Rogers Corp (ROG) 2006 Q2 法說會逐字稿

Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation second-quarter earnings conference call. All lines had been placed on mute to prevent any background noise. After the speakers' remarks there that will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Wachob, you may begin your conference.

Good morning, ladies and gentlemen. With me at Rogers this morning are Dennis Loughran, Chief Financial Officer and Vice President of Finance, Paul Middleton, Corporate Controller, and Ed Joyce, Investor Relations Manager. Thank you for joining us. 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 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 statement. I will now turn it back over to Bob.

Thanks, Dennis. It is a pleasure to be able to report record sales and earnings for the third consecutive quarter. As you saw in the press release, sales were up 24% quarter-over-quarter and profit after tax was 12.4% of sales. This performance reflects our final results except for the determination of the impairment charges, as mentioned in the press release.

As soon at the complicated process of determining the extent of any asset impairment is complete, we will be able to report final GAAP earnings. Unfortunately making this determination requires independent appraisers and auditors to complete a lengthy process and then all parties must come to a common conclusion.

We continued to benefit from the organizational changes, the capacity additions, the new factories in Asia, and the other strategic initiatives we have invested in over the last 24 months. Fortunately we still have room for improvement in our operations, especially as volume expands. The process of bringing our Other Polymer Products reporting segment to a profitable state is continuing. Be assured we will not stop until we have achieved this goal.

We expect to continue to add resources in the coming quarters to our new business development efforts as we expand that to the in our three strategic business segments. By having more people investigating and validating new business opportunities, we expect to sustain and hopefully increase our growth rate over time. Last quarter we said and we still believe that we have ample capacity in all our key businesses, affording us operating leverage as we continue to achieve sales growth.

Currently we see excessive cellphone inventory being worked off during the third quarter with demand for certain products accelerating in Q4 and on into 2007. Consequently we will further expand EL lamp capacity in China in Q4 and again in 2007. Additionally, we are negotiating a significant increase in inverter supply as new programs with the five largest cellphone manufacturers taking effect in early Q4.

As we said in the news release, we expect a strong third quarter and believe 2006 will be a breakout year with Rogers and our joint venture setting new all-time sales and earnings records, even including any impairment charges. I now turn it over to Dennis for a closer look at the financial details of the quarter and then we will be happy to answer any of your questions.

Thank you, Bob, and good morning again to everybody. I'd like to start by echoing Bob's comments that we continue to set performance records and show reliable strength in our key segments that portends a continued strong annual performance. Indicative of this was our net sales, which for the second quarter set a record, reaching $104.8 million, up 24% compared to the $84.6 million sold in the second quarter of 2005 and up 1.6% sequentially over a very strong first quarter of this year.

As indicated in the press release, our non-GAAP second-quarter earnings were $0.75 per diluted share excluding a probable non-cash charge involving the impairment of certain assets in the Other Polymer Products reporting segment, as previously announced on June 29 of this year. This compares to non-GAAP earnings of $0.27 cents per diluted share in the second quarter of 2005. Non-GAAP net income for the quarter was $13 million, which includes $1.1 million of expense to comply with the new equity-based compensation rules implemented last quarter.

They were obviously no equity-based compensation charges booked in the second quarter 2005 and only a partial quarter for the first quarter of 2006 at $0.5 million. We expect the $1.1 million level to impact each of the remaining quarters of this year and that estimate is included in our third-quarter guidance. The non-GAAP diluted EPS figure of $0.75 per share for the quarter exceeded the high end of our guidance of $0.69 to $0.72 per share as sales came in slightly stronger than anticipated. The result almost tripled our second-quarter 2005 non-GAAP earnings of $0.27 per share.

We do not have final profit numbers by segment at this time, but they will be included in our forthcoming 10-Q filing. As this is only the second time that we are reporting using our four business segments, I would like to explain them in a little more detail than what then was in our press release.

Our reporting segments include Printed Circuit Materials, which includes our flexible and high frequency circuit material products; Custom Electrical Components, comprised of our electroluminescent lamps, inverters and power distribution components; High Performance Foams, which contains our polyurethane and silicone phones; and lastly our Polymer Products, Other Polymer Products, which has our elastomer rollers, floats, polyolefin foams, nonwoven materials, and our flexible polyester-based laminates for electrical shielding.

While the segment numbers are not final, we do know that the strong operating results in the second quarter stem primarily from strong sales levels in our three strategic segments, led by Custom Electrical Components at 72.2% higher than the previous year, as well as significant operating performance improvement in Other Polymer Products based on last year's restructuring effort, and the continued improved contribution of our China operations with improved utilization and production yields, all of which we expect to carry through 2006.

Taking a closer look at our market performance, sales of Rogers Custom Electrical Components sold into the portable communications device market and High Performance Foams with strength across all of its markets were key drivers of the year-over-year volume growth in the second quarter. The majority of our volume improvement for the quarter relates to increased market share as our products gain increased acceptance for quality and performance. Second-quarter gross margin was 32.4% versus 28.8% for the second quarter of 2005, an excellent performance compared to historical levels.

In addition, we were able to achieve a non-GAAP profit after tax of 12.4% of sales representing the third-best by only a few basis points performance on record. Quarter-to-quarter we are operating at a level where our margins can be expected to remain strong although variable due to unit sales mix and quarterly production levels.

Selling and administrative expenses for the second quarter totaled $14.2 million versus $15.1 million in the second quarter of 2005. The change reflects higher incentive compensation, including the full quarter of expense recorded associated with the Company's adoption of the new equity-based incentive compensation accounting rules, offset by a favorable swing in the impact of service costs, depreciation, reserve accruals, and other charges.

Research and development expenses for the second quarter were $6 million compared to $5.2 million for the second quarter of last year. The spending rate was 5.7%, slightly less than the 6.1% for last year. Other income and expense, which includes income from our joint ventures and royalties less other expenses, amounted to $2.6 million in the second quarter compared to breakeven levels in last year's second quarter. The change is due to significantly higher joint venture income and lower other expenses, partially offset by lower royalty income.

Rogers' 50% owned joint ventures had record second-quarterly sales totaling $25.2 million, up 19% from the second quarter of 2005. Sequentially sales were down slightly as efficiency of the new equipment and the foam joint venture in China increased sufficiently in the first quarter of this year to fill orders accumulated during its start-up.

Leading the year-over-year increase in joint venture sales was Rogers Chang Chun Technology flexible circuit materials as well as the company's high-performance foam joint venture with INOAC Corporation. All of these joint ventures had strong sales into the consumer electronics and portable communications markets.

We achieved a non-GAAP second-quarter effective tax rate excluding any impairment charge of 23%, which is slightly higher than the first quarter, reflecting the impact of projected increased annual earnings. Turning to our financial position, Rogers continued to enjoy a strong cash position with our cash and short-term investments balance at the end of the second quarter at $79.1 million, up from the first-quarter total of $65.2 million. The increase was driven primarily by earnings plus depreciation and partially offset by a net working capital increases.

Capital expenditures were $3.3 million for the quarter. While the first-half capital spending lags behind our annualized projection pace, we continue to expect our annual expenditures for capital to be approximately $30 million to $35 million in 2006, with significant expansion projects slated for the second half of 2006.

The company did not repurchase any shares during the quarter, however we continue with the authorization to repurchase up to $21.4 million in additional shares and expect to repurchase shares as appropriate based on conditions in 2006. It may sound repetitive but our balance sheet does remain very strong with working capital management a high priority. We continue to have no debt and our current assets reached a level of 3.4 times current liabilities.

Inventory levels ended the quarter at $54.8 million, up slightly compared to the $53 million at the end of the first quarter. This increase relates primarily to valuation increases due to raw material price increases. Accounts receivable ended with 61.7 days outstanding compared to 57.6 days at the end of the first quarter, with our domestic collection days down 3 but Europe and Asia up somewhat, which we are countering with increased focus in those geographies.

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

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

(OPERATOR INSTRUCTIONS) Shawn Severson with Raymond James.

Good morning, gentlemen. Did I hear you correct? Was SG&A down in the quarter? I think I missed that.

We reported down against last year's second quarter and I believe we were also down against the first quarter for pretty much the same analytical reasons, Shawn.

Which was what again?

Well, we obviously had the increase in SG&A related to the compensation. When we looked at our reserve valuation, service costs and this kind of things, we did absolutely have a decline in those related to those two comparative periods.

Okay. I just wanted to clarify. Did you say you have inverters and lamps on the big five handset manufacturers coming at the end of the year, Bob?

We said inverters.

Inverters, okay. And what about on the lamp side?

We still don't have much in the way of lamps in Korea but are having significant success everywhere else.

Okay. Have you made any -- out of the five have you made any big what we would call I guess marketshare gains this year with the inverter business? Is that fair to say?

Yes, that is fair to say.

Okay, thank you.

Jiwon Lee, Sidoti & Co.

Good morning. Just a few questions. Now the SG&A line, I wasn't quite clear what Dennis explained. What was the dollar figure that you gave on SG&A for the second quarter?

$14.2 million, I believe.

Okay, that is what I thought I heard, but last year wasn't your SG&A line over $15 million the same period?

Yes, $15.1 million. I believe -- I mentioned to Shawn each quarter we do have as a part of SG&A reserves and accrual valuations that are periodic assessments against liabilities. When we looked at period-to-period for both last year and this year, the impact of those adjustments was favorable and more than enough favorable to offset the increase in incentive compensation.

Okay, so stay with me on SG&A Line and your operating expenses for a minute. Over the last I guess four to five quarters, your operating expenses were above 22 to 21%. I guess the third quarter about 20%. How should analysts like us look at this going forward on a normalized basis?

Well, our long-term goal is to get SG&A at 14% and R&D at 6. Currently we are a little below on R&D at 5.7, I believe. I think this quarter is something like 13.8 on the SG&A. But I don't expect to hold at 13.8. It should go back up.

To give you an example of things that happened this quarter, we had a significant overbilling on our workmen's comp insurance, which we eventually resolved that this quarter and managed to reverse that expense. That was a $400,000 expense.

Bob, as you have to this number of CapEx projects planned -- as much as $15 million was approved -- that SG&A line, did you think you could keep that 14% level?

Yes, going forward maybe not next quarter but in the long run we expect SG&A at 14%. Of course it has a lot to do with sales. If we are able to continue to grow sales quickly, then holding SG&A as a percentage of sales becomes easier.

Fair enough. The sequential gross margin decline, any more color that anybody could provide on this please?

Well, it is several things. One is that we had significant growth in the Custom Electrical Components area and that area carries lower gross margins than either High Performance Foams or Printed Circuit Materials. In addition, we have been instituting price increases. Those price increases only reflect our cost increase. That results in higher sales but no increase in margin dollars and therefore some percentage decreases in the margin.

The most significant was mentioned in my comments in terms of the absorption impact in our circuit materials business. Their production levels were down slightly from anticipated. They actually showed a decline in inventory value, which for the quarter we would have preferred that they produce a little more.

So we expect very good to excellent margins at the rates and the mix we are selling at now. That rate even for the second quarter was higher than most any other quarter we have achieved, so we think it is a pretty excellent result also.

Okay. And any more color on your CapEx projects? Obviously the CapEx spending was a little light in the quarter, but you were still projecting the level that you earlier gave us. So any more color on that?

We've looked through it and our assessment as recently as the last month's assessment of capital just has the timing of the expenditures very late this year. Many of the projects have long leadtime on equipment acquisitions, so purchase orders are in and whether it pushes from late fourth quarter to early first quarter we can't tell you at this point. But the timing of these bills being paid for a majority of that capital, about 50% of it, is strategic growth, major equipment acquisitions with the very long leadtimes.

Additionally, for the buildings, which we have one major one under construction, we do not really pay most of the money until we accept it. So it comes in large chunks both for the machinery and for the buildings.

Okay, great. Finally with this potential charge that you will be announcing soon, does that sort of mean that you guys are essentially exiting in the flex business?

No, it means the very strict new accounting rules that require that periodically we assess the future prospect of all our businesses and then compare those prospects with the assets and see if there is any indication of impairment. If there is, then we have to go hire appraisers. They have to go do their work. They do estimates and then the public accounting firms take a look at it. Then they all have to get together and make a decision.

Okay, fair enough. Thank you very much.

[Mike Marianacci], [Ravinoth Capital]

I didn't catch the actual accounts receivable balance that -- if you gave it?

We didn't give it, but I can certainly pull up my statements. Paul Can --

$76 million.

Roughly $76 million.

76, okay. That is all I needed. Thanks a lot.

(OPERATOR INSTRUCTIONS) Dana Walker, Kalmar Investments.

Good morning. The secondary operation that you would expect to retain for Q3 is that in inverters or is that in a different business?

No, this is -- currently with one at our large customers we sell the lamp to someone who then puts the domes on them. What the end customer wants us to do it is that we put the domes on the lamps and then sell the lamps with the domes on them. We don't really want to do that operation and so we are contracting that out. Of course there is very little margin associated with that.

That will add a couple of million dollars to sales during the next quarter, but there will be no margin associated with that. The benefit to us is this solidifies our position with this particular major customer, locks us in, makes it more difficult for the competition. That causes us to get increased market share and as sales increase we make more money on lamps.

Would you expect to play that role indefinitely?

I think so, yes.

Okay. If we were to look at the second half versus the first half, it would appear that based on your EPS guidance that -- can one presume that you are expecting gross margin to factor back higher again?

Yes.

Looking at the different segments, how would you expect the segments to progress, let's say Q3 versus Q2?

I would say the Printed Circuit Materials will do better. The others will be pretty similar.

Same question, Q4.

Q4 our custom electronic components will take a big step forward. High Performance Foams will have a strong, we believe, and so will Printed Circuit Materials. Expect all three strategic areas to be strong.

Do you see a building of momentum in your Printed Circuit Materials business? If so, why?

The major thing we have seen is that cellphone infrastructure buildout in places where there previously wasn't much business like northern part of Africa and in India. At this point we talked previously that the wild card is China and when they do 3G I don't think that wild card happens this year. We are also expecting traditional improvement in the fourth quarter in the Printed Circuit Materials area associated with handsets.

How would you describe, though, your program activity levels and whether that ought to lead to higher levels of activity in '07 versus 06 in flex?

That is a hard one to tell. You remember we talked about the second quarter that our joint venture, RCCT, having an extremely strong quarter compared with last year. That's a result of their customers being awarded flex circuit contracts versus ours. So it depends on the individual programs who it goes to. We don't really have any control over that, of course. The good news is it either goes to us or it's going to our joint venture. Of course we make a little more money when it comes to us, obviously.

Are you in a position to comment on the amount of inverter activity you are working on prospectively and how that compares to the present amount of inverter activity that you have?

I really can't comment on that detail.

Are the economics of what you are looking at, though, favorable? How might they compare to your present economics?

The inverters of course are something that we buy and we have someone else package them. So the margins are relatively constant with volume.

Okay, thank you very much.

Shawn Severson, Raymond James.

Can you give a little more color on maybe the number of programs you are on this year and across how many OEMs? I know in the past you have been fairly concentrated in that business. I am just wondering how diversified you are this time as we go into the stronger selling season here.

We are we continuing to be more diversified both in the lamp area and in the inverter area. It's both across manufacturers and across programs. The key here is it's -- one program is not driving all of this. That is an important for stability. The things we see going forward are that if we look at last year we think about 5% of the cellphones had EL backlit keypads. This year we think about 10% will. Next year could be 15 to 20%. We don't have 100% marketshare but we believe it exceeds 50%

I was actually referring to the flexible circuit business.

Based upon some of the programs, we think that business will strengthen.

Is that more diversified this year too? I know you had --

Oh, absolutely, absolutely. Because the big year of 2004 it was the triplets that drove the whole thing. That caused us a few problems in 2005, but we are much more diversified now.

Both in terms of OEMs and programs?

Mostly in terms of programs.

All right, thank you.

Rick Lane, Broadview.

Good morning. Bob, a couple of things. I guess one, are there any major swing factors still to come from the relocations of the various businesses in China in terms of profitability?

Well, in the Other Polymer Products area we expect the elastomer and the float business to continue to make improvements. Of course we are adding capacity for EL lamps. That will be about a 20% in the fourth quarter. We will add about 20% to our capacity. Then in 2007 we will have to see, but it could be as much as a 50% increase. Of course we are more profitable in China than we are in the United States.

Has the elastomer and the float business reached what you think is a reasonable level of profitability or is there still more to come there?

There is more to come there.

Okay. Do you feel at this point that most of the businesses you want to move to China, that's largely happened now?

No, I don't think so. I think there will be a point at which we place high frequency circuit material capacity there and probably place some flex laminate material capacity there also. It is our belief that all the major businesses will eventually have factories in China. As we are approaching 50% of our sales in that part of the world, not just China, eventually we need to be making about that much in that general area.

Contemplating moving some of the flex manufacturing to China, does that -- would I take it that you feel better about that business longer-term such that you'd make that investment?

Yes.

Has anything changed there two cause that --

It's a machine-driven business. As you get to the right volumes, it becomes very profitable. Being close to our customers since the majority, almost 75% of our flex laminate are sold into China, it only make sense to make it there. You can respond much better, which we are pretty sure that eventually will lead to increased market share.

Additively, however we feel about the business, moving it there will improve its margin. I mean, the supply chain will go down. Conversion cost will go down --

Inventories will go down.

Exactly. So there's a lot of economics behind just the basic business principle of sales there.

We would accomplish that by building a new machine. We would not try and pick anything up and move it.

Yes, okay. Would you guess that would likely be in the '07 type of timeframe?

I don't think we could have that finished in '07.

(multiple speakers) -- started on it?

In all likelihood, yes.

Okay.

Something to keep in mind is a building over there takes about 15 months.

I take it that you have room in your current -- in Suzhou to accommodate that?

We have sufficient land, but it would entail a new building.

Okay. Just do you have an eyeball on what that would likely cost you?

$10 million to $15 million.

Okay. Your PORON business has -- I guess BISCO as well, both those businesses the profitability had been somewhat obscured by the polyolefin business these past few years. Now that it has been kind of unleashed there and you've got much stronger volumes there -- and I understand the incremental margins are pretty substantial -- are we at a level of profitability in the PORON and BISCO business ex the polyolefin that it's kind of sustainable, do you think?

How do you look at that? Because it's been such an incredible increase in margin, although again somewhat obscured by the losses on polyolefin.

We believe those margins are sustainable and we believe that the joint venture that has the facilities both in Japan and in China has room to improve their profitability as they more fully utilize the China-based machine.

So you have got plenty of capacity there, I take it. What about here in the U.S.?

Of course we are in the process of building a building and we have ordered a new PORON machine and expect to have that operational during the fourth quarter of 2007 in China.

Okay. And that will expand your capacity how much there?

That would be our third machine so it would be about a 50% increase in capacity.

Okay. What about capacity here in the U.S.?

We are somewhere around 90%, 92% of capacity in a six-day week. We are no longer working Sundays because we've improved the operation. It's not because the sales are down. It's just we have made operational improvements and so we have gotten away from Sundays.

Would you be approaching the point where you would need to expand that capacity?

No, we don't anticipate any capacity expansions in the U.S. Remember that about half our sales are over in Asia and almost the vast majority of that is currently made in the U.S. and in Europe.

Yes.

So what we will be doing when we add capacity is we will take it away from - -some of it away from U.S. facilities, which will allow them to grow in the U.S. then.

Okay. Then the last thing was the tax rate crept up a little bit. Do you have a feel currently for what you think a more sustainable tax rate looks like?

Well, the tax rate that we implemented in the quarter is the annualized estimate for the year excluding the discrete event of the impairment. So our view of 2006 as 23, as we look at our view of the year with earnings growth in some of the higher tax rate jurisdictions, that is where it ends up. We believe that is an accurate number to use for the year.

Okay. Given the mix and the changes in mixes in your business geographically, what would be an early -- should that meaningfully change in '07 versus 06 or do you think that is a reasonable proxy?

We believe that is a reasonable proxy. It's hard to tell where the mix of the tax rate averages will come, but as we were looking at our one- to two-year tax rate 22, 23% was it. I think you could use 23 at the proxy.

Okay, fair enough. Thank you and it certainly is a pleasure to see Rogers humming again. So congratulations.

Thank you.

Thank you.

[Dan Malcolm], Moore Capital.

I was just wondering just in terms of the EL lamp business, what do you think your share of the overall market is this year. What do you expect you share to be next year? You may have said it earlier. I apologize.

We think we have at least a 50% market share.

And you expect that to stay consistent as you go through the year? So looking at these -- the new, the ramps that are coming online at the end of this year and into 2007, do you expect to capture similar share or higher?

Actually we think our share may grow a little.

On the inverter side, what do you think your share is there? It sounds like you are potentially taking some share in year. What do you think the reasons are when you go out on the inverter side? Why are you planning and where?

We have almost all the business for the cellphone manufacturers headquartered in Europe and in Korea. We are now gaining share for those people headquartered in the U.S. as they had previously been sole-sourced. Of course sole-sourcing is not a procurement thing that they want to continue.

I see. So it is primarily coming on as a second source?

Except second source doesn't work quite that way. You win programs.

Right, (multiple speakers) so you are sole source for a single platform or a single model but you are second source in terms of the overall customer?

In that one case, yes.

Okay. If you look out, it seems like there is a lot of the new slim-form factor models on the handset industry that are hitting the market at the end of the third quarter. It sounds like you are talking about your business kind of flattish this quarter. What is the reason for the ramp up not happening until fourth quarter of the year on EL side?

Some of the guys built really big inventories in Q2. So our sales benefited from an inventory build in Q2 and we will pay that price in Q3 but it is obvious that our marketshare must be increasing significantly since we are (technical difficulty)

Okay, so that includes for some of the new programs. So you actually benefited in the second quarter for new programs that are coming online in the third quarter?

Or some existing programs where they got a little carried away with their forecast.

Okay, fair enough. Thanks so much.

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

Yes, thank you. I would like to leave you with one last thought. Over the last two years we have significantly improved the Company's future prospects. We have invested heavily in new business development efforts, expanded capacity in key growing markets, restructured our polymer products reporting segment, and added new organizational talent throughout the Company.

We are beginning to see the anticipated benefit both in terms of sales and margin growth and it remains our goal to continue delivering increasing sales and earnings. Thank you and good day.

This concludes today's conference. You may now disconnect.