Rogers Corp (ROG) 2005 Q2 法說會逐字稿

Good morning. My name is Lori 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 been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I will now turn the call over to Bob Wachob, President and Chief Executive Officer of Rogers Corporation. Please go ahead, sir.

Good morning ladies and gentlemen. With me at Rogers this morning are Paul Middleton, Acting Chief Financial Officer and Corporate Controller; Deb Granger, Director of Corporate Compliance; and Ed Joyce, Investor Relations Manager. Thank you for joining us today. First, Paul will dispense with the formalities and then we will get right down to business.

Thank you, Bob. I would like to point out to all of our listeners that statements made in this conference call that are not strictly historical are forward-looking statements within the meaning at the Private Securities Litigation Reform Act of 1995 and 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 back over to Bob.

Thanks, Paul. We believe the second quarter marked the end of the storm we have weathered for the last four quarters. While sales are down about 11% and operating profits if you exclude the impact of the impairment charge are down about 60% from Q2 2004. When we look at the longer term, our sales are up 70% and operating profits are up 93% compared with Q2 2003.

During the quarter we put a couple of difficult issues behind us, namely polyolefins and the Elastomer Components Division transition to China. We still have to manage the Rogers Inoac Suzhou and busbar startups in China which we expect to complete in Q3. And we have a new challenge which is the China Durel startup in Q3 and Q4.

This quarter printed circuit material segment sales were down 7% sequentially but operating profits rose 10%. Better operational effectiveness and more appropriate staffing for the level of sales caused the profit increase.

Looking at the two-year period, sales are up 68% and operating profit is up over 350% from Q2 2003. Looking forward for the printed circuit material segment we see sales growing sequentially at a 10% rate over the next couple of quarters and expect profit to grow at a higher rate. This growth will be driven by cellphone adoptions of our flex circuit materials and increases in cellphone base stations and satellite television for high frequency laminates.

High performance foams segment had a sequential 3% sales decline but operating profits excluding the impairment rose over 23% as we reduced polyolefin losses. We see little opportunity for higher revenues over the next couple of quarters as we have finished manufacturing Poron for our joint venture, Rogers Inoac Corporation. Therefore growth in our normal markets will be masked by the lack of total manufacturing business for our joint venture. Operating profits are projected to grow in each of the next two quarters due to the reductions in the polyolefin losses.

Our polymer materials and component segment is where we experienced the most significant improvement with sequential operating profit, increasing by $900,000 on essentially flat sales. This was driven by operational improvements at the Elastomer Components Division which more than made up for the increased startup cost for busbars in China. In Q3 and Q4, this segment should have significant sales and operating profit growth as the Elastomer Components Division operations continue to improve, startup cost for busbars decline and Durel experiences rapid growth in flexible keypad lamps.

For the first time in a long time the joint ventures contribution to profit was negligible. This was due to startup problems at Rogers Inoac Suzhou which inhibited sales while we were fully staffed for a two-shift operation. Additionally the Rogers Chang Chun Technologies joint venture profit was down substantially as sales declined and a new machine was qualified for production but sat idle. We expect Q3 to return to a more normal profit level for the joint ventures to somewhere in excess of $1 million as the problems at Rogers Inoac Suzhou are resolved and Rogers Chang Chun Technologies sales increase substantially.

In summary, even with the sequential $3 million sales decline, we improved gross margins from 27% in Q1 to 29% in Q2 and the operating margin from 4.5 to 6.5%. Going forward for Q3, we expect sales of 85 to 88 million and profits of $0.36 to $0.40 per share and a fourth quarter substantially better than the third.

And now I will turn it over to Paul for a closer look at the financial details of the quarter and we will be happy to answer your questions.

Thank you, Bob. For the second quarter we achieved 83.4 million in sales and incurred a net loss of 8.8 million which equates to a loss of $0.54 per diluted share and includes a non-cash charge involving the impairment of certain long-lived assets and the write-down of certain inventory and receivables within the polyolefin foam operation of 13.2 million or about $0.81 per diluted share. These results are in line with updated guidance we provided for the quarter on July 7.

Looking at sales for the quarter, in our Printed Circuit Materials segment we saw a continued sequential softening in sales of our flexible circuit materials, down 22% from the first quarter, primarily in the cellphone market. Printed high frequency circuit materials sales were relatively consistent with the first quarter of 2005. Although a smaller part of this segment, our shielding laminate and cable installation sales were up 10% from the first quarter in 2005. The net of these business trends drove our overall Printed Circuit Materials quarterly sales down 7% sequentially.

In our Polymer Materials and Components segment we saw continued success in our flexible keypad lamps during the quarter, largely mitigating the continued softening in our inverter product sales. Flexible keypad program is well ahead of original expectations and we will be making significant capacity investments in China in the balance of the year to meet increasing customer order commitments.

We saw some sequential softening in our busbar business stemming from increased pricing competition in the transportation market in Europe. And we saw some sequential strength in our floats business as we worked down the backlog generated from the first quarter startup effort in China. Cumulatively these events kept our overall Polymer Materials and Components quarterly segment sales relatively consistent with the first quarter.

Sales of our High Performance Foams segment in the quarter remained strong; however, overall sales were down 3% sequentially due in part to less toll manufacturing for our Japanese joint venture from our wholly-owned facility in Connecticut. Our 450% (ph) owned joint ventures had sales of 21.2 million for the quarter, collectively down 12% from the first quarter. We saw continued softening in the Rogers change on flexible laminate circuit materials sales commensurate with our wholly-owned flexible circuit material product sales.

Our High Performance Foams joint ventures with Inoac Corporation experienced some quality issues and customer conversion issues with the new China foam line which caused a shortfall in sales. Collectively down 24% from the first quarter in 2005. Also, the China foam venture brought additional products on line causing increased startup and development cost.

Manufacturing margin as a percentage of sales was 29% for the quarter, up from 27% in the first quarter despite a 4% reduction in consolidated sales. This positive trend was due in part to a great deal of improvement realized in the float production recently shifted to China and the start of some operational improvement benefits in the polyolefin line in Carol Stream. Excluding the cost associated with the polyolefin asset impairment, commercial expenses which include selling, general, admin and R&D, totaled 19.9 million or 23.9% of sales as compared to 19.5 million or 22.5% of sales in the first quarter of 2005.

Other income and expense which includes our joint venture income, royalties and other miscellaneous items was a net expense of approximately 300,000 for the quarter as compared to income of 2.6 million for the first quarter of 2005. The variance reflects the significant downward trend in sales for RCCT, our Taiwanese joint venture, the operational and customer issues associated with the startup foam venture in China and a slight decrease in royalty revenues.

Excluding the effect of the asset impairment, our current annual projected tax rate is 20% as compared to the 24% rate it had been projected in the first quarter of 2005. This reflects the benefits starting to be realized with increased business and the lower tax jurisdictions in China and the effect of lower income projections for the year.

Taking a look at our financial position, Rogers enjoyed another quarter of strong cash flows. The Company generated over 4.5 million in operating cash flow and made additional progress in reducing inventories. The Company's overall cash and short-term investment position decreased by 6.6 million due primarily to 7.9 million in capital expenditures and approximately 4 million in stock repurchases. The Company continues to remain debt free and able to fund capital expenditures from operating cash flows.

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

Thank you, Paul. At this point, we would be pleased to answer any questions you might have.

(OPERATOR INSTRUCTIONS) Michael Judd, Greenwich Consultants.

Good morning. A question about the tax rate for the second quarter. It looks like you needed to be around 18% in order to get to the 4.4 million, is that right?

I'm not sure I followed your question.

You basically had some special items and obviously we have to back those out but to get to the $0.27 --?

Yes.

I'm trying to understand what the correct tax rate that we should have used?

If you back out the effect of the impairment because the impairment was taxed at a different rate for U.S. purposes in terms of its effect, the operating rate was effectively 20% and that is the rate that we project for the year. And we had to adjust to that rate for the year.

Okay. And then secondly in terms of Durel, it looks like you had forecasted that revenues could be up 20% sequentially in the third quarter. But is it fair to say since you're going to be starting up new capacity in China that the overall profitability -- what are your thoughts about the profitability at Durel?

We believe that Durel's profitability will improve at a rate at least as fast as sales even with the startup expenses in the third quarter.

Very good, thank you.

Jiwon Lee, Sidoti & Co.

Good morning. Just two quick questions. Could you comment on the current utilization of high frequency circuit materials overall?

That is about 60% of capacity.

Okay. And should we still assume over $35 million in CapEx for 2005 particularly in regards to Durel as well as the potential high frequency plant in China?

Yes.

And we previously said the qualification period, I guess including that it takes up to nine months or three quarters to get this operation up and running. Could you comment a little more?

Which operation is this?

It's about high frequency circuit materials.

Oh, high frequency. Yes, it will take about nine months, a big chunk of that is the time to construct the building.

Okay. Nine months only for the construction of the building, correct?

About six months for the building and three months to get the equipment operational.

And then there would be additional qualification period that you need with your customers, correct?

Yes. And that will vary -- depends on how bad they need more material.

Right, I see. Any comments on the tax rate in '06? You said potentially higher sales in China and elsewhere in lower tax jurisdictions will result in some benefit.

Yes, I mean it is difficult to project this far in advance. I think we envision a significant ramp in our China operations. This is the first year that we've triggered our tax holiday in China. And so as we grow business in that region and continue to shift operations to that region, we will enjoy more benefit from that region. So I suspect 20 to 22% -- that is probably a fair guess at this point largely dependent on a lot of factors and obviously we will have more visibility as the year plays out.

Okay, great. That is all for me. Thanks.

(OPERATOR INSTRUCTIONS) Dana Walker, Kalmar Investments.

Good morning. Could you talk about the tolling influence on your foam business, revenue wise?

Over a full-year period the tolling was approximately 3 to $4 million.

What type of an impact would it have had on profits?

That business is less profitable than what our business that we sell to our customers.

So as RIC does this themselves, you'll have half share in that but you'll have a half share of their direct profitability rather than your watered-down direct profitability?

Yes.

At the bottom line, how would you expect that trade off to play out?

If we don't grow sales from the Woodstock facility then we'll make less money in total. This allows us to operate in a more effective way with the toll manufacturing for the joint venture. We were party much forced into seven days. Which is not -- we don't really want to operate seven days on a continuous basis.

What if anything is in the offing for new applications for Poron from your domestic operations?

Well, a big application for Poron would be $50,000, Dana. So that is one of the reasons it's always hard to talk about that because there aren't these million dollar pieces. There's a huge number of $50,000 pieces, $10,000 pieces. We don't see anything that is a big new trend. We just see continuation of growth in the electronics area for our polyurethanes.

You mentioned that gross margin when one excludes the extraneous charges was better by a couple hundred basis points. You attributed a lot of that to the float business. Could you, however, go through the various segments? I presume when Printed Circuit Material revenue was down that would have a dilutive effect on gross margin. Is that a fair assumption?

I don't believe it was this quarter as we were able to get the resources more in line with the level of production. That is why our operating profit on a sequential basis went up in the Printed Circuit Materials area.

Okay. So that was no inventory -- I mean that is just a true flat out higher value add results based on lower revenue. There is nothing that is non-recurring in that number?

That is correct, Dana. And actually we were able to reduce the inventories by 2.6, I think, or 2.3 million.

If you, I believe you were suggesting that sequential growth in Printed Circuit Materials would be 10% or so. Was that the number I heard?

Yes.

What type of leverage would you expect to see in gross margin from that?

Well, Dana, we would expect the profits would grow faster than the sales.

You need to add to your resources though or can you just -- just wondering -- (multiple speakers).

Yes, we will.

You will?

On the flex side, we will be adding resources. And of course that will keep the profits from being quite as high as they might. But as those people are fully utilized as we continue to grow again, then of course profits once again reach their maximum.

Since we heard from you in the very recent past on the whole issue of new design ins and take away from flex, do things change enough so that there is incremental discovery in formation in the last couple of weeks?

No, not really. Every week something gets pushed out, something else gets pulled in. But the net result is not much change.

Final question. As you assess what the Motorolas and Nokias as of this morning -- the Samsungs and others have been saying in the cellphone world -- how would you collectively distill that in its effect on you? And your outlook?

I believe we are more affected by specific design wins than we are by the general trend of the market. And it is those design wins that we have that are planned to go into production in both the third and fourth quarter that will drive our sales in the cellphone area.

Thank you very much.

You are welcome, Dana.

At this time there are no further questions. I'm sorry; you now have a question from the line of Shawn Severson of Raymond James.

Thanks, good morning, Bob.

Good morning.

Could you give a little color on how you think the seasonality will play out given normal handset trends we see in the marketplace versus kind of your ramp into the handset both from flex and then even more importantly I guess from the Durel business? Should we think of this as tremendously strong December quarter and then a real weak March? Or do you see enough to kind of get a consistent growth trend here for a few quarters?

We would expect that of course third quarter is -- and especially toward the end of the third quarter is when a lot of things begin. That is part of why third quarter will be somewhat better than the second. But then in the fourth is when lots of things have been put into production in the latter part of the third and the beginning of the fourth. And we would expect that, associated with cellphones, to be the biggest quarter. That would be both for polyurethane foams, for Durel and for flexible laminate materials.

Should we expect kind of an abnormally or even stronger or weaker than usual March because of some type of ramp up and subsequent decline or should we think of March along kind of normal seasonal terms?

I think March will be normal seasonal. It's the second quarter where we generally see the big drop off as people are beginning to get ready for the new product introductions and they start trying to work down those inventories of the old products.

Okay. As you prepare for the ramps, I assume most of the manufacturing and the phone assembly is done in China. How are you kind of managing the process of inventory management in preparation for the seasonality that we will be seeing over there? Do you have to stockpile a bunch during the summer so that you're going to be running the machines so that they are available? Or kind of walk me through how you're going to work the process so we don't see like a big surge early and then some kind of weakness in manufacturing utilization later?

We have, I'll take the specific areas -- in the polyurethane area, we have built a rather larger finished goods inventory than we had. We do some value added there also. We do a lot of slitting in China. And if things get a little ahead of us, we will use the joint venture in Suzhou to fill any gaps, and that of course -- there we can react quite quickly. But Durel, we have as it has been growing and we're doing some finishing operations in China now, we have a whip that is increased even though our total inventories are down, Durel inventories are up.

And as we bring on the Suzhou facility, then we would expect there to be able to adapt to the changes in supply and demand. We're also going to be utilizing in the third quarter Hansung in Korea to make some lamps for us which also allows us some flexibility. Then in our flex material area we have an inventory position both in China and in Singapore. And we have a fair amount of material on the water. But we are able fortunately if need be to airship that material unlike the polyurethane foam where the value per pound doesn't allow air shipment.

Okay. And then last year flex was driven primarily by one customer and a couple of product lines. How is that shaping up this year for the handset sales and flex? What is the diversification there?

A lot more diversification both in the number of handsets and in the number of customers.

Okay. And sort of related to the same question with EL, I mean is that, do you know today exactly how many programs you are going to be on by the end of the year or is there still an opportunity as we get through the next month or two to get additional back ends (ph) both in flex and in EL or is that pretty much done now that these things most of the handset cycle has been worked and the new programs are ramping?

At this point the fourth quarter is there is some questions there but it is mostly associated with what gets pushed into the first and what was planned for the first tries to be pulled back into the fourth.

Okay.

But we expect a very substantial increase in the number of models.

All right. Just one last question. Wireless infrastructure market, seemed to kind of like it was consistent with the first quarter. Any read on how high frequency should do in September and December as a segment? I mean does that seem to have some sustained strength or is now kind of an inventory out there that would be implemented out in the field with finished goods so you would see some slow down in the second half?

We don't expect a slow down this year in the second half because we didn't see that inventory build that we did last year.

Okay.

Things are a lot steadier in the whole marketplace for high frequency.

What is the difference then between this year and last year that you think you kind of see it -- you don't see it today but you didn't see it last year necessarily either. I mean what are the dynamics that make you have a higher confidence level today?

Last year the whole supply chain got surprised by a surge in business which then caused everyone to order more thinking that it might be even bigger. That didn't happen this year in 2005. Things have run along fairly steady with no surprises.

So more of a controlled growth this year?

Yes, plus the singular buildout is probably the biggest single thing going on right now.

Yes.

And that is well-known and well-controlled. It's not a big surprise.

And then what do you think today out of your high frequency, how much of that do you think you are shipping to China for PCB fabrication versus the U.S. or Europe? Is that a significant (multiple speakers) leaning heavily now towards China like the rest of your business?

Yes, well over 50% goes to China.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Mark Keeler (ph), Paradigm Capital Management.

Good morning everyone.

Good morning, Mark.

Bob, just a couple of clarifications. Now for Durel you said that or you thought that the possibility there would increase faster than the revenue. But if we look at the polymer materials and components sector or segment as a whole, we still have some drags going on there with the elastomers and busbars. So for segment margins we should anticipate that they don't improve quite as rapidly as revenues, is that correct?

Well we expect busbars sales out of China to grow in the third quarter. That should improve. And we expect continued improvement in the Elastomer Components Division. So I think the answer is we expect for the whole segment that earnings will grow faster than sales.

Okay. And then as far as revenue growth at Durel, could you give us any idea of like Q1 or Q2 versus Q1 on the lamp product?

On the lamp product I think it was probably up 15%.

And then you said that the inverters were kind of weak. Are you seeing any indications that you are less likely to get inverters with the keypad versus the old display?

No, we are seeing increased interest in adoptions of the inverters now. Just -- it would be good if we got on one of the really big programs.

Sure, naturally. And then one larger strategic question. EL lamps, they went from the displays, handset displays to the keypad product and we had a little foray into auto -- I guess we're still working on the auto?

Oh, yes, we are. Auto continues to grow.

Okay. And it seemed like polyolefins were an attempt to diversify into some other industrial market specifically autos but especially you still have the dashboard product there. As you look out maybe three years, four years, what products do you see that Rogers has now or in development can you use to diversify away from the wireless markets?

We believe we will experience continued rapid growth with our digital laminates as the servers and telephone switch gear, actually, the Internet switchgear begins to reach speeds of 10 gigabits per second of data switching. That is when we see a significant amount of usage of some of our new material. We see that growing quite rapidly. It has good growth now but we don't talk about it much because it is relatively small. But the growth is quite rapid.

We have several new products that we are working on in the polyurethane foam area where we think there will be more applications in sealing as these are much lower in density and much softer than the existing products. But those will be another year or two before anything really significant occurs.

Okay, thank you.

You are welcome.

Michael Judd, Greenwich Consultants.

Thanks for taking my follow-up question. A question about raw materials. In the flex area in the past there have been some issues around adequacy of raw materials. I was just wondering if you could kind of update us there? And also give us a sense of -- it looks like the commodity polyolefin materials prices could have bottomed out and may be heading up for the rest of the year. Are there any particular raw material issues that we should be alert to as we look forward to the second half of the year, please?

Both polyimide film and copper, the supplies are more than adequate as there has been significant additional capacity brought on line. And in the case of both polyimide film and some copper suppliers, some of the people are reducing their prices and some reason or not. So we are moving more of our business toward those who have the lower prices. And on the polyolefin, I'm not sure if we're going to see price increases or not. It is our intention to raise our prices though.

And lastly, I guess in terms of margin. Can you talk about which product do you feel that you have -- where it is the easiest to basically increase price right now in the portfolio?

Well, we've increased both our polyurethane and our silicone foam prices already this year. And we see no real negative effect. Those price increases were mostly to pass along raw material price increases. I think it is quite difficult if not impossible in the flex materials area to raise prices. And in the high frequency, in the more customized things you can always have a little price ability to price up. But in the really high-volume stuff, there is little opportunity to raise prices.

And finally, you've been repurchasing your shares which is returning cash to the shareholders which is good. Are there, could you talk a little bit more about plans to perhaps further increase stock repurchases, please?

I believe we have 10 million left on the $25 million authorization. And we will continue to purchasing the shares.

Thank you.

(OPERATOR INSTRUCTIONS) Dana Walker, Kalmar Investments.

I'll keep it to one. Can you help us recall when the high watermark took place in your joint venture income? Would that have been Q4 of last year? Perhaps break out what that number was and at what point you would foresee approaching that level again?

Well, Dana, the other income line in the joint ventures is in there. I'm hesitating because I'm not sure that I can remember what the total was.

I think it depends on your reference point. When Durel was a joint venture obviously it was a significant contributor. Last year RCCT was although Durel wasn't in RCCT or our Taiwanese joint venture had a significant year was a significant contributor as was the ramp up off RIC last year. So it's difficult to tell when the high point was and what is our kind of watermark level on that. Within the last couple of quarters we have perspective on that --.

That is what I'm focused on. We will look at an AD as an after Durel.

Dana, I believe it was in excess of $3 million in the highest quarter. And it probably was the fourth quarter of 2004.

When Chang Chun joint venture would have been smoking?

Yes.

The second portion of that question would have been at what point would you foresee approaching that level again?

Chang Chung could -- we removed the toll business, a big chunk of what they were doing was our toll business. Their direct-to-the-customer business should equal or exceed Q4 2004 in the fourth quarter of this year.

I presume RIC will look better because they will have all that Poron?

Yes, that is correct.

So when I believe you said that your joint ventures were loss maker or close to break even in this quarter?

Close to break even.

And you would hope to see a delta of a million plus in Q3?

Yes.

And I would presume you would expect to see another delta of some significance in Q4?

Yes.

That's all I have. Thank you.

Thank you.

Ralph Leif (ph), KR Management (ph).

Would you discuss the effect of the change in the currency from China is going to have on your operation?

Well, as I understand it, China is now linking their currency to a basket of currencies.

That is right.

And of course I don't know if the dollar is going to strengthen against that basket of currencies or get weaker against the basket of currencies. If the Rim MD becomes stronger than our raw maternal purchases in China, we will cost less than Rim MD. And our labor will still be our labor. So my view would be that it would be positive.

Thank you.

You are welcome.

At this time there are no further questions. Are there any closing remarks?

Thank you all for joining us today. Enjoy at least the beautiful day here in the east. Goodbye.

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