Rogers Corp (ROG) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Rogers Corporation fourth-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). I would now like to introduce Mr. Bob Wachob, President and CEO of Rogers Corporation. Thank you. Mr. Wachob, you may begin your conference.

Good morning, ladies and gentlemen. With me at Rogers this morning are Jim Rutledge, Chief Financial Officer and Vice President of Finance; Bob Soffer, Vice President and Corporate Secretary; Deb Granger, Director of Corporate Compliance; Ed Joyce, Investor Relations Manager; and Paul Middleton, Corporate Controller. Thank you for joining us today.

First Jim will dispense with the formalities and then we'll 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 statement. I'll now turn it over to Bob.

Thanks, Jim. 2004 was a year of all-time record sales and profits. Sales grew by 50% and profits by 27% before the increase in earnings associated with the onetime tax-deferred adjustment and 53% after that adjustment. The seeds of this record performance were sown several years ago. For example, in 2002 we added significant marketing resources in our operating divisions to focus on future growth. We recognize that our business success does not come overnight; instead it requires discipline, focus and hard work over a long period of time.

While the first half of the year was almost too good to be true the second half had some issues. We brought on significant amounts of new capacity just as our sales declined from the peak of the first half. We also encountered some operational problems, especially in our advanced circuit materials division resulting in larger than anticipated inventories of raw materials and finished goods. As the year ended we were making and have continued to make good progress in solving our operational and inventory issues by focusing on process improvements and initiating a Six Sigma program for forecasting. This is no substitute for basic blocking and tackling in running a business.

The year certainly marked a period of transition at Rogers. On an organizational level, eight of the 13 members of the executive leadership team were either new to their job or completed their first year in their new position. It is important to note that seven of those eight changes more internal moves, a testament to our organizational development philosophy which is to promote from within. We continue to believe that we have the best people and that is the way we will eventually prevail over the competition. Organizational development will always remain high on our agenda.

Other areas of transition included the relocation and expansion efforts in several of our facilities. We completed outfitting the Carol Stream, Illinois plant and moved the polyolefin foam business from St. Johnsville, New York. Our Elastomer Components unit was moved to Suzhou, China and our South Windham, Connecticut facility was closed. The joint ventures, Rogers Inoac Suzhou, designed, purchased, installed and made operations a new (indiscernible) urethane foam machine in one of our three facilities in Suzhou.

The Evergem, Belgium high frequency laminate facility was brought fully onstream early in the year and a third and fourth press became operational in the latter half of the year. Our Rogers Chang Chun Technology joint venture purchased and installed a second flexible printed circuit laminate production line in Taiwan.

Early in the year we purchased KF Inc., a small Korean float manufacturer. The KF location will perform all float material development, procure and mix master batches of raw materials for our Suzhou facility, produce all prototypes, develop all pricing and handle small volume production. The float facility in Suzhou will be tasked with all the high-volume production work. And finally at the end of the year, Durel began transferring responsibility for its inverter product line to Suzhou.

From the aforementioned project it's clear that we completed many long-standing projects in 2004. Looking forward we expect our busbar expansion in China to be completed in Q1 2005, and by late Q3 Durel expects to increase its current capacity for EL lamps by 75% with two-thirds of that expansion occurring in Suzhou. This expansion is driven by a high level of flex lamp adoptions. And finally by Q3 2005 we expect the construction of a facility in China for our high frequency laminate product line will begin.

Whereas 2004 was a year of transition, 2005 will be a year of consolidating our gains and of steady operational improvement in all new and relocated facilities. We've expanded considerably in China, expect that trend to continue in 2005, 2006. Sales to Asian locations were 45% of Roger's total sales in 2004. Growth in Asia has been at over a 53% compounded rate for the last several years. The expectation is for Asia to continue to grow faster than Europe or the U.S. Overall 65% of our sales were outside the United States, a percentage never imagined just a few years ago.

As long as most of what we sell in Asia is manufactured in the U.S. or Europe, we will continue to have large finished goods inventory in local warehouses and in transit. And our response time to changing conditions will be less than optimal. We are to fulfill our vision of being the first choice of customers worldwide in specialty materials and we need to manufacture our products on at least the same continent where our customers are located. And it is our customers who are driving our need to expand in Asia.

Except for the expansion of the busbar and Durel product lines in China, much of the repositioning and restructuring of our Polymer Materials and Components business is behind us. As you know, we sold our slowly declining mobile composites business in late 2002, we purchased the other 50% of Durel in late 2003 and moved the Elastomer Components Division to China in 2004. The result is if we are favorably positioned to grow sales and profits as we now or will soon be near to most of our customers and thus can be more responsive.

Research and development continues to be the key to our future growth. We have a strong team which we are improving. The initial stage of the new product development process where innovation, technical feasibility and market validation are key, has received much attention. People who are particularly skilled in those three areas have been added to our team to improve our chances of having a robust new product pipeline. We continue to target spending 6% of sales on R&D efforts. In the fourth quarter of 2004 R&D spending was 6.4% of sales.

During the year our efforts resulted in a new rigid high frequency laminate targeted at the high speed digital marketplace where data switching speeds reach 10 Gbps. Over the next several years we expect this product line to make a significant contribution to be printed circuit materials business segment. We also introduced the R/bak SA 3000 family of polyurethane foam based products for cushioning flexographic printing plates. These new printing products will help us increase our presence in this $100 million market.

As you know, in our earnings release we included a liability of 36.2 million on our balance sheet for projected future asbestos claims and a $36 million insurance asset resulting in a $200,000 net expense. We have previously disclosed ongoing asbestos litigation in our filings and have recorded current claims activities when such claims were probable and when we could reasonably estimate them. Considering the current governance environment and a general increase in asbestos litigation, we recently hired experts to estimate our potential liability and to confirm our insurance coverage. Having now completed this analysis GAAP required that we record our minimum projected liability against current and future claims.

After achieving record results in 2004 we now find ourselves by all accounts in a stronger position to face the many challenges ahead and expect 2005 to be another strong year. With focus and discipline we will continue growing our businesses globally, developing innovative specialty materials to satisfy the needs of our customers and improving our manufacturing processes until we arrive at our vision of being the first choice of customers worldwide for specialty materials.

I'll now turn it over to Jim Rutledge for a closer look at the numbers and details of the quarter, then we'll be happy to answer your questions. Jim?

Thank you, Bob, and good morning, everyone. For the full year 2004 we achieved a record level of sales and earnings. Net sales were at 365 million in 2004, a 50% increase over 2003. Net income for the year amounted to 40.1 million, a 53% increase over 2003. This equates to $2.34 in diluted earnings per share in 2004 compared to $1.61 in 2003. As described in our earnings release, this year's results include an adjustment which increased earnings by 5 million or 29 cents per share related to the reduction of our net deferred income tax liability on our balance sheet.

Looking at our quarterly figures, our fourth quarter's net income was 9.6 million or 58 cents per diluted share. This includes the previously mentioned deferred income tax adjustment of 5 million. Excluding this adjustment our net income would have been 4.6 million, which is below the 9 million of net income earned in the fourth quarter of 2003. Our net sales in this year's fourth quarter were 87.3 million, exceeding last year's fourth quarter by 1.5 million or 2%.

The earnings shortfall, despite this increase in sales, is primarily due to a significant drop in the profitability of our Durel electroluminescent lamp business compared to superior profitability in this business last year, a less favorable product mix of sales within our Printed Circuit Materials segment and reduced operating leverage in our high frequency materials business within this same segment.

Our 350% owned joint ventures had sales of 24.9 million during the fourth quarter, which exceeded their revenues in last year's fourth quarter by 8.4 million. This increase reflects the increased level of sales in our flexible circuits materials joint venture, Rogers Chang Chun Technologies in Taiwan, with nearly four times the revenues of last year and significantly higher volume in our Rogers Inoac urethane foam joint venture in Japan.

Taking a closer look at our wholly-owned business segments, the Printed Circuit Materials segment of our business brought in sales of 43.5 million which is 5.4 million or (technical difficulty) % higher than last year's fourth quarter sales of 38.1 million. Although we are still in the process of finalizing our segment profitability figures for the 10-K, the estimated operating income of this segment during the fourth quarter was about 40% of the level it was during last year's fourth quarter.

Two main factors have caused this decrease in profitability despite the growth in sales; the first involves the product mix of sales. Specifically the flexible materials product line within this segment showed a 48% increase in sales, but at lower margins than the high frequency materials product line which experienced an 8% decrease in sales. The second factor giving rise to the earnings decline has to do with operating leverage.

Having increased our high frequency lamination incapacity in Europe in response to the higher level of sales in the first half of 2004, we are well poised for expected future growth in the markets for high frequency materials. However, the immediate effect during the fourth quarter was a decrease in operating leverage, thus Lowering our margin given this underutilization of capacity. Also, given the capacity constraints of our wholly-owned flexible products facility in Arizona, we were toll producing materials at our joint venture in Taiwan, although at a lower margin, in order to satisfy the increased level of demand for flexible products.

The High Performance Foams segment of our business had sales of 23.7 million in the fourth quarter, which represents a 33% improvement over last year's fourth quarter. This quarter's profitability was substantially greater than last year's fourth quarter due to the increased sales of urethane foams and the reduction of cost within our polyolefin foam product line having completed the move of the business to Carol Stream, Illinois from upstate New York.

Our Polymer Materials and Components segment had sales of 20.1 million during the fourth quarter, which declined about 10 million or 33% from last year's fourth quarter. This year-over-year change relates to the anticipated reduction in the level of sales of our Durel business. Profits in this segment were adversely impacted by this reduction in sales as well as the initial inefficiencies associated with ramping up production of the new flexible keypad programs.

Our overall manufacturing margin was nearly 27.5% during the fourth quarter, which is below last year's fourth quarter rate of 33%. The reduction in margin reflects several of the factors I just described in our business segments.

Selling and administrative expenses during the fourth quarter totaled 16.2 million compared to 14.2 million last year. The increase in expenses is due to final restructuring costs associated with the move of our Elastomer Components business from South Windham, Connecticut to China, higher selling and incentive compensation expenses and costs associated with the Sarbanes-Oxley compliance effort.

Research and development expenses were 5.5 million this quarter compared to 4.5 million last year reflecting an increase in development activity in our Durel business and polyolefins. As Bob pointed out, our research and development spending rate was 6.4% of sales during the fourth quarter.

Other income, which includes income from our joint ventures and royalties less other expenses, amounted to 3.7 million during the fourth quarter compared to 2 million last year. The increase is due to higher income from the increase in joint ventures sales, a net gain from the disposition of certain unused fixed assets, and higher royalty income which was partly offset by startup expenses in our RIC joint venture's new urethane foam production facility in China.

Our effective tax rate for the full year 2004 was 14%; however, this includes the effect of the onetime deferred income tax adjustment recorded in the fourth quarter. Without this adjustment our effective tax rate would have been 25%. Our cash and short-term investment balance at the end of the fourth quarter was $40 million, capital expenditures were 8.2 million during the fourth 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 three times. We recorded an estimated long-term liability and an offsetting insurance receivable associated with potential asbestos-related claims of two previously discontinued product lines amounting to approximately 36 million. Shareholders equity increased during the fourth quarter from 265 million to 281 million.

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

Thank you, Jim. And we're now prepared to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Michael Judd, Greenwich Consultants.

Good morning. A couple of questions for you. You mentioned towards the end of the year that you saw business begin to pick up a little bit. Can you talk about that? And also current business conditions?

In the Printed Circuit Materials area, our high frequency product lines picked up considerably at the end of the fourth quarter both for the infrastructure applications and for the satellite TV applications.

And what about current business conditions in each of the businesses, please?

Continuing on the Printed Circuit Materials areas, the flexible product line dropped significantly in the middle of December and continues to decline as we reach the end of life on several very large cell phone programs and we've not yet begun producing in some new ones.

Our Performance Foams business has just remained strong throughout the quarter, especially because our joint venture in Japan is completely out of capacity and the joint venture in China is spending most of their time during the fourth quarter qualifying that machine with products -- trial products at various customers. So we were producing for our joint venture and shipping to Japan.

And Durel, in our polymer materials area, began to increase during the fourth quarter from third and we expect that business to continue to ramp. As I mentioned, we will be adding more than 75% additional capacity to that a little later in the year and actually we have a 25% increase with several new machines in place now that are being qualified and then there will be quite a few more coming in the July/August time frame.

Thank you. And can you also just comment -- it looks like the reserve for asbestos, you can see it looks like it showed up in the other long-term liabilities on the balance sheet, is that right?

Yes.

And can you just talk about the trend in terms of claims? Many industrial companies that have asbestos issues basically saw a peak in terms of number of claims in let's say 2002, 2003 and in 2004 in general. It seems at least a fair number of them saw their claims actually decline in 2004. Can you talk about the trend in terms of claims?

Yes, until 2002 we really had very few very sporadic claims. And in 2003 and 2004 that level of claims rose significantly. We seem to be a little behind potentially, we do have -- a significant number of those claims were in a particular county in Mississippi that's pretty famous for frivolous asbestos claims.

Would you say that the number of claims in 2004 was higher than 2003?

Yes.

Okay. And then lastly, on the SG&A expense in the fourth quarter, I noticed it was up a couple million dollars or so. Is there anything in particular there or is it sort of onetime?

The closing of the South Windham facility too -- restructuring costs are in there too.

In the SG&A?

Yes. The pension curtailment and severance would be in there.

And our SOX expenses.

And SOX expenses, too.

Thank you very much.

Bob Fetch, Lord Abbett.

Good morning. Looking at the year as a whole -- obviously a lot of progress has been made, it would be nice if business flowed in on a more even basis. When you look at the kind of top-line growth you had, it really didn't quite bring it all down to the bottom-line because you're ramping up and then you're ramping down. But just touching base on some more of these sales issues first in perspective periods. Durel clearly dropped in the third quarter, what was the annual run rate though for the product line?

Overall for the year?

Yes.

I believe it was 51, 52 million, down from 72 the year before.

Okay. And the capacity that's coming on now would have been augmenting the capacity that was already in place when -- you're talking about the increases that are going to occur in this period, correct?

Yes.

Can we use the prior period sales run rate as a base to get some feeling in terms of what the sales potential might be for the product in the next year or two?

We could go -- probably the best way to think about this is that the current sales, if you were to increase those by 75%, that's probably a good way to look at it.

As opposed to the prior year's 70?

That's right. There's a significant change in mix with the inverters being down and the lamps being up.

And the inverters were in that Durel product line family?

Yes. You have to have an inverter with every lamp.

Have we now put all the moving costs completely behind us? I know some of the things did not occur as quickly as hoped, but then we had the last six months of the year to hopefully get some of those things out of the way -- the moves to China and the move to Carol Stream. Are there any more duplicates of costs that are continuing into the current period?

Certainly all those costs have peaked. We are incurring startup costs for busbars; at the moment we have six of the operators from Belgium and several management people in China training their personnel and making the first products which we intend to ship in March. So there is a cost there for this whole quarter. By the latter half of the year that business in China should have turned the corner and be making a profit to contribute.

And of course, we -- right now we're spending capital to build cleanrooms on the second floor of one of our buildings in China for Durel. And we will have the startup of at least four new machines in the July/August time frame. There will be some expense associated with that because there will have to be quite a few people from the U.S. there to get it started.

But is that actually duplicate costs or is that really just more the expansion in normal capital extending (ph)?

It's expansion in normal capital extending. I believe, though, we will expense the startup costs, we will not capitalized those.

So when you look at last year, what roughly would you say might have been the overage in terms of the moving costs that were incurred that may go away this year?

Probably $3 or $4 million.

And were they reflected in the cost of goods?

Yes, I believe that's where they were.

Okay. Can you elaborate a little --?

Excuse me, Bob. The restructuring charges which is mostly the charges for severance are in the SG&A expense.

Okay. In the automotive market, can you talk about whether the collision avoidance, adapted cruise control products are beginning to evolve into any meaningful business awards?

We are in the -- remember here, the high-end Mercedes and the BMWs that have those systems and, to my knowledge, everyone who's introduced the system is using our material. But of course, they're just in, at the moment, in the very high-end cars where the volumes are not huge.

And content on those products?

I think it's $0.50.

Okay. In the area of yields, I know you had some issues in Illinois and you also had an issue in Belgium with microwave which was kind of unusual. How far along are we in terms of putting them behind you?

The issue in Belgium was a onetime event in June -- in July. We've not had any reoccurrence of that. And in Carol Stream with the polyolefin business, we're making steady progress in improving the yields. Enough progress that we have taken most of the R&D resources that we had put there for process -- brought them back here to work on new product development activities. There's progress there, now we need to generate some sales. We created the capacity and the ability to make the goods, now we have to go and sell them.

You talked about a pickup in the fourth quarter in microwave materials, the fact that you were beginning to see the order rates come back. Did that suggest to you that the inventories are back to normal or below normal levels either at Rogers or your customers?

At our customers we believe that they are back to normal. And at Rogers they're still high. But we're, especially in the high frequency area, reducing those pretty quickly.

And is Belgian back towards a more normal schedule?

Actually to give you an idea of how volatile this is, we went from only working half the time to seven days a week for four consecutive weeks. And now we're back to a five-day week.

Which you always prefer?

Yes, in Europe it is a nightmare working Sundays. They've never heard of that actually.

And elaborate a little bit further on the Durel, the visibility there. How many adoptions you may have and when some of those new programs are likely to start in the '05 period?

We're in production on three programs, a fourth should begin this month, a couple more will start during the second quarter. We're in five additional programs that have passed the point of no return.

In the second half?

In the second half. We are the design of record and it's too late for them to go backward.

And how many different customers are we talking about in total?

Four.

Okay. And the float business, you made an acquisition of a Korean competitor. What do you see that business expanding at and what kind of marketshare do you feel you have now?

We're pretty much -- we are the largest player with a marketshare that's somewhere around 50%, maybe a little higher. And as we get that operation running better in China we expect to take on considerably more business from Japan as our facility has been approved by the major Japanese users. We just don't quite have the efficiency yet to make as many floats as they would want to buy so we'll wait a little while there before doing that.

And in Korea, we're in the process of moving most of the high-volume stuff out of Korea and into China. And using Korea for the low-volume, high value things plus procuring as many of the raw materials as possible from Korea, doing all the development work, doing the prototype work and doing all the quotations so that we keep all of the technology and knowledge in Korea.

And then lastly, as you've been talking over the last number of periods, you've been really putting in place some of the pieces to support future business levels. I would say it seems like you've done most of the heavy lifting there. When you look in the aggregate, say in the next year or two now, you seem to have some pretty good sales opportunities, a number of which are very visible, which sort of suggest you at a minimum ought to grow off the '04 four base. And your mix should be somewhat more favorable as well. As you get the utilizations back up with some of those period costs falling away that you had to incur in '04, is it unrealistic now that we should hope to see those gross margins at that 35% plus level but we've really been pointing towards for the last number of years?

As we get the utilization up 35% it is quite realistic.

Thanks, and good luck.

Dana Walker, Kalmar Investments.

Since this is not a market share issue, it's always nice to follow Bob, there's less to do. Good morning. Keeping it brief, if we were to look at Q1 compared to Q4, I suppose my impression had been that gross margin would be more pressured, even though it's already pressured, but pressured versus Q3 levels in Q4. And that really wasn't the case, it was more of an SG&A issue. And I was surprised to see that your inventories were higher at year-end than they were at the end of the third quarter. Can you talk about where you would expect gross margin to be in Q1, SG&A compared to Q4, and where you think inventories in absolute dollars are likely to be at the end of Q1?

Let's start with the inventories. The inventories rose mostly in raw materials and our flexible product line as we had -- we have a supply chain that is six weeks long, almost all the raw materials come from either Europe or Japan. And so when the business fell way off, all that material was still coming. Now we've got that under control and we don't expect to see -- received any raw materials for the rest of the quarter. But we will pull those down pretty quickly. Gross margin wise, we should be similar -- similar I believe in the first quarter and we expect to see SG&A come down.

Similar to Q4 levels?

Yes. As we're going to end up with sales which are quite similar.

But if the mix better favors high frequency, why wouldn't there be a bias up?

Because all the businesses are leveraged and with sales dropping by as much as a third in the flexible area we're not having that kind of increase in the high frequency. And so on the downside you lose a lot of leverage on the flex, even though overall margins are not as high.

How much of that flex volume reduction happens in the tolling relationship that you have in Taiwan rather than in Chandler?

About half because we stopped the tolling activity.

You talk about end of life, when would you expect to see beginning of new life on new programs in flex?

Second quarter.

That's a hard target?

That's what the sales guys tell me.

Well, you have to listen to somebody.

That you do.

The -- that's enough for now. Thanks.

(OPERATOR INSTRUCTIONS) Stephen McBoyle, Lord Abbett.

Similar to what you did with Bob on Durel, could you do the same with high frequency? What was -- obviously you made the comment that sales were down year-over-year 8%, but can you put back in absolute dollar terms both in terms of sales as well as either gross profit or operating income? Again, the spirit of the question here is to attempt to understand the obvious embedded leverage in any improved customer demand on that side of the business which is obviously what you're seeing?

Stephen, we've never broken out the product line sales inside of the Printed Circuit Material area.

Is there a way to get an appreciation as to what embedded margins there may be on every incremental dollar?

A pretty good rule of thumb is that every million dollars worth of sales that we increase we have at least a penny increase in earnings per share.

Okay, great. And the gross margin comment that you made with regards to trying to get back to the 35%, what sort of sales volume would that require?

Now that we've added so much capacity we probably need to get in the $430 to $450 million range.

And can you just elaborate a little bit more with regards to the customer inventory both on the satellite and infrastructure side? Obviously you've had some favorable comments, but anything more you could add there in terms of color?

We think on the satellite TV that the whole inventory picture is in pretty good shape. We've had an usual circumstance in that some of the fabricators actually worked through the Chinese New Year which is -- doesn't happen very often. On the infrastructure side, it seems to be pretty well wrung out now. They had it in multiple places in that supply chain both at the OEMs and their assemblers and then at the (indiscernible) shops. That all seems to have settled down.

Okay, great. And on the 3G front, I know we've been running at growth rates north of 50% for some time here. Would your expectations be similar rates through? And again, I know we're all somewhat struggling to determine where the market may go, but knowing what you know?

Yes, Stephen, the report I continue to read is one by Deutsche Bank that projects that 3G infrastructure spending will go from 7.5 billion, something like that, up to about 12.5 billion. But the infrastructure in total is only growing like 6% or 7%. So most all the growth there is in 3G.

Okay. And obviously inventory has been discussed here. But I was also surprised to see it up some 15% on flat sales sequentially. I understand the comments you've made. But is it fair to say that the model is one -- obviously with your customers demanding shorter lead-times -- that you will inherently have to carry more inventory relative to what you have in the past? Or is that not the case?

Currently that is the case and, in fact, the way to think about it is with 45% of our sales in Asia every thing sold in Asia, except for what we make there, is sold out of inventory. Because it takes -- by boat it takes almost six weeks to get it there and if our lead-times are a week or two we can't respond to the customer's request. And then we have a fair number of very large customers who require consignment inventory. For example, in our busbars, which is a business that has eight week lead-times, 40 percentage of their sales every month are out of consignment inventory. That's one of our issues about visibility because there's no forecast -- no accurate forecast from those users.

Now our plan is, and one of the reasons for putting more capacity in Asia and trying to make most of the product lines over there that we're selling over there is to get us back to a more normal inventory model so that if we make it locally then, of course, we don't need to have those very large finished goods inventories. Maybe a little larger than we used to in the past, but nothing like what we have now.

Great, thanks very much.

John Roberts, Buckingham Research.

Good morning. Just sort of a related question, but do you think you'll be able to fill out the European capacity fully or as the business migrates to Asia in the high frequency business that both the boards and equipment are going to be made there and you'll eventually be cutting back on European capacity?

I think eventually we will cut back on the European capacity.

So how do you sort of prepare or run it if you've got to ramp it and then eventually cut it back down again?

We're going to be using Europe as base capacity because Europe is -- has so many difficulties with adding and reducing people. We will use the United States at this point as surge capacity or absorbing any of the swings down. Then with time in 2006 I expect toward the latter part of the year to have a high frequency facility running in China and we will probably have a new treater in Europe at that time. And that will require -- use some of the people. And that at some point we will take one of those presses in Europe and we will put it in the United States as some of our equipment here is reaching end of life.

So you think you can have a nice orderly transition here across the regions for the business?

Yes. And we also have to have ourselves in a position where we could deal with 50 percentage increases in business which is the kind of thing we have experienced. So it means a lot of unused capacity needs to be available.

Thank you.

Glen Primack, Broadview Advisors.

Good morning. I'm pretty sure you already answered this by just moving the manufacturing -- more manufacturing over to China. But I was wondering, in the improvement in the planning process, is there any system implementation or any ERP like that involved or is it just pretty much more of -- more manufacturing being moved to Asia in order to get the inventories in line?

It is having more manufacturing in Asia will get the inventories in line.

Great, that's it.

And probably the other addition to that is we have a Six Sigma project that is trying to get at how do we get better forecasts. How many different people -- part of it is how far up the chain do we have to go to understand what the demand is? Because our biggest OEMs for the most part purchased in 2004 what they said they would. But it was nothing like the way they said they would do it. That's the part we're trying to understand, why did that occur and is that likely to occur again?

Okay.

Dana Walker, Kalmar Investments.

The phone business had a wonderful fourth quarter, can you talk directly about your -- the influences on that business moving through '05?

Yes, we are at capacity in Woodstock, we are at capacity in VA (ph) Japan and in -- this is the polyurethane side, and in Geno (ph), Japan. We have a one shift operation in China and on March 1st that became a two shift operation. The second shift will run all product, the first shift will alternate between making samples before qualifications and running product for sale. We expect to transition some of the business that we make in Woodstock for our joint venture in Japan to the joint venture in China, bring the operation here in the U.S. from a seven-day to at least a six-day operation and be able to pull our lead-times down because they have gone from two weeks to three or four weeks now as -- because we're out of capacity.

If you have end of life issues in flex certainly related -- or almost certainly related to cell phones, are you having similar issues in Q1 in PORON?

No. And the reason is that PORON is probably in half the phones made in the world. And no one phone contributes a large number of dollars. In the flex circuit area you could have a phone that might use $1.5 million of material a month and in the polyurethane foam business it might use $15,000 a month. So it's a much stabler business because it's much broader-based.

Was the present flex volatility visible to you -- just pick a date -- two or three months ago? Was it known that this end of life was about to happen or is this new information?

We knew end of life was going to happen, what we didn't know was within three months of when it would happen.

With the pickup from new generations of phones would you expect this to be a net neutral or are you gaining or losing in flex?

I think when the year is over we will have gained.

Final question is this, on gross margin, if high frequency is likely to be better in Q1 than it was in Q4 flex is likely to be down, but flex recovers in Q2. Can you give a high-level view as to how you would expect gross margin to track from this just sub 28 present level in the fourth quarter as we go through '05?

By the fourth quarter we should be up around 31 or so.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Russ Piazzo (ph), Piper Jaffray.

Good morning, Bob.

Good morning, Russ.

I was wondering if you could update us on this car door molded product please?

Water shields, polyolefins used as water shields in the cars. That business is continuing to grow fairly slowly and we have three new opportunities that we'll find out within the next few months whether or not we've won that business. The product we're most excited about is a product called innerlam (ph) that is a polypropylene-base foam. It would be used in the dashboards between the dashboard -- it's a solid dashboard and a textured polypropylene film that is over it. That may not result in any significant business this year, but it has the potential to be extremely large as the only competitor is a Japanese company and there are some issues associated with domestic auto manufacturers.

So you think that product might have more potential than the water shield product?

Its value is multiple times the value of the water shield product.

Is that an indication that you have -- that the water shield product is probably less than you thought it was maybe seven or eight months ago?

It has significant potential, but the margins are not nearly as good as some of the newer products we're working on. Which is where we intend to take this business is -- gradually take it all to a new family of products that have a significantly higher value.

Thank you very much.

Greg Weirick, Westcap Investors.

Good morning. Sorry, I got on the call a little late here. Bob, you spoke a while I guess at the Needham conference back in I guess it was January and you seemed pretty convinced that kind of a lot of these onetime things and stuff were really behind the Company. And yet I guess I didn't -- I haven't completely understood since I got on the call late why the earnings are going down so much for the first quarter. I mean, are you in a situation where you've really got that little visibility or what's kind of happened in the last six weeks?

Not a lot has changed in the last six weeks. We expect to have improved sequentially quarter-to-quarter, but one of our issues now is that we have added more than $140 million worth of capacity last year, we have sales that are at a level that is less than last year. That negative leverage is going to hold down the profits until we begin to utilize some of that new capacity.

And when do you expect that to happen?

Forecasts are for sales to grow each and every quarter this year. Our visibility is not very good.

So the first quarter is really just a carry over then from fourth-quarter levels?

One of the things that is now different about the first quarter is that with 45% of our business in Asia we are significantly affected in February by the Chinese New Year where most companies close-up for one or two weeks. Now one of our product lines -- some of the big customers continue to work but that's a very unusual situation. Most everything else, of course, drops way off in February. And we didn't see those things in the past when our business was a lot smaller there because it didn't affect things as much.

Thanks.

At this time there are no further questions. Mr. Wachob, are there any closing remarks?

I thank all of you for listening in today and I hope you have a good day.

Thank you. This concludes the Rogers Corporation fourth-quarter earnings conference call. You may now disconnect.