Rogers Corp (ROG) 2005 Q4 法說會逐字稿

Good morning. My name is Cynthia and I'll be your conference operator today. 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 session. (OPERATOR INSTRUCTIONS).

I would now like to turn today's call over to Bob Wachob, President and CEO.

Good morning, ladies and gentlemen. With me at Rogers this morning are Dennis Loughran, Chief Financial Officer and Vice President of Finance; Bob Soffer, Vice President, Treasurer and Secretary; Paul Middleton, Corporate Controller; Deb Granger, Director of Corporate Compliance; and Ed Joyce, Investors Relation Manager.

Thank you for joining us today. First, Dennis 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 our listeners that the statements in this conference call that are not strictly historical are forward-looking statements within the meaning of 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 statements.

I'll now turn it back over to Bob.

Thanks, Dennis. Regardless of all the complications associated with deferred taxes and reporting segments, Rogers had a very strong quarter, actually, a record fourth quarter, and we made significant progress generating income in tax advantaged regions.

During the quarter, we made significant progress both in sales and in operations. The result was a return to more normal levels of profitability. There was meaningful operating progress in China during the quarter. The most recent results further validate our strategy of locating manufacturing where our customers purchase our products.

The significant increase in gross margin percentage this quarter, both sequentially and year-to-year, was driven by the leverage created by increased volume and considerable yield increases in some areas, especially in our EL manufacturing operations.

The handheld wireless communication market had its usual strong fourth quarter and was the most noteworthy contributor to our sequential $12 million sales increase. On a year-over-year basis, the $9 million sales increase was driven by the handheld wireless market, wireless infrastructure and consumer marketplace.

Joint ventures had all-time record sales and profits for the quarter. The RIC/RIS joint venture led the way in the fourth quarter. The facility in Suzhou, China was operating its Poron polyurethane foam machine 24 hours a day, 7 days a week in December. We expect it to continue as we steadily increase the line speed toward its designed maximum limit. In Japan, we expect to begin construction of a new Poron machine this year to add capacity and reduce cost.

In Taiwan, Rogers Chan Chung Technologies had record fourth-quarter sales. We expect them to have a traditionally slow first quarter, as the handheld wireless and consumer electronics markets pause after the holiday season. But their outlook is for a strong 2006.

On the Rogers front, looking forward in 2006, we expect to expand our polyurethane foam capacity in Connecticut by making machine modifications. In China, we plan to install additional EL lamp, busbars and flow capacity, while beginning construction of a new Poron polyurethane foam line.

As we said in the news release, we currently expect record sales and earnings in 2006. We believe we are well-positioned to quickly adapt to most changes in market conditions and expect to be able to fund planned capital expenditures and continue to repurchase shares, using internally generated funds and cash on hand.

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

Thank you, Bob, and good morning again to everyone. I'm happy to be here as a new member of the Rogers team and look forward to meeting and working with each of you in the coming months.

Starting with net sales performance, for the fourth quarter, we achieved $96.5 million, which was up 11% compared to the $87.3 million sold in the fourth quarter of 2004, and up 15% sequentially from the third quarter of 2005. Our preliminary GAAP net income for the fourth quarter of $11.2 million equates to earnings of $0.67 per diluted share.

This amount includes a tax credit recorded in the fourth quarter of $0.06 per diluted share related to our continued remediation of the deferred tax reconciliation internal control weakness identified in 2004. Excluding this favorable tax impact, EPS for the quarter exceeded our high end of guidance of $0.52 to $0.54 per share.

The strong operating results in the fourth quarter stem from significant improvements in yields and productivity, higher overall sales volume, and favorable sales mix, all of which we expect to carry into 2006.

Full-year 2005 net sales were $350 million, 4% below the record $365 million of net sales in 2004. Net income for the year amounted to $15.7 million, which equates to earnings of $0.94 per diluted share, as compared to $40.1 million net income, or earnings of $2.34 per diluted share, in 2004.

Taking a closer look at our operational performance, sales of Rogers' specialty materials and custom components sold into the portable communications market were key drivers of the overall volume growth in the fourth quarter. The Company's sales of foams, circuit materials and EL products used in cell phones all increased during the fourth quarter. The trend in consumer preference for feature-rich clamshell style, thin and aesthetically pleasing cell phones is expected to continue providing Rogers with opportunities for greater market penetration worldwide.

Sales of circuit materials for cellular infrastructure were also up significantly over the fourth quarter of 2004. Strong sales should continue to be driven by the ongoing rollout of the next generation of cellular telephone service that provides high bandwidth data download speeds.

Fourth quarter gross margin was 32.2% versus 27.3% for the fourth quarter of 2004, and up sequentially from 29.1% in the third quarter of 2005. The improvement was driven by overall sales growth, a more favorable sales mix, and significant operating improvements, particularly in China. Gross margin for the full year of 2005 was 29.5%, slightly below the 31% achieved during 2004, a year when the Company had higher capacity utilization throughout the year.

Selling and administrative expenses for 2005 total $55.8 million, which was relatively consistent with 2004. 2000 (sic--see press release) results also included approximately $21.4 million of costs associated with the polyolefin asset impairment charge recorded in Q2 of 2005.

Research and development expenses for 2005 were $20 million as compared to $20.5 million last year. Research and development spending rate was 5.7% of sales in 2005 compared to 5.6% in 2004.

Other income and expense, which includes income from our joint ventures and royalties less other expenses, amounted to $6.1 million in 2005 compared to $12.2 million last year. The decrease is due to a $1 million decrease in royalties associated with the multiple composites business divested in 2002 as the underlying license agreement winds down; the inclusion of $2.2 million in 2004 for the gain on sale of an idle property; and lower full-year joint venture income due to the startup costs incurred with the new China foam joint venture in the beginning of the year.

Rogers 50%-owned joint ventures had record sales for the quarter and the full year and significantly contributed to Rogers profits. Fourth-quarter sales were $28.8 million, up 16% over 2004, and for all of 2005, revenues increased 15.8% to $98.7 million. Cellular handset and consumer products were key drivers of joint venture sales in the fourth quarter. In addition, joint venture equity income for the quarter was up sequentially and year-over-year due to increased sales volume and the continued ramp-up and learning curve achieved at our new China foam joint venture.

Excluding the effect of the second-quarter polyolefin impairment charge, we achieved a 2005 effective tax rate of 13%, reflecting the benefits being realized with increased business in lower tax jurisdictions such as China, and the onetime positive adjustments recorded in the third quarter of 2005 associated with the completion and resolution of issues associated with previous federal tax filings. Many of the benefits of the low tax rate are expected to continue in 2006, with our current annual predicted tax rate for 2006 at 22%.

As noted in our press release, the Company is currently in discussions with the SEC regarding the treatment of a $5 million, or $0.29 per share positive tax adjustment taken in 2004 and reported and explained in the Company's 2004 Form 10-K and March 3, 2005 press release, and the net tax charge of $0.8 million, or $0.04 per share recorded in 2005, both related to adjustments to certain deferred income tax accounts for temporary differences that most likely accumulated over many years.

The ultimate resolution of the matter with the SEC could result in the restatement of 2004 and 2005 results. These items are identified and explained in the reconciliation of 2005 non-GAAP earnings per share in the press release.

Turning to our financial performance, Rogers continued to enjoy a strong cash position, with our cash and short-term investments balance at the end of the fourth quarter totaling $46.4 million versus $40 million at the end of 2004.

Capital expenditures were $28.6 million in 2005 compared to $28.1 million last year. Ongoing capital expenditures, projected to be 30 to $35 million in 2006, are expected to be funded from long-term operating cash flows.

Also of significance, the Company repurchased $3.6 million of shares in Q4 and $15.9 million of shares for the total year. We have authorization to purchase $21.4 million in additional shares and will do so as appropriate, based on business conditions in 2006.

Our balance sheet remains strong. We continue to have no debt and our current assets exceed current liabilities by three times. Inventory levels ended the year at $43.5 million compared to $49.1 million at the end of 2004. Accounts receivable ended with 57.6 days outstanding compared to 58.7 at the end of 2004.

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

Thank you, Dennis. And at this point, we will be happy to answer any questions.

(OPERATOR INSTRUCTIONS). Your first question comes from Jiwon Lee with Sidoti & Company.

Good morning, gentlemen. Okay, I guess the first question is you preannounced back in January 9th, and I am wondering what caused this preliminary result to be so materially different than what you [saw] back in January 9?

Sure. By its very nature, when you preannounce with only sales information, it is prudent to be conservative. That being said, the major thing that occurred was we found a double counting of expense in our European subsidiaries of $600,000 during the closing process. That, of course, would have added $0.03 per share.

Then the rest of it is $100,000 here, $50,000 there. As most of you know, during the closing process we are now required to review every single accrual count within the Company and reestimate the appropriate level of those accruals, and therefore either pick up or record additional expense. In this case, most of them went to the positive side.

Okay. And the next question is on your SEC review, this has been going on for I guess almost four years. I guess my question is why for so long and what is going to take for Rogers to kind of put this behind?

Well, to give you an example of why so long, I believe we answered in February or March, but we did not hear anything again until the 31st of December. And the way this process apparently ends, since we have never had this experience before, is when they stop sending us things. So we thought it was over.

Okay. So it was recently resurrected, [if I will].

Well, there seems to be a continuing discussion about reporting segments, as this has become the new point of emphasis. And one of their initial questions was, what were all of our business units and what were their P&Ls. When we supplied 10 operating units, the first question is, why don't you have 10 reporting segments, and please justify why you should be allowed to aggregate any. That's how the process begins. We have some strong beliefs, but in the end, we will compromise.

And by the time the K comes out, do you think this is going to be put into bed?

I would hope so, but we don't control that.

Okay. And next, a little more on operations. It does seem like you're sort of resolving a lot of issues associated with (indiscernible) and whatnot. But I guess I'm going to focus more on your flex circuit materials. I'm sort of encouraged to find that you're kind of getting back into the cell phone programs.

And provided that most of your cell phone programs, you're probably not an exclusive supplier anymore, but how do you see visibility going forward?

In the whole wireless communication handheld device area, I am not sure that any major program across the board that we are in a sole source position, which actually is a very good thing. And overall, across all of our business units that deal in that particular marketplace, we have a wide variety of applications and design-ins much broader than we have had in the past, which should add some more stability versus some of the historical things where we would be sole source on one huge program and would suffer the consequences when it came end of life.

As I have mentioned before, we have worked very hard to mitigate those kinds of spikes by either utilizing joint ventures or utilizing outside contractors to make excess parts for us.

It looks like -- finally -- you are adding a number of different capacity in China. Did I hear you correctly saying that you will be adding EL lamps, busbars and Porons? Was there something else that I missed?

Flow capacity, also.

Right. I see.

In all cases, this is mostly incremental increases for the polyurethane, the Poron polyurethane, that will be the second machine, as our joint venture. as a machine operating in one of our buildings. And we will be putting a new building up right next to it, actually connected, and we will be putting a Poron machine in there and will be expanding busbars.

Earlier, last year, we purchased 18 acres next door, and with that came 170,000 square foot building and another 30,000 square foot building. And we would expect to expand the EL lamp production inside of that building, and of course the floats, we will just be adding incremental capacity there.

I think if my understanding is correct, you have like 12 lines each in Arizona and China for EL lamps.

That's correct.

Especially with all these expansions going on, how far along are you in terms of sort of your kind of a best utilization yield, if I may, for EL lamps?

The yields have improved considerably, to the point at which consider them acceptable, not outstanding. And so there is room for improvement there. And we are well within the range of capacity utilization that makes us comfortable so that we are capable of dealing with spikes. But as you know, we also have an outside contractor who is making lamps for us also and could add significantly to our capacity if we need it.

Final question, inverters this is something you want to sell more. How strong were the inverters sales during the quarter.

We really can't talk in that kind of detail. That is one of the -- I can explain -- that is one of the issues. If I talk about that, that has the potential to become a reporting segment.

Okay. Fair enough. Thank you very much. I will jump back to the queue.

Dana Walker with Kalmar Investments.

I hope if we were to ask what might be for lunch this afternoon that it might not prompt a similar SEC requirement.

Yes, Dana. I would hope so, but you don't know.

Good morning. Dennis, welcome aboard.

Thank you very much. Good morning.

When the gross margin now works its way back to the former respectable levels, undoubtedly you folks feel better about that, as do we. Can you talk about to what degree you believe that that is a sustainable level at this volume rate, or did you have pluses and minuses in the quarter that are worth talking about?

We believe that is very sustainable and that there is actually room for improvement. In fact, you see that in the first quarter forecast, as we have considerable additional expense in the first quarter, namely the $800,000 of long-term compensation expense. And we also will be recording funds for anticipated bonuses, which did not occur in 2005.

Implicit here in that forecast of $0.60 to $0.64 is an increased gross margin and also an increased tax rate, as we were 13% before and we are planning on 22.

In Q1, when we talk about the stock comp and we talk about incentive comp, where will stock comp fall in your operating expenses, and same question for incentive comp? I presume incentive comp is in SG&A.

Yes. This is Paul Middleton, the Corporate Controller. It will fall parallel to how our bonus expense is as reported, which for that portion attributed to people in manufacturing, it would fall in the manufacturing margins. But a larger portion of it will fall in the SG&A line.

Bob, if you describe how gross margin has opportunity to rise, even at these same volume levels, can you describe why that is the case? What will likely be working more smoothly or what mix will be better in the early part of '06 compared to '05?

[I'll] give you one example, our RIS joint venture in China. I mentioned it was operating 7 days a week, 24 hours a day in December, but that was not the case in the full quarter. I expect that to be the case during the whole first quarter.

Other things that are going on is in the float area, we are making significant improvements in that operation, and we are continuing to have improvements in EL lamps (indiscernible). Those, I believe, will be the major things, along with some improvement in busbars as we add volume into the China manufacturing operation.

Is the $800,000 in stock comp a ratable level per quarter foreseen in '06?

Yes.

Is the right way to think about that at a U.S. tax rate or should one apply the corporate tax rate to think about that figure?

It's a complicated question because of the other benefits you get associated with that, but I think that is the fairest, to use the U.S. tax rate.

U.S. tax rate being more similar to a mid-30s type number?

Yes.

Most of that expense occurs in Europe and the U.S. The tax rate is similar in the U.S.

If you would have applied a stock comp figure to '05, how would that number look compared to the $800,000 pretax that you're seeing in '06?

Again, a difficult question. As you are aware, we had made some changes last year in the open options that we had, as many companies have, in anticipation of the change in accounting principle. But I think this I will grow over time. Because of those options that we changed last year, this is a number that will grow over the next few years to -- could be, dependent on a number of variables, but could be up to as much as 1 million a quarter.

Or more. It could even be more than that.

But again, that is up to the Board of Directors and the compensation committee.

I wish we had more control, but we don't.

There is more verbiage than we are used to seeing in your press releases on the circuit material front. Can you talk about what type of visibility you have, how broad the customer indications happen to be, and how that percolates down towards your ability to plan production runs that will maximize yield and effectiveness?

On the flex side, we are selling almost exclusively from stock now, as the customers' visibility is typically two days. So we plan and build to stock and anticipate dealing with the ups and downs by utilizing the inventory. And we have the inventory in place, both in Singapore and China, where the majority of our sales are.

On the high frequency side, things are relatively calm. There are not much in the way of spikes, and therefore, business was running along pretty smoothly. As you know, our lead times have three to five days, so we have very little visibility beyond two weeks. That's just the nature of the world today.

Final couple of questions, which I will rattle off and then sit back. Can you talk in broad terms -- hoping that this is not an SEC problem -- about what you foresee for your product families in '06 in a sales and/or a mix progress standpoint? And as well, you have mentioned MP3 players as one of the phenomena that is helping your Poron business. Maybe you would elaborate on what you see there.

Sure. In the MP3 player area, we actually have applications utilizing EL lamps, inverters and Poron, and is, as you know, a rapidly growing area. We foresee that to continue to be significant, maybe even more significant for our joint venture than for us.

What type of penetration do have in that field, though? Are you working with most of the vendors?

No, I would say we have a lot of room for increased penetration. It's already significant, but we could go a lot further on the penetration side.

Are you in a position to say who you're working with and who you're not?

No. Unfortunately, our customers don't like their names to be used.

Okay. And the product family question?

Can you repeat that, Dana? That was more complicated than I could handle.

I will keep it darn simple. Can you talk in broad terms about what you expect from your product families, sales progress and mix wise, in '06 versus '05?

No, not really. That is one of the things that we in the future probably be limited to only talking about reporting segments earning sales.

And the reporting segments are Circuit -- the three that we have had in the past?

No, no. We don't believe that will be the case. We don't know what they will be, as that is the discussion.

So can we have a conversation about reporting segments as they once stood or is that verboten?

We can't do that.

Because you don't know what they're going to (multiple speakers).

(indiscernible) and therefore we are in limbo with no reporting segments. We would expect to solve this by the time we report in the 10-K.

Very well. I will step back and rethink how to approach this.

(OPERATOR INSTRUCTIONS). Mike Judd with Greenwich Consultants.

Good morning and congratulations on a great quarter. Just taking a step back, I hate to bore everybody with this, but you have given us the SG&A and R&D for the year, and based on the information that you have given us, I think that we could calculate the operating income is around $12.2 million. Is that right for the fourth quarter?

I mean, we have got the gross profit, right? Because you have given us the percentage and you have given us the revenue. So we have the SG&A and R&D; I assume Other is nothing.

Pretty close. Pretty close.

Great. So interest expense, I would imagine that probably didn't change much. So my question (multiple speakers) really -- pardon me? Interest income -- sorry. So then basically, my question is in order to get to the $0.61, I have to use approximately a 33% tax rate. Is that right?

We are projecting a 22% tax rate.

Right. But I am saying for the fourth quarter, for the $0.61, which is the clean number. And we know that the clean operating income number is around 12. Then it implies a 33% tax rate. Is that right?

In the non-GAAP number, I calculated that we would be at about a 20% tax rate.

I guess we could talk about this afterwards, but the math is the math, basically. I mean, you could work it from the bottom down and the top -- whatever, so.

And then just secondly, with EL, do you have enough capacity right now to satisfy all the demand?

Yes.

Okay. And do you anticipate that that will be the case for some time?

Yes.

And then you mentioned here about the ongoing global rollout of next-generation cellular phone services. Could you give us some sense of what impact the Beijing Olympics or 2008 -- do you really expect a big ramp-up in China during that time period in terms of 3G? How do you see the market developing over the next year or two?

That is the wild card. When does it begin in China. There is -- there seems to be little question that it will begin, and everything you read says it will be huge. The question is when. I have no better information than anyone else as to when it starts, although we believe and everything I read says sometime this year things will begin.

Thank you very much.

That's the key -- it has to begin, because we're designed in almost to everyone's system in one way or another.

[Mark Keeler] with Paradigm Capital Management.

Good morning, everyone. Bob, I had just a quick question in the EL product line. The Korean contract manufacturer that you have working for you, how much excess capacity do have there?

They have about a third of our capacity.

And then relative to the Korean marketplace, are you trialing or qualifying any of the EL [keypad] product with any of the Korean handset manufacturers?

Our contract manufacturer is working with various potential customers in Korea.

And could you just give us an estimate of the timeline of when they might go to trial or qualification runs? Is that later '06?

I can talk about cell phones in general. In general, designs are finished toward the end of the second quarter, beginning of the first. Introductions generally begin in the end of the third quarter through the middle of the fourth quarter, depending upon if they meet their design time window or they're late.

And then second quarter, generally, if you look at cell phones, that is the lowest quarter for manufacturing, as they are reaching -- most products that are going to reach end of life reach end of life in the second quarter and they sell out of inventory.

That's great. Thanks, Bob.

(OPERATOR INSTRUCTIONS). Your next question comes from Shawn Severson with Raymond James.

Bob, could you kind of touch on how you would expect the seasonality to play out? I mean just how tough of a comp is the fourth quarter going to be, given what has happened in EL and the push that that business has had over the recent quarter or so?

I mean, do you think as we get through the year, there is going to be plenty on top of that to keep growth in EL throughout the year on a year-over-year basis?

Let's talk in general about things that are going on here. The first quarter in the wireless area generally is an okay quarter. It is generally not quite as good as the fourth because there is lots of activity until the Chinese New Year, and then there is the lull. You all remember they don't work for a whole week. That is most of Asia. And then in the second quarter, things typically have the lull.

But also during the first quarter, the whole transportation area generally is strong and then begins this decrease from the first to the second to the third to the fourth. So those two things tend to balance each other a little bit, except in our case, the handheld devices are about 30% of our sales and the transportation area is about 10 or 11% of our sales.

But in total, as we said in the first quarter, we think we will have a balance of activities here that will keep us right in the same range. It we would be hard pressed to think that we would do better in the second. You never know, but it would take a special event for the second quarter sales to grow from the first.

And as you get through, though, into the fourth quarter, I guess a lot of this comes down to EL and maybe the strength there. Do you think EL will be up year-over-year in the fourth quarter -- the (indiscernible) business?

I think that as long as the world economy continues to go well here, that we have a reasonable chance of exceeding Q4 2005 for 2006. It's just so far away that who really knows. We have to wait until we see what happens with the Chinese rollout, if it actually occurs and when it occurs, for the infrastructure. What do they do about buying locomotives, how fast? There is just a lot of moving parts that make it really hard to look so far ahead.

And what about on raw material costs -- I mean, copper and the different -- any energy costs and things that you have been dealing with. I mean, is there anything as far your putting through ASP increases or you're seeing ASP increases in your input costs. Can you new address that -- kind of say your outlook for the year?

We have seen increases in transportation, in copper and in raw materials that are based on oil and gas, and for the most part, we have passed those increases along. Especially on the copper side, the whole world knows, as do all of our customers, what is going on with copper, and we are able to move those things right through the system. But generally, we are not able to get much, if any, of a margin on that.

And you don't foresee that being any incremental problems throughout this year, as far as --?

No, no.

I mean you have enough pricing power right now if something does happen, it's not going to be an issue.

Yes, and we are not alone here. So it's not like we're the Lone Ranger out there passing this along. Some people have been much more aggressive than us, so everyone expects it by the time we get there.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. Management, are there any closing remarks?

I want to thank all of you for calling in today, and I look forward to talking to some of you in the near future down in Florida, hopefully, and hope you all have a good day. Goodbye.

This concludes today's Rogers Corporation fourth quarter earnings conference call. You may now disconnect.