Rogers Corp (ROG) 2006 Q3 法說會逐字稿

Good morning. My name is Meredith and I will be your conference operator. At this time, I would like to welcome everyone to the Rogers Corporation third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I will now turn the call over Robert Wachob, President and CEO. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and greetings from Ghent, Belgium, the headquarters of Rogers European operations. We have just concluded the October Board of Directors meeting. Our directors like to visit Rogers' facilities and that is why the meeting was held here in Ghent. In fact, last October the meeting was held in China so that the directors could see firsthand how rapidly we are growing our operations there.

With me in Ghent are Dennis Loughran, Chief Financial Officer; Bob Soffer, Vice President, Treasurer and Secretary; Deb Granger, Director of Corporate Compliance and Control; Luc Van Eenaeme, our Vice President of European Operations; Jack Ritchie, our Vice President of Human Resources; Paul Middleton, Corporate Controller; and Ed Joyce, Manager of Investor and Public Relations, are participating from Rogers, Connecticut.

Thank you for joining us. First, Dennis 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 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 will now turn it back over to Bob.

Thanks, Dennis. Reporting record sales and earnings is a habit which I could easily become accustomed to. As you saw in the press release, sales were up 45% and earnings were up 86% quarter over quarter.

Q3 was an unusual quarter as our cellphone customers introduced their products as scheduled and bought what they had forecast. This is seldom the case as generally many programs are delayed and therefore we always discount our customers' third-quarter forecasts. Normally, we would see several programs originally slated for Q3 actually start in Q4. That won't be the case this year.

Although we continue to believe in and enjoy the growth of the portable communications market, looking ahead we believe that other markets, such as semiconductors thermal management, have multiple opportunities for specialty materials.

Our New Business Development efforts have identified aluminum silicon carbide as one such material for this market. Consequently, we have announced a strategic partnership and an option to buy Thermal Transfer Composites Corporation. TTC has significant intellectual property associated with metal matrix composites, of which aluminum silicon carbide is one.

This is the first announced step in Rogers' entry into this emerging market. We expect to make further announcements during the next year. It is our intention to become the market and technology leader in semiconductor thermal management material.

We are also experiencing growth in new applications for existing materials and their extensions. The packaging of high-speed semiconductors and high lead count, high lead count being 1200 to 1400 leads, are presenting numerous opportunities. To cite a few examples, our RO2800 Printed Circuit Material is being used as a package for a family of high-speed semiconductors that have 1200 to 1400 leads.

Our liquid crystal polymer circuit material, along with RO2800 and RO2808, have been designed into chipsets for Wi-Fi, WiMAX and wireless local area networks. Our ability to make these electrically superior materials as thin as 0.001 inch has been key to winning these adoptions, as their attributes allow for very high circuit densities. Using our materials, a 10-metal-layer chip package can provide the same number of interconnections as a traditional 40-layer, low-temperature, co-fired ceramic package.

Semiconductor thermal management, high-density semiconductor packaging are two of the areas were we expect significant growth in the future. Our New Business Development efforts are geared toward assuring our future growth through entering new markets and adopting new technologies. You can expect to hear more about these efforts in the future.

We are nearing capacity in several of our operating units. As a result, Durel will commission a 16% increase in lamp capacity in December and at least an equal amount in the first half of 2006. Construction continues in Suzhou, China on a new building, which will contain a PORON polyurethane machine by late 2007 and will allow us to at least double our power distribution components capacity in China.

At a second site in Suzhou, we have commenced construction of a facility which will provide much-needed warehouse space and, when fully equipped, allow the manufacture of a new flexible Printed Circuit Material.

Finally, we have hired the architect for a building on our main campus in Suzhou for our new high-frequency circuit materials. Additionally, our Rogers-INOAC Corporation joint venture is planning the addition of a new PORON polyurethane line in Japan in late 2007. In total, Rogers will add about $140 million of capacity in 2007 and our PORON materials joint venture will add another $40 million.

It seems like a lot of capacity, however we expect to grow sales by about $100 million in 2006 and be near a $500-million annual sales rate throughout the second half. We expect the fourth quarter to be strong, and in 2006 we will achieve all-time sales and earning records with our joint ventures doing the same.

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 your questions.

Thank you, Bob, and good morning again to everyone. As you read in the press release and heard in Bob's commentary, Rogers set an all-time record for the quarter for total sales. We also achieved a less-visible record of having monthly sales total exceeding $50 million for the first time ever this September.

While we would like to focus primarily on those accomplishments, I do want to state upfront that our continued focus is also on financial remediation of the 2005 reported material tax weakness that has caused a temporary delay in reporting GAAP earnings for the quarter.

As you read in the release, our ongoing efforts have currently identified a balance of approximately $2.3 million of tax assets that need more thorough evaluation before determining whether the amounts are properly represented in our accounts or whether a restatement of prior periods, if material, or adjustment of current earnings, if immaterial, is required to achieve accurate GAAP financials.

We believe this disclosure represents a necessary step on the way toward full remediation of our 2005 tax material weakness. We expect to perform whatever analysis is required to resolve this issue in the weeks prior to submitting our third quarter 10-Q and look to full remediation of our 2005 tax material weakness during the remainder of our efforts in 2006.

Turning back to our quarterly performance, we achieved what would be rated from excellent to outstanding growth across all of our segments with total net sales reaching the all-time quarterly record of $124 million, up 45% compared to the $85.4 million sold in the third quarter of 2005 and up 18.3% sequentially over what was a record second quarter of 2006.

As indicated in the press release, our pro forma non-GAAP third-quarter earnings were $1.07 per diluted share, which includes a benefit of $0.16 per diluted share related to recovery of tax reserves from closure of prior year tax audits. This compares to GAAP earnings of $0.59 per diluted share in the third quarter 2005, which includes $0.10 per diluted share related to a onetime tax benefit.

Pro forma non-GAAP net income for the quarter was $15.7 million, which again includes $1.1 million of expense to comply with the equity-based compensation rules implemented in the first quarter of 2006 compared to no equity-based compensation charges booked in the third quarter 2005. We continue to expect that $1.1 million level to impact our future quarters and that estimate is included in our fourth-quarter guidance.

In looking at the pro forma diluted EPS figure for the quarter of $1.07, if you exclude the $0.16 per diluted share from the onetime IRS and state tax audit resolutions, the net figure of $0.91 per diluted share exceeded the high end of our last updated guidance for the quarter of $0.87 to $0.89, as operating margins came in slightly stronger than anticipated.

While the segment numbers are not final, we do know that the strong operating results in the third quarter were powered by strong sales levels in all three of our strategic segments with the biggest gains in Custom Electrical Components at 146.2% higher than the previous year. In addition to volume-related profit improvements, we continue to reap the benefits of year-on-year operating performance improvements in Other Polymer Products based on last year's restructuring efforts.

Third quarter gross margin was 31.1% versus 28.5% for the third quarter 2005, an excellent performance compared to historical levels. Considering the margin-reducing impacts of pricing for raw material pass-through, subcontracted no-margin secondary operations, and lower gross margin outsourced search volumes, we believe this represents continued progress in our goal of achieving long-term gross margin targets.

Selling and administrative expenses for the third quarter of 2006 totaled $15.5 million versus $12.4 million in the third quarter 2005. The change reflects higher incentive compensation including a full quarter of the expense associated with the Company's adoption of the new equity-based incentive compensation accounting rules and increased selling and commission costs as well as higher annual projected bonus payouts due to our record sales volume and strong operating results.

Even with the higher level of spending we achieved an improvement in percent of sales to a level of 12.5% from 14.5% in the third quarter of 2005. Research and development expenses for the third quarter were $6 million as compared to $4.9 million for the third quarter last year. Research and development spending rate was at 4.9% versus 5.7% for the third-quarter last year.

We continue to be committed to long-term rate -- spending rate of 6% and are aggressively pursuing new technology and business development efforts, although recent surge in sales have not allowed the rate of spending to keep pace in the short-term.

Other income and expense, which includes income from our joint ventures and royalties less other expenses amounted to $2.1 million in the third quarter of '06 compared to $1 million in last year's third 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 have record third quarter sales totaling $26 million, up almost 17% from the third quarter 2005. Sequentially, the sales were down as the Company's new foam joint venture in Suzhou ramped production and worked off backlog in the first half of this year and volumes have now normalized.

Leading the year-over-year increase in joint ventures sales was Rogers' Chang Chun technology flexible circuit materials as well as the Company's High Performance Foams joint ventures with INOAC Corporation. All these joint ventures had strong sales into the consumer electronics and portable communication markets.

We achieved a non-GAAP third quarter effective tax rate, excluding any impairment charge, of 22%, which is slightly lower than the second quarter, reflecting the impact of projected increased annual earnings, a significant portion of which is in lower tax jurisdictions.

Turning to our financial position, Rogers maintained a strong though slightly-reduced cash position with our cash and short-term investments balance at the end of the third quarter at $77.5 million, down from a second quarter total of $79.1 million. The change was driven primarily by earnings plus depreciation, offset by net working capital increases and increased voluntary contributions to defined-benefit pension plans of approximately $5 million to achieve maximum tax deductibility for returns filed in September and placed our two plans at funded levels of 100% under ERISA standards.

Capital expenditures were $7.7 million for the quarter. Capital spending for the first three quarters has lagged behind our annualized projection pace and we now expect our annual expenditures for capital to be approximately $25 million to $30 million in 2006. The decline from our previous range estimate of $30 million to $35 million is primarily related to approved projects for which near year-end acquisition and construction schedules have migrated slightly into the first-quarter of 2007.

Overall we continue to have a total approved project listing in the $55 million range. The Company did not repurchase any shares during the quarter, however we will continue to monitor the market and our investment plans with an eye toward repurchase of shares if and when an appropriate situation arises.

We have said it every quarter, but our balance sheet does remain very strong and working capital management continues to be a high priority. We continue to have no debt and our assets reached a level of 3.1 times current liabilities.

Inventory levels ended the quarter at $62.3 million, up somewhat compared to $54.8 million at the end of the second quarter in 2006. This increase relates primarily to supply chain increases in support of higher sales levels. Accounts receivable ended with 59.2 days outstanding compared to 61.7 days at the end of the second quarter, driven by a decline in domestic accounts of two days and a decline in Asian accounts of five days, all pretty good results. This concludes my financial remarks and I will now turn it back over to Bob.

Thanks, Dennis. I would like to just make one correction here. We had a little typo. Instead of a pension contribution of $4.8 million it was actually $8.4 million. Now, we would be happy to entertain any questions you might have.

(OPERATOR INSTRUCTIONS). Jiwon Lee, Sidoti & Co.

A few questions here, and I would like to sort of start off with the Custom Electrical Components, if you can. Bob, obviously you are gaining a lot of traction on the ELM side as well as some strength on the inverter side, especially on the upside that you saw with your preannouncement, can you sort of talk about two things, first your visibility in this business as they appear to be program-driven; and if you could, in any sort of fashion, sort of break down your inverter versus the ELM sales during the quarter?

Sure. During the quarter, we had several new program launches, of which several of those included inverters and we have a couple programs in which we're supplying both the lamps and inverters. Of course, our volume ramps long before shipments occur and phones arrive in the stores because we're relatively early in the supply chain. Some things which are just arriving now we have been shipping into for a while.

We have seen in the inverter side some share growth as we have added significant quantities to one of the five top manufacturers who we were not doing business with before. We also, on a large program, where we had been at 50% share for the lamps, we were awarded 100% share.

We have multiple new programs with several new manufacturers such that we see our lamp business going forward diversifying considerably and the inverter business is quite diversified. Try as we may to get permission to talk about who is buying and what models, they absolutely refuse to allow us to do that. I know others do. We won't do it without permission.

And the visibility, the type of visibility you have on this?

We get a forecast one quarter in advance, and we see change weekly. So sometimes the visibility is good; sometimes it is horrible.

You're saying basically a quarter is your maximum visibility?

Absolutely.

Even though you are in what appears to be sort of a new replacement program?

Yes, but we never really know what the volume is. We are in one program where they told us it could be 100 million units, and I do not believe that for one instant, but that is the number they would like to use so that we would give them the lower price.

Fair enough. A little more color on your semicon thermal management material. This is sort of a new thing that I keep hearing from you, so --.

Yes, well there's several areas here. Semiconductors that use the power amplifiers are getting extremely hot and they're having some difficulties in removing the heat. The new high-powered LEDs used for lighting need some new ways to remove that heat and we believe we can address some of those.

The hybrid vehicles use a large number of what are called integrated gate bipolar transistors. They switch very large amounts of power, generate tremendous heat, and need a way to eliminate that heat, to remove it. In addition, the trains use even larger ones and have very significant needs for removing heat. So we see this across a very large area.

Traditionally, copper moly, copper tungsten have been used in these areas and have had pretty good growth rates, but since you all know what has happened to the price of copper, tungsten and molybdenum, aluminum silicon carbide becomes extremely economical. But that's only one. We expect to have multiple entries in this area, five to seven different pieces of technology when we are all done, which will take some time.

Okay. For some other competitors in your circuit materials market, the price of copper foils and the magnitude of increase has been really a big concern, and I do understand that you are hedged, but beyond December how do you gauge this market and what is your plan going into '07?

We have continually passed on the copper price increases but we also happen to be in a fortunate situation which the more commodity players, FR4, sell their product for $3 or $2 a square foot and copper becomes by far the major expense, where we are in a very different price range with many of our products and therefore the copper, although it hurts some, is not nearly as big and we can have reasonable price increases and not disrupt the marketplace.

Okay, and finally the level of leverage has been pretty positive but you obviously try to expand further in China next year. What sort of normalized level should we be looking at for next year?

Historically, we have been growing in that 10% to 15% range, and I would expect in the current environment, as long as the world economies stay good, we should be closer to the higher end of that range on average. Remember, last year we grew by a negative 4%. Add those two together, I think it compounds to about 17% or 18%.

Okay, I will step aside here. Thank you.

Dana Walker, Kalmar Investments.

Fun times, Bob and team. Well done. Can you expand on the comments in your press release on your foam outlook where you talk about some new markets and integrate those thoughts on revenue in the most recent quarter and how the more recent or more immediate future might look?

We remain bullish on our opportunities in the High Performance Foams area, both in the fourth quarter and looking ahead to 2007. To give you some examples, in mass transportation, for example, we're finding an increasing number of uses for our silicone foam. In railcars, subway cars, trolley cars where we are the underlay under the floor, one, to eliminate the noise and the vibration but a lot of things can do that, but silicone does not give off a toxic gas in fire and there are a whole new set of regulations associated with that, due to some of the -- over the last few years fires in subways that created some serious life lost.

Then the medical area, there is a really wide range of things in medical devices that we're a -- we're being used as a pad and as a disposable neo-natal sensor. That would be PORON or silicone foam -- is used as several seals in a medical flashlight that has to go through an autoclave. Silicone is used in a DNA analyzer.

There is some equipment that measures skin color and we are used in sensor pads, used in defibrillators, a whole range of medical devices from Waters -- that's the manufacturer. There is an antifatigue mat being used in the surgery room that is made out of PORON. It's a wide range of things, none of which are huge but in total add up to pretty significant business.

Is there a retrofit opportunity in mass transit?

When they refurbish the cars, yes, but they are not applying these, at least not this point. It is pretty expensive to refurbish them. They do not seem to be requiring refurbishment earlier than normal.

Is the benefit to take vibration out of the passenger experience or --.

Yes.

Is it something else?

Yes, it is.

When did they start to care? I hope that is chuckling and not just a chair vibrating in the background.

I really don't know, Dana.

We would appreciate them starting to complain more.

Does that mean we'll sleep better or sleep worse when we are trying to ride on a train?

Well, it depends on how much you like the clicking.

Moving on to a different topic, can you -- once upon a time, circuit material margins were robust when you were maximizing on both flex and high frequency. Can you talk in this environment when high frequency seems to be delivering more of the growth and yet you are not quite back to the peak in the total segment revenue, where you stand on margin and how that might progress from here?

Sure. Overall, the flex material portion of this has not been growing. It is way below its peak, but on the other hand our joint venture has -- is enjoying a large portion of the business that we once had. As you know, our joint venture sales, the fabricators who are headquartered in Taiwan, and to the EMS houses that are headquartered there, and those particular customers are winning pretty big chunks of business away from some of the more traditional suppliers. So we tend to look at this now as add them together and see how we're doing because together, things look pretty good.

On the high frequency side, that business continues to grow and we're quite pleased with the margins. In fact, we have recently moved to seven days, 24 hours in Arizona, and next weekend we will move to six days, 24 hours in Belgium, and within two weeks to seven days, 24 hours.

As we have talked about the satellite TV, and that one day they would make the high-definition satellites, it would turn them on and begin to push them, that appears to have happened as we have a forecast which is an 80% increase from the third quarter. And they have already taken our full inventory. We are now in air shipment. We did have six weeks of shipments on the water. That will be drained as we supplement those with air shipments.

Now, I do believe that some of this is the pipeline filling, but they clearly have made the decision to bring this into the high volume. My guess is that the early adopters who are willing to pay whatever must have slowed down.

In addition, in some cases, is we're having some difficulty on our flex material side adding people. We are using our joint venture to make some of the product for us. Of course, that depresses the margins considerably as it's shown on our income statement because some of that income comes down into the other line.

Understood. Many of us tend to look at the satellite TV market from a U.S. perspective when we see what DIRECTV and its partner or its -- what's the name of the other company Charlie what's-his-face runs?

EchoStar.

EchoStar, thank you. Is the adoption of high-def, is that a worldwide experience or is it likely to happen in the U.S. first?

It is happening in the U.S. first, but what is happening in the more traditional areas is there is a lot of adoption of satellite TV in India. Of course, that is back to using five square inches of material versus 27 here in the U.S. And in China, before October 30 they are going to launch a satellite which will allow them to move into the modern world for satellite TV at the 12 gigahertz frequency. I believe that is the frequency. And of the four manufacturers we know of, of the low-noise block down converters, they have all adopted our material. We expect that, can't tell exactly when but sometime in the next few months that should start to ramp also.

You've described how your share of market in that business has crept up over time to a very robust figure. Where would you say that marketshare happens to be now and how might that differ in high-def world?

I think we're in the 70% to 80% and high-def would tend to raise our marketshare.

Another question. You are growing astronomically in the EL/keypad area. Can you talk about what processes you are likely to handle internally versus externally? We have talked about domes. We've talked about a variety of things. There is further mention of external sourcing in the quarter which might go outside of domes, but how might that look as you bring on new lines in China moving into '07? What implications would that have for gross margin and operating margin?

First answer here is that the placing of the domes, we view that as something to outsource. It is something our customers want, but they know exactly what the suppliers charge and therefore there is really no room to add any margin to that. So raising the sales doesn't help the margins. It does not hurt the absolute dollars, but it certainly hurts the percentage some.

We have pursued a strategy, as you know, of having an outside contract manufacturer available to make lamps such that when a spike occurs we are able to fill our customers' needs in a seamless manner. That is exactly what went on in the third quarter to the point at which a contract manufacturer was making more than 30% of all the lamps we manufactured.

Now, as we see that volume begin to stabilize, as we add more programs, then that is one of the reasons for adding the capacity in December and make [fastly] at the beginning of the year. And of course when we make it, the contribution is significantly larger than when someone else makes it.

Then we will wait a little while and if we see another spike coming, we will use the contract manufacturer and when that turns to baseline business, we will again add capacity. Our goal here is to keep our lines running at full capacity so that we get the maximum leverage and that any overage that occurs, which generally is a short-term situation -- latter part, third quarter generally and early part fourth quarter we use those contract manufacturers. So volume can surge; margins will shrink a little. And then we expect them to be able to cut back as we add capacity. And this -- for once this worked exactly how we planned.

You, however, are making a judgment that over time lit keypads will penetrate more models, which is why you are continuing to add lines so that these surges, as you describe them now, at least in a volume sense, will be incorporated into your internal producible run rates.

Yes, exactly, and we do expect that the percentage of phones using EL will continue to grow at least through 2008. And the way to think about it is a higher and higher percentage of the very thin phones are choosing to use electrolume -- ELM.

One last question, which will be two-part. Can you talk about the implications that adding capacity in the scope that you described during your pre-question discussion today will have implications for smooth operations in '07 and beyond? Can you update how we might score you from a gross margin standpoint given the very large increase that we're seeing in the Durel inverter business and the fact that that is likely to be a lower-value-add gross margin business?

We expect very smooth ramp ups with the lamp capacity as we're installing the exact same equipment we have installed multiple times in China. And the last two startups in China have gone very smoothly. This one is going just the same. And in early next year, we will be adding the same equipment. For us, it is very good in that we do not have to add significant amounts of overhead in that we're doing it at the same location.

With the inverters, as that grows it should help our gross margins. It all depends upon when you look at the aggregate how many of the lamps were made by an outside contractor. If indeed we were able to make all the lamps and had all the inverters then you could expect several points, maybe three or four, on the gross margin line, to increase in the custom electronic components area.

A 300 to 400 basis point increase in that segment loan?

Yes.

Not corporate?

No, not corporate.

That segment, being the component segment, in total will probably always have lower gross margins than materials segment.

You have long talked about the 35 gross level as being operating nirvana. Has the computation changed, though, based on the mix of business and where the growth is coming from, or is that still an ideal that we ought to hold you to?

I believe we still get there. We just may get there -- it may take a little longer than we thought. But then we did not want to turn away all this growth. One thing to keep in mind about the custom electronic components is the business comes in much larger chunks and requires less SG&A than, say, material businesses where the business comes in $10,000 and $50,000 pieces. Therefore, you are seeing that our net income as a percent of sales continues to rise even though we had somewhat lower sequentially gross margin.

I will step back. Thank you.

Maybe one more thing, David. The real goal is 15% after-tax. I am not wedded to how we get there. I have a preferred way but there is more than one.

Good show. Thanks.

(OPERATOR INSTRUCTIONS) Bob Fetch, Lord Abbett.

It is good to know the phone systems make it sound like you are across the street here.

Yes, it does. I think five years ago this might not have been possible.

China and 3G, can you update us on where they may be in terms of deployment at this stage?

They have continued to postpone that and last I heard they're talking about next year, which means no one really knows.

The nice thing is, I guess, it's still in front of us then?

It is still a wild card. We all know it's going to happen. In many ways, it's like the thing that's going on right now with the satellite TV. Lots of speculation. You don't really know until the day it happens.

But the important thing is you're designed in with the manufacturers.

Yes, we are.

Okay. You had spoken earlier in regards to your flex business and how it was favorably exposed to plasma TV business. Are you starting to see the benefits of the growth that is occurring there?

Yes, but most of that is occurring in the joint venture.

Okay, and the busbars continuing to do well with the exposure that you had in locomotives and disk drives and mainframes, etc.?

Absolutely, and in fact, our business in China is continuing to grow quite rapidly. That is actually the reason that we're trying to get that building done so we can double the capacity.

How many employees now in China?

890.

That is actually fairly flat from, say, six months ago.

Fairly flat, that's right. We only added 90.

What are you seeing in terms of labor costs for unskilled as well as salaried?

Labor costs, the unskilled, is going up in the range of 10% to 12% a year, but of course it is starting at a very low base. The skilled labor, the salaried people, is more in the 15% to 20% range.

So that is pretty steady from a level of, say, maybe 6 or 12 months ago?

Yes, it is. It is not accelerating, but it also is not slowing down. Hopefully, there is a long way to go before we get to U.S. and European income levels.

The flex circuits, they are also positively positioned for more touchscreens either in automotive or other applications, correct?

Yes.

Are we seeing some of the new applications come to fruition?

No, not really. We haven't seen any.

Okay. Back to the foam area, you were running at record levels in the footwear area. Is that continuing to expand and are there more applications there?

Yes, it continues to expand. Actually we're putting more effort there. Since we got surprised by what we could do we decided to put a little more sales effort on that. It is continuing to grow.

Is it partly because of the volumes that you're producing generally in foam as they maybe brought average prices down to levels where there are more uses for it?

I think instead of that the drive for comfort and the ability to use only two or three square inches of PORON in the heel, which then does not add much to the cost of the shoe but adds a tremendous amount of comfort is causing many more people to adopt it, so that is helping our volumes go up.

Which we would prefer that they would use a square foot for the whole shoe, but I don't think that is going to happen.

Okay. In regards to mood lighting in autos that you had been positioning for and bidding on, have you seen some of those out-year contracts benefit you yet?

Know, but we are still in the middle all of multiple applications there.

Can you update us on in the RFID area and potential in the tag business?

Yes. Most of our potential is in the readers. That is where they have the high-power and the need for the high frequency, but in some applications they are actually using some of our more expensive high frequency materials. To give you an example, the U.S. Army has an RFID tag made with the Rogers material in each of the ammunition cases so that when someone walks into the ammunition dump they can locate immediately the ammunition they need. And you might imagine, getting it fast, they consider that rather important. That is turning into a very large application actually, something that we did not quite think of until someone came to us with the idea.

So is that applied to, say, handheld projectiles as well as --?

Yes, if it is a rifle or a pistol or whatever, they put the RFID tag in the case.

So when you said it is becoming a nice-size business, is it a seven-figure business?

Yes, I try not to talk about anything that is not well above $1 million because nowadays it would be insignificant. The other thing that is going on is that our high frequency materials, especially the very thin ones, some that we have not talked about much, such as RO2800 and the liquid crystal polymer, have been designed into -- as the package for chipsets, both in Wi-Fi and WiMAX, and of course in the local area network. We see that as very rapidly growing.

So that is in each site or just in the chips that are being used in there?

It would be the chips that are being used in each of the readers.

Okay, and there's going to be a lot of readers at this rate.

That's right, but also there's an awful lot of Wi-Fi boxes out there and there will be a lot of WiMAX boxes.

And as the retailers roll out ultimately the RFID tags, you are going to need multiple readers in single locations.

Absolutely. There generally are two readers on every single store, so they have two shots at reading what is in the carts in the truck.

Okay, but that is only on the consumer side. You also have the inventory management, right?

Right.

It requires even more in inventory management because many of the materials can't be read through and you need at least 4-D in terms of reading sometimes.

What I meant by door was not a door into a store but the overhead doors that the trucks drive, back up to in a warehouse. Sorry, I did not make that clear.

On the disk drive business, there was some earlier discussion about improving your share position with your major customer. Is that occurring? As a result, are you seeing the revenue bump occurring?

We are doing better with them although I am not sure that the total volume is going up.

So share is going up but the business is reflecting the end market?

Yes. I'm not sure how they're doing share-wise actually.

Is there any technological change occurring?

Not that I am aware of in the disk drive area.

There is a move to the vertical, but that doesn't really affect the flex business.

But suspensions are not going away?

No, not at all.

Okay. Cellphones are increasingly being used to access the Internet as well as download video and requiring wider, bigger screens, at least as far as user preference. How do you play into that?

Wider screens would require more interconnection than a narrower screen. And of course there are three in a color screen, green, blue, and yellow -- excuse me, green, blue and red. So times three, if you increase the screen width by 50% then we increase the interconnections by 50%, and therefore 50% more material is used to connect to the screen.

Okay, so it is a one-to-one relationship?

Yes.

Okay. Are you continuing to consider manufacturing in India?

We will when there's sufficient volume to make that economical. At the moment we have a sales manager in India and we are expecting to add a market development person there also as we're beginning to find more opportunities.

Okay, well with all the markets that you are serving that has been talked about today, I guess the only meaningful, major one that you're not exposed to that has some pretty strong dynamics is wind energy. Do you have any exposure there?

Actually, yes, we do. Busbars are used in the motors that convert -- in the device that converts the DC power to AC power.

Again, is that a seven-figure plus business?

Yes.

So that has been growing, contributing nicely?

Yes, it's actually in Europe.

At equal or better corporate margins?

No, there's pretty tough guys. They are about the same. It's about as difficult as the train guys.

Relatively few customers?

Yes.

All right, Bob. Thanks.

You have a follow-up question from Dana Walker.

The other folks are just not pulling the load today. Bob, can you speak for a moment on this thermal management stuff and what timeframe would this be commercial and measurable for you?

Let me give you an example. The Company that we have the partnership with, and which we intend and we have an option to buy, that option to purchase is between three years and seven years from today. In the meantime we are -- their sales are -- so this could become meaningful, but you won't see it reflected in our sales until the day we choose to buy it.

In the meantime we are helping them with some R&D. In fact, that is how we're approaching most of these situations because they are generally quite small companies. We believe they're going to be $30 million or $40 million in three or four years and they want us to pay the price for what they're going to be.

Our approach is if you are, we will be happy to, but let's agree on the formula today and we will give you a little money to help you continue with your R&D effort for that option to buy.

Some of the other arrangements are shorter term ones. An announcement is likely to be a nine-month to 30-month type term. In other cases we're going to be taking licenses. Those negotiations are going on and there would be immediate business that would be measurable on receiving the licenses.

Then in other cases we have developed or in the process of developing materials, and of course, from introduction of material to significant sales is two or three years. We look at all this as large growth for Rogers in the three to five years out.

As investors we've had longtime regard for your expertise and positioning in electronic materials fields. If we were to flip this around, though, why would these folks who are doing something incipient be looking at you as the preferred partner?

Just, for example, if the base station customers, the train customers, the automobile customers are targets, for example, we have access to all those and most of those companies are not willing to discuss with a very small company. They won't allow a very small company to become a supplier.

However if we are there representing them and are saying that we will stand behind this, then everything changes, and that is exactly what has already happened with the first ones we talked about. We are able to get the access they can't get. They all see that and therefore we have become their preferred partner.

If this particular company goes from what might be nil revenue today to $30 million or $40 million, how would we discern your participation in that? It sounds like you would act as a sales agent. How would that percolate through your P&L?

We would make a little money off of that but not munch. But if it were headed toward $30 million or $40 million, we have the right to buy it any time we want after three years. And of course, the way these things go, you can't beat $30 million in three years. It is just not possible. But if we thought it was going to be $30 million in four years, you can bet I would buy it at three years and one day. The formula is fixed on past results, not future prospects.

A circle-back on the foam business. You've described how you would hope to grow on a secular trendline basis at 10% to 15%. Given the surge that the foam business has been through and yet would appear to be a broadening of applications, do you have visibility towards 10% to 15% growth type growth over the next couple of years in foam from this level?

I think foams are going to stay in the 8% to 12% range as opposed to the 15% range. Your Printed Circuit Materials have more opportunities to grow faster and at least for the next few years the custom electronic components will be growing probably the fastest.

Dennis, I was momentarily distracted. Did you say that the companies operating margin in the quarter was 12.5%?

That was in the -- I believe it is 12.6.

The joint venture contribution was how much again?

Hold on one second.

The sales are $26 million.

We did not speak to the contribution of the profit.

So what was the 12.5 or the 12.6 percentage figure that you talked about when you were making your presentation?

That was SG&A expense, 12.5% of sales was our SG&A.

And you did not cite a specific number on joint venture income?

No.

Nor do you intend to until the Q comes out?

That is correct.

That is all I have today. Thank you.

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

Yes, I would like to leave you with one last thought. That is that over the last few years, we have significantly improved the Company's future prospects and we continue to invest heavily in New Business Development efforts. We have expanded capacity in our key growing products and are planning more expansion.

We've introduced over a dozen new products and added new organizational talent throughout the Company. As you can tell, we're seeing the anticipated benefits, both in terms of sales and earnings growth, and it remains our goal to continue delivering increasing sales and earnings. Thank you and good day.

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