the approximate mix do you think between capacities in Asia versus your domestic, once this all said and done?

I will tell you our plan. It could be different. It all depends on how fast things develop. But our plan is to add 2 machines here in the U.S. as quickly as we can get them and then later in the year add 2 machines in China but put in a clean room that would let us put in for. We would have room in the existing facility in China to put in a clean room -- a second clean room which would let us add 4 more. And in the U.S. we have clean room space available to add an additional 6 in addition to the 2 we are adding now. We can more than double our output given about 9 to 12 months. I would prefer to add most of it in China but if we have to move fast the space is available in Arizona.

I wanted to specifically touch on the inventory at the PCB fabricator in Asia. You said you felt the inventories were in pretty good condition. Were you including that particular fabricator as well?

That is the one exception. (multiple speakers) We still haven't purchased anything.

(multiple speakers) on the business for the fourth quarter?

Right.

And lastly, if we look out into '05 -- new application development for the rigid material, anything we can look at there beyond the scope of the wireless market that we should be thinking about in the next 12 to 18 months?

The main thing that will be gaining some traction will be associated with automotive and what they used to call collision avoidance systems, which now is an automatic cruise control I think. Adaptive cruise control.

Anything else on the networking side there or is it pretty much automotive?

Pretty much just the automotive. 3G was a win a long time ago. People really have not really started working on 4G.

Okay, thanks.

Bob Fetch with Lord Abbett.

Good morning. In regards to streaming the auto business are you holding to the expectation you had last period that the business could double next year from around 10 million?

I think it is going to be difficult for us to double the business next year. It is more likely to be a 40 or 50 percent kind of increase.

And is that more the timing of some of the programs you had hoped for or still more related to any production or yield issues?

It is mostly related to us taking longer than we had hoped to get the yields up and the productivity up because we have been unable to sample new programs. Of course that slows everything down.

And on the sampling issue though, is it suggestive that potentially you would be winning business beyond that confidence of customers that they can get all the material they want when they might need it?

Yes. Our goal here in getting out of New York was to be able to make all the products in Carroll Stream and we succeeded in that, but to succeed they ran everything very slow. That's why our comments about improving productivity.

In the case of the satellite business, you had spoken in previous calls that third quarter historically has been down from the second quarter and was about 90 percent of the time, so did we see a greater than normal seasonal fall off this time than what was expected?

I believe the comments were that our business in total is generally down in the third quarter from the second, but the satellite television is almost always up in the third quarter from the second quarter. Second quarter generally has been the lowest.

Okay, if you can address 3G, you had a European customer whose business was very strong and a domestic customer had a very big first half as described. Did the pace of that business slow and was that also a function of maybe them taking more product in faster than they needed relative to their own run rates?

I think that is true. The business did slow in the third quarter and part of that most likely working off some inventories as their growth did not continue at the rate they had been.

And can you talk about an expectation for that business coming out of China next year, which you hopefully have their licenses set?

Well, if China comes on stream, that will be a big plus next year.

And when would one -- do you typically see the orders for that business develop close to need or is it in advance?

Our orders generally happen pretty shortly after you read the announcements of big base station wins. Of course all the big players like to publicize when they get these $500 million pieces of business or so.

Okay, and how wide is the volume expectation when a program goes from being a specialty program to a flagship program? Are we talking tens of millions of units?

We are looking something that -- specialty might be 1 to 2 million units a year and flagship might be 15 million units a year.

When you say might -- meaning is typically?

Yes.

Okay, and can you give us any visibility on the new programs that Durel has won in terms of the likelihood of other flagship programs in that mix?

Each customer can only have 1 flagship product. A fourth OEM will come on stream in Q1 with a new product and then the next set of things, there might be 1 in Q2 and then quite a few are scheduled for Q3 as the normal cycle here is trying to get ready for the Christmas rush.

And when you said 1 in second quarter, that would be an additional OEM meaning a fifth one?

A fourth one. There 3 right now we're running production on and we have won the fourth, we're just waiting for them to go into production next quarter.

Right but then you said 1 in second quarter, would that be a fifth one?

No that will be one of the people who are already adopted.

And quite a few just relates to additional programs as opposed to additional OEMs in the third quarter?

Yes.

My guess is with more limited shifts in production and expenses that were associated with that this year; can you give us some guideline on your spending requirements for next year?

You mean capital?

Yes.

Capital will probably be in the range of $29 million this year, 28, 29. And next year will be very dependent upon what we decide in the high frequency area, because there is a $20 million expansion which -- it could be next year. It could go into 2006. That would drive everything. If we did all that, we could be as high as 35 million next year but we could also be as low as 23, 22.

So 23 to 35 might be the number there?

Yes.

And in regards to the progress with Durel, are we still talking either existing or proposed similar pricing per lamp that we've had in the recent past?

A little higher actually.

So closer to $1.00 than 80 cents?

Yes.

And any other thoughts on how you're likely to utilize existing and/or future cash flow that is free?

Well, there's lots of possibilities with future free cash flow and we will have to let our Board decide what they want to do here.

On a new product front, anything meaningfully close that has been under development that could be important in the next year or 2?

We have several things that are close but of course once we introduce them, they generally don't have much impact for about 18 months. So anything we do now really hits in the latter part of 2006 as far as meaningful revenue.

And to the extent that you can, can you give us a feel for what your Sarbanes-Oxley costs might have been this year?

We thought they were going to peak in the third quarter but the auditors seem to be way behind schedule, and therefore with the audits fees are going to be peaking in the fourth quarter. And in total this is going to be in the range of $1.5 million. I think before I said between 1.3 and 1.8.

So you have been able to narrow it to the midpoint?

Yes, hopefully. You just don't know. They have a blank check.

And in that regard, do you have some sense as to what if any proportion of that is non-recurring as far as next year is concerned?

Maybe half, because the consulting fees will be less and hopefully the auditors will have learned how to do this so they can do it more effectively. We do have to pay them to learn.

Right and they might also have more time on their hands and maybe the rates will come down as well. And then on the phone business, can you give us some sense for next year how dependent it may be on, say, cellphone volumes versus non wireless applications?

That's a hard question. In total in the phone business the cellphones are important but it's not the majority of the business. That's about as good an answer as I can give you, Bob.

Okay, and then I think you're trying to give us all a sense that with all the moves that you've made this year and some activities yet through the end of this year that hopefully you'll be at least from a yield or productivity standpoint running at not necessarily optimal levels but at solid levels and you ought to have capacity in place to meaningfully drive sales next year. Should we be in our unusual situation of as those utilization rates improve that that is what is giving you some confidence that the gross margins ought to pop back pretty much towards the levels that we have all been hoping you would achieve over the last 12, 18 months?

Yes, that is absolutely right. We have had a lot of moving parts going on here. We are bringing to closure many of those strategic things that we put in place and we expect to benefit from that in 2005.

All rights, thanks.

John Roberts of Buckingham Research.

Good morning. We only get the regional update once a year so I think full year 2003 is the last time we got that, but it has been changing quite a bit over the past several quarters as the Asian businesses have held up better. Do you have a sort of update including a share of joint ventures? What percent of your business is in Asia right now?

We don't really because we really do only update it once a year but I would say it was 40 percent last year. It could be 45 percent this year. That would be my best guess.

You don't think it will get over half the business yet?

No.

And in Rogers Chang Chun you cited flat screen displays. I didn't go back to previous releases but is that still just the hinge on laptops or do you actually have some flex materials going into the TV marketplace for example?

Yes, both LTD TVs and plasma TVs.

And where would the flex circuit be on a rigid device that does not have a hinge like to plasma or a --?

It is what is used to connect the screen, the glass in effect to the rest of the circuitry.

Okay, it is not any hinged connections or anything, it's just (multiple speakers)

It is a flex II install application is the way to think about it.

Okay and as TVs start to ramp over the next year or so, does it become a meaningful part of business that you have sort of called it out here in the press release as one of drivers?

Yes.

Is it not majority of Rogers Chang Chun?

No, the largest is still associated with cell telephones and the hinged flex.

Okay, thank you.

At this time, there are further questions. Mr. Wachob, do you have any closing remarks?

Thanks. I thank all of you for joining us today. And have a good day and good luck.

Thank you. This concludes today's Rogers Corporation third-quarter earnings conference call. You may now disconnect.