Rogers Corp (ROG) 2006 Q4 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the Rogers fourth-quarter 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). Thank you. Mr. Wachob, you may begin your conference.

Good morning, ladies and gentlemen. With me today are Dennis Loughran, our Chief Financial Officer; Bob Soffer, Vice President, Treasurer and Secretary; and Deb Granger, our Vice President of Corporate Compliance and Control. Additionally, Paul Middleton, our Corporate Controller and Ed Joyce, our Manager of Investor and Public Relations, are with us also.

Thank you for joining us. First, Dennis will dispense with the formalities and then we will get down to business.

Thank you, Bob. I would like to point out to all of 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. 2006 -- it really was an outstanding year for Rogers. We had record sales of $454 million, up almost $100 million from 2005. And our earnings, $2.69 per share, tops our previous record set in 2004 by more than 35%. In the past, many of you have asked about what we are doing to ensure our future success. Therefore, I would like to take this opportunity to talk a little about how we are implementing our strategic objectives.

More than 53% of our sales were in Asia in 2006. As our sales base continues to shift to Asia, we must ensure that we provide local services to our customers. Thus we expanded three of our four manufacturing operations in Suzhou, China and opened sales offices in Beijing, and in Bangalore, India. We are working to achieve a culture where innovation, teamwork, and employee empowerment are highly valued. To achieve this, we have continued to refine and adapt our worldwide employee performance planning and review process to ensure that everyone has their major responsibilities linked to at least one of our six long-term goals. We have established working councils, each major function of the Corporation. They are chartered with identifying and implementing industry best practices. With representatives from each business unit these councils are helping us achieve a sense of teamwork and empowerment across the entire Corporation.

Now an example of our commitment to innovation was that during 2006 we staffed R&D exploratory efforts to determine a technical feasibility of new product concepts for each our three reporting segments. We have long said we want to grow by developing new products and entering new markets. In 2006, seven significant products were brought to market, up from six the year before.

We also began 17 new product development projects, which is the largest new set of projects begun in any one year. Our total product development pipeline now has the potential of annual sales exceeding $500 million five years after introduction.

Additionally, the number of people working in our new business development groups has more than doubled. In 2006 these efforts resulted in the formation of our thermal management solutions business. The investments we have made in new business development are beginning to show results. And they will add significantly to our growth over the next three to four years.

We continue to strive to implement common business processes and information systems which improve our competitive position. During the year, we established four global business analyst positions covering operations, supply chain, order management and finance. Each analyst works with the relevant working councils to identify best industry practice, often through benchmarking activity. They then create standard business processes across Rogers and ensure that those standards are implemented in our common enterprise-wide information systems platform. As we have more operations around the world, standard practices enable us to assure that our customers see the same Rogers, the same Rogers products, no matter where they originate.

In today's world, where it's often difficult to increase prices, the need to be more productive, to lower costs and improve yields is critical to long-term success. To this end, our Six Sigma black belts completed overall equipment effectiveness improvement projects that added over $25 million of capacity across the Company without spending any significant capital. These projects plus others improved our profits by more than $6 million last year. Over the long term, I believe we can grow sales and profits at a 12% compounded rate.

But we realize this growth most likely won't be a straight line. Some years will be better than others. It's clear at least to me that sales growth is what drives our profits, new products are key; they generally carry higher margins. Sustainable margin improvement will require that our new product sales increase as a percentage of the total.

Although we've talked frequently about our wholly-owned operations, our four unconsolidated 50% owned joint ventures continue to be very important contributors to both our global market position and our profitability. As a group, they had record sales of $109 million and record profits stemming from additional market penetration and continually improving operations. It is our expectation that these JV's will remain a part of our future and that they will mirror our growth.

It is our people around the world who are driving change, improving all that we do. That is what is making Rogers into a worldwide world-class operation. It is through their hard work that we achieved record sales and profits in 2006. And I would like to thank each and every one of them.

Rogers enters its 175th year of operation in 2007. We are enthusiastic about our future and our strategic plan, and we have a goal of once again setting new records in both sales and profits.

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

Thank you, Bob, and good morning, again, to everyone on the call. I'm very pleased to follow Bob's report of Rogers' excellent progress with the confirmation that our financial processes have also made substantial progress in 2006. With the successful completion of the remediation of our 2005 tax internal control material weakness, we have improved our tax accounting reporting and control environment to a level commensurate with required reporting standards and in line with the excellent program of S-Ox compliance that has been evident in Rogers' S-Ox results for all of our other key control systems since inception of the program. We are finalizing our formal audit steps for this quarter but fully expect to report 2006 results in our 10-K with a clean audit opinion.

With regard to our results, as you read in the press release and heard in Bob's commentary, Rogers reported final GAAP earnings for the fourth quarter of 2006 at $0.72 per diluted share, including an excellent year of records for both sales and profits. The quarterly GAAP earnings compares to $0.62 per diluted share in the fourth quarter 2005.

GAAP net income for the fourth quarter 2006 was $12.7 million, which includes $2.2 million of pretax expense to comply with the equity-based compensation rules implemented during the first quarter 2006 compared to no long-term equity-based compensation charges booked in the fourth quarter 2005. As we proceed into 2007, we expect a total for long-term equity-based compensation be higher than in 2006 due to the partial year adoption impact as well as the layering impact of annual awards in the second year of this new accounting treatment. The estimated increases have been included in our first-quarter guidance.

The fourth-quarter sales total of $122.7 million, representing a 25% increase over the same period in 2005, was our second highest quarterly sales total, second can only to the $124 million reported in the third quarter 2006.

Sequentially, sales were fairly consistent across all major segments. However, year over year, the customer electrical component segments reported the most significant sales gain with a 73% improvement.

Fourth-quarter gross margin was 27.8% versus 31.6% for the fourth quarter 2005. The margin decline reflects the negative impacts of higher product pricing to pass through raw material cost increases, newly subcontracted, no margin secondary operations and the less than optimal manufacturing mix reported in our press release and custom electrical components segment. Overall, 2006 showed a 240 basis point improvement in the gross margin at 31.4% for the full year of 2006 versus 29% for 2005. And we believe there is potential upside in this metric in 2007 as we implement additional cost reduction initiatives, operating efficiencies and margin improvement efforts throughout our portfolio.

Selling and administrative expenses for the fourth quarter of 2006 totaled $15.9 million versus $13.9 million in the fourth 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 dollar level of spending, our SG&A expenses as a percent of sales declined to a level of 12.9% from 14.2% in the fourth quarter 2005.

Research and development expenses for the fourth quarter 2006 were $6.4 million as compared to $4.8 million for the fourth quarter last year. The research and development spending rate as a percentage of sales was 5.2%, slightly higher than the prior-year fourth quarter at 4.9%. We continue to be committed to a long-term rate of spending of 6% of sales for R&D and are aggressively pursuing new technology and business development efforts, as outlined in Bob's comments.

Other income and expense, which includes income from our joint ventures and royalties less other expenses, amounted to $4.1 million in the fourth quarter 2006 compared to $2.9 million in last year's fourth quarter. The change is due primarily to the elimination of onetime charges that occurred in the fourth quarter 2005 that did not repeat in 2006, partially offset by lower joint venture income and lower royalty income.

Rogers 50% owned joint ventures had near record fourth-quarter sales, totaling $29.8 million, up 3% from the fourth quarter 2005, driven primarily by circuit material sales through of Rogers Chang Chun Technologies and poly [ended] laminate systems. Sequentially, sales were up 12.9%, driven predominantly by sales through RCCT and our foams Inoac Corporation.

We achieved a GAAP fourth-quarter effective tax rate of 23.4%, which is higher than our third quarter and annual rates due primarily to year-end tax position adjustments. Going forward, we're currently projecting an effective tax rate of 24%. However, we, like most other corporations, are reviewing all of our tax position and rate impacts in relation to the new FIN 48 regulations and will be finalizing its implications for our 2007 rate projections prior to issuing our first-quarter 10-Q.

Turning to our financial position, Rogers maintained a strong and improved cash position with our cash and short-terms investments balance at the end of the fourth quarter at $82 million, up from the third-quarter total of $78 million. The change was driven primarily by lower earnings, slightly higher capital spending but more than offset by lower net working capital growth for the quarter.

Capital expenditures were $9.6 million for the quarter, bringing our annual totaled $23 million. That total came in below the low end of our previous estimate of approximately $25 million to $30 million. Not due to any delay or cancellation of projects, but more due to the timing of significant infrastructure and equipment outlays on ongoing projects. The decline from our previous range will result in a larger first half 2007 expenditure due to those carryovers. With the carryover projects and new authorizations, our overall expectations for capital expenditures in 2007 stands at approximately $45 million.

The Company did not purchase any shares during the quarter. However, as announced in our recently issued press release we have received approval to initiate up to $50 million share repurchase program, which is expected to be implemented as soon as possible.

Our balance sheet remains very strong with the additional strength added of a completed $100 million credit facility during the fourth quarter. While we had the new facility in place, we continue to have no outstanding debt and our current assets increased to a level of 3.3 times current liabilities.

Inventory levels ended the quarter at $70.2 million, up compared to $62.3 million at the end of the third quarter in 2006. This growth related primarily to lower sales than expected in the fourth quarter and will be managed down to match ongoing sales level and supply chain needs.

Accounts receivable ended with 67.8 days outstanding compared to 59.2 days at the end of the third quarter, driven by primarily increased sales to our longer credit term customers in Asia.

This concludes my financial remarks and I'll now turn it back over to Bob.

Thank you, Dennis. And now we'll be happy to answer any questions.

(OPERATOR INSTRUCTIONS). [Mark Keeler], [Paradigm] Capital Management.

Good morning, everyone, and congratulations on a great 2006. But of course the questions that we're going to have are pertaining to what has happened lately. And along those lines, Bob, what has changed or hasn't improved as much as you thought since January 12th, when in that press release, you were making a projection that Q1 was going to be record sales and earnings, but now it seems like you're backing away from that.

We are.

And somewhat related, what will drive the improvement in Q2?

Okay. A few things are going on here. As the sales growth is not occurring, which we thought it would -- it has backed off considerably in the first quarter -- we find ourselves in a situation where we will not be building any inventory, of course. In fact we will be trying to pull down our inventories. But when we look at last year because sales are growing so fast we added $10 million in the first quarter of [whip] and finished gods inventory, which as these things work, accounting wise, that added $0.12 to our profits last year.

The other thing that is going on is now that we better understand our tax position, we think that that will cost us about $0.02 a share. And our joint ventures have changed their forecasts such that they now expect their earnings will probably decline from last year by about $0.03.

And I have to admit this whole accounting for additional equity, long-term equity compensation is a little confusing and only within the last couple weeks did we get a real good handle on that. And because, as Dennis mentioned, it is a layering. And it's a layering because we worked real hard to get it as low as possible as we entered 2006. We have in effect a 50% increase from 2006 or $0.12 a share, the biggest chunk of which, or at least the large chunk of which occurred in Q1.

Those are the basic things that are going on in addition to us working real hard to pull down inventories, which of course is a double negative, because it means we produce less than we actually sell, and therefore, we don't absorb our overheads. But flat sales happens from time to time.

We certainly see in the first quarter a continuation of the drought and infrastructure purchases. This can't go on forever but we are selling very little into sell telephone infrastructure. And in the sell telephones themselves, a lot of the new models are not being as successful as our customers had projected. For us that is not a good thing because we produce to their production schedule and put the product in a just-in-time inventory hub. Now they're required to take that product within 90 days. But when things change, which they did, in the fourth quarter and it looks like it's changing again, not in a positive way, they don't pull from that inventory. So we produce but we don't sell, which then means in a future quarter, like this one, first quarter, we're selling out of inventory and not absorbing much overhead.

I think most of you know in the short term, except for material, all of our costs are really fixed. We can't adjust labor on a weekly basis or a monthly basis. And in addition, as we grew throughout 2006 we have more than 100 additional salaried employees, which on a quarterly basis cost us about $0.06 a share. Not an issue when you're growing. It's a little bit more of an issue when sales flatten out, which is what we believe will happen in Q1.

Okay. And then what are you seeing that is driving your optimistic forecast for Q2?

We don't think, one, we believe that infrastructure and pulling down inventories, you can't keep pulling them down forever. You run out eventually. And we have indications that we -- things should begin to pick up in March. And so that part will be good. We also believe that the second quarter as far as our cell phones are concerned, although it's traditionally the lowest, based upon what we see in the Q1, we don't think that'll be the case in (technical difficulty) think it will be similar.

Okay, good. That's helpful. And then --

The other part or one other thing, which is, we're continuing, as we had mentioned, we built quite a little inventory of polyurethane foams in anticipation of a potential strike. So we will finish pulling those inventories back down to normal levels during Q1, which means we will be back to a normal production level. You won't see this on the sales side, but you'll certainly see it on our profit side because it's a rather major effect when we pull down inventories.

Right. And then if you could just, Bob, kind of going ahead a little bit, the major capital programs, CapEx is going from $23 million to $45 million, and Dennis talked about how some of that was a carryover? Was like half of that the carryover? What was the differential there? And then how will the fact that some of it is slipping into 2007 impact when those programs come online?

Yes. It's probably $12 million to $15 million that slipped over into 2007. It's mostly associated with buildings in China that we thought we would have to pay for but we didn't have to pay for because they did not send us the bill.

Okay, but are those buildings up now?

Oh, yes, they are up. There's no change in the schedule of completion. It's just a change in when they -- as you know, you don't account for this until you pay. So we had progress payments but they didn't send us the bill, so we didn't pay.

That's a good thing.

Yes, well it makes us look like we don't know -- we are a little confused about our capital spending but this is sort of how things work from time to time. As you know, we have two buildings going up in China and we expect to start a third by midyear. Then we have equipment that comes into those buildings. And we also haven't -- although we have received some of the equipment -- for some reason, they did not send us the bill either. Expect those bills to show up real soon and then the capital spending will come in big chunks.

Right, okay. And then on the foam side, you're talking about increased applications in ground and air transport. Is that for PORON or are there other foams that you are now producing, targeting those markets?

The silicone foams in air transportation are in pretty much every single aircraft made by the two big airline -- airplane manufacturers. That is driving quite a bit of growth. As you know, airplane sales are up quite a bit, and refurbishment efforts are going on on some of the older ones, and we get a lot of business when that happens.

And then in addition, in trains, they're now starting to use quite a bit of silicone under the floors to decrease the noise. And also they use silicone because it's nonflammable and doesn't -- when burned, doesn't give off a toxic gas.

Right, okay. And then one final one, could you kind of give us a little bit more information on 100 new salaried employees, like a breakdown? How many of those are in R&D, sales, and how many come under the new business development initiative?

Oh, that's a lot of details, Mark. I can tell you under the new business development since I focused on that quite a bit, there is about a dozen new people there.

Okay.

I can't tell you about the rest of the details.

Well, that's good. That does it for me. But once, again, congratulations. Thanks.

As you know -- thank you -- more than half of those salaried additions were in China, which is where we are expanding the production.

Dana Walker, Kalmar Investments.

Good morning, everybody. Can you talk about the sales delta Q4 to Q1 somewhat more explicitly and to what degree are either lamps or inverters different compared to Q4?

Yes, more than half of the decrease in sales is in the custom electrical components area, and it is associated with cell telephones. And the other area where the rest of the decline is, is in the high-performance foam area -- excuse me -- in the printed circuit materials area, and that is all associated with the cyclical decline of cell telephones in Q4 -- Q1 versus Q4.

As we look out to Q2 and beyond, where -- you've talked about how you would expect and perhaps believe that the infrastructure business ought to come back, but where do you suppose the EL and inverter business ought to progress?

I think in Q2, it will be similar to Q1 and then we will see some very significant increases in Q3 and Q4. But then that could be a lot different depending upon what some of these new programs that at least got off to a slow start compared with what the manufacturers had protected. If they pick up, and some of those -- we can't mention model names or manufacturers -- but in some cases they started out with phones that were $250; they didn't sell very well and now they're less than $100. And they're working off some pretty significant inventories that we've built based upon their forecasts. When those are gone then I expect sales to pick up and for us, of course production to pick up, which is actually a really good thing because it will generate a lot of profit.

You have been taking lines in Chandler and taking them to China. You talked about in the latter part of '06 and the early part of '07 about accelerating that process and how there would be a lot of cost takeout. If volumes are lower how does that complicate what you're seeking to do?

We currently are not making any lamps for wireless applications in Arizona. And we have idled at least two of the machines there, or eight. Shut down two and we have moved all of that production to China. So China is running at capacity and we are reducing the operations in Arizona. Of course there is a little lag there and we get some under-absorption of overhead while we make those adjustments.

To what degree are you making use of subcontractors presently and how will that evolve as the year progresses?

Much less. Since in the fourth quarter we had -- the mix wasn't what we were told it was going to be so the subcontractor made a lot of the product that was actually sold. And we made a lot of product that ended up staying in inventory. We have solved that issue. This is the whole idea behind the subcontractor is, in a market that has big ups and downs, then either turn on or turn off the subcontractors quite quickly with no real negative effects on us, and that is what we have done.

If you were to compare some quarter in '07 to the more recent high watermark in EL, which would be Q3 of '06, can you talk about how qualitatively and quantitatively you think you will behave versus that high watermark in '06?

We think the third quarter will be a new high watermark.

Third of '07?

Yes.

That will be because you will have more volume and your profit margin on that volume based on being more China-centric will deliver better bottom line?

Yes.

Your mix between lamps and inverters, how would you expect that to evolve?

We believe it will become more favorable than it is today.

Let me ask two last questions and then I will back away. What type of view do you have on your joint venture tone over the next couple of quarters? And then perhaps you might spend a moment or three expanding on the 17 new products initiatives that you're talking about.

Look at the various joint ventures. I think poly [emit] laminate systems is going to have a very good year as we are gaining market share. Our polyurethane foam, those two joint ventures should do quite well as more of the business is being produced in China and we are working to increase the speed of that machine, which would allow us to produce more product with the same overhead and labor. And our flex material joint venture in Taiwan, we think it will have a decent year. It really depends upon how well the Taiwanese based flex circuit manufacturers do in relation to the U.S. and China-based manufacturers.

We have this shifting of business that goes back and forth between us and our joint venture. It's always hard to know because the OEM's won't tell us who they're going to give the business.

And our 17 new projects -- they are distributed among our three major reporting segments. And although I must say we're not counting any exploratory projects, which we're trying to determine technical feasibility because those things -- at least half of those turn out to be nothing. But we only count once if you've gone beyond the technical feasibility stage and we've also had a business opportunity analysis, which indicates that this would be a profitable thing to do.

And the way we count these sales is that we have a projection of what the sales will be five years after the product has been introduced because that's the typical cycle for us -- is at least five years of growth and often it's more, but choose five. And that is how we came up with the $500 million. That's up from numbers around $200 million and $300 million last year. So we believe we're seeing some real benefits from increasing our efforts in R&D and also on the new business development area.

As you know, we have an option to buy one company; we have purchased the assets of a thermal management company and then we have several other negotiations, which are ongoing, which I choose not to talk about any of those until we have something that's signed on paper.

Are there any of the new products that you would describe as having '07 relevance?

No. Dana, anything that has '07 relevance was most likely introduced in 2005. Sort of our normal lag time here; it takes a little while.

Bob Fetch, Lord Abbett.

Good morning. In regards to some of the issues that impacted the quarter that were previously announced, a quality issue and an inventory protection against a strike and infrastructure sales being a little less.

(multiple speakers) contract manufacturing.

Right. Those issues are meaningfully behind you now, correct?

Yes, they are. Including the issues associated with the polyolefin foam.

And not that companies don't continue to have ebbs and flows of the business or issues come up of an unexpected kind. In the absence of those, though, you would have likely reported $3 million or $4 million greater profits.

Yes, that's right -- $3 million or so.

And when we think about say earnings power that was generated in the period, in the absence of that, we should really think about that in terms of that being more of the appropriate base when we get to the end of this year.

Yes, yes, that's absolutely correct. In fact, sequentially the biggest thing that is going on is in the neighborhood of a $12 million sales decline. Of course in the short term, that's 50% to 60% of that falls to -- is taken off the bottom line. And in addition to that, we won't be building in any inventory and we did in the fourth quarter. That will probably cost us another $0.10. If you add those things up it's a much bigger number.

Okay so what's really more important though is then identifying some of the market drivers that you are exposed to that ought to build on your current sales run rate. You talked about infrastructure. We know that need is out there. The timing is always difficult to identify in terms of when some of the orders and sales are going to be generated. But beyond that, just elaborating a little bit on the satellite markets, some of the things you have alluded to here in the most recent release as well. How much more material will you have in the new digital boxes as they get released?

We have about 50% more material in the new high-definition boxes than we did in the previous [three horned] boxes. And the volume also at least at this point is quite a bit higher such that we are producing more than double what we were last year in that area.

Okay, and again just to reiterate, in order to provide those services, people are going to -- we're going to have to replace the current installed base of dishes, correct?

Absolutely, that's right. That's where the big change will happen is, anyone who wants more than I believe five high-definition channels will have to have a new dish and a new box. For us the dish is the part that counts because it is -- and the reason for that is that they're operating at a different frequency. And there has been some advertisements talking about that they're going to have 150 channels but at this moment we produce a lot of stuff that's gone to inventory because we don't believe that those dishes and boxes are yet being sold. Because they're just advertising about what will be.

Okay, but the important thing is that you not only have growth from net subscriber additions by those customers, that you will have volumes related to the subscriber growth plus a replacement cycle.

Right exactly, exactly. And the other thing that is going on in the satellite TV area is that the Chinese government has indicated that they are going to allow satellite television, which they have not allowed to date.

They just have not given a date as well yet?

They're talking about some time this year. There are at least four manufacturers who have designed systems. We are in all of them. So first we don't know the timing exactly but we know what I consider the most important part, is, when it happens, it's us.

I understand they have a few people over there?

Yes, they do. It's an interesting little piece of information. I read just yesterday that 25% of the Chinese students are considered honor students. There are more honor students in China than there are students in the United States. Just to give us a perspective of what this is like.

In talking about some of the newer materials that are important to these new, more elegant designed handsets and such, can you talk about the newer PORON products that are much thinner and have the adhesives attached to them, what the benefits are? And is that largely being the product of choice and is it largely replacing the existing, pre existing products?

There's two different situations here. If we start with the ones with adhesives, by being able to cast PORON on an adhesive, we eliminate a couple layers of film just to be there. And therefore, the thickness of the package is reduced by about 35%. That allows them to have a smaller gap. That is considered very important to them. For us, it doubles the value of the product.

To Rogers?

To Rogers. And then in the low density, which is the very thin and very low density, and low density means that you can also compress it more easily. That allows them -- and they're choosing this on a pretty regular basis -- it allows them to buy their cases from manufacturers who can't quite hold the best tolerances. So that the PORON in effect fills the gap, which varies, on those cases. And what they're asking us for, and we have delivered is, that they can have as much as 80% compression of the foam with no more then five pounds per square inch of force. So, they can have anywhere between 20% and 80% compression.

Does that suggest that the cases they're buying are probably lower cost to them as well?

Yes, it is. That's what it's all about. And therefore they're willing to pay us a little more money for this thinner, lower density (technical difficulty).

Okay, and in regards to the flex circuits and inverter business and so forth, the largest cellular manufacturer out there has been producing more clamp shells. Do they seem to be, or are they included in their group that are showing somewhat lesser sales run rates than they had hoped?

Yes. They are the largest manufacturers. Their new products are dramatically lower than what they projected (technical difficulty) causing us a few issues because I would imagine they make their projections and then they pull product based upon that; if it's too much then they stop for a while.

Now they've been somewhat of a lesser customer to you folks but are they continuing to design more clamshell type models?

Yes.

Okay, so to the extent that they are, that still ought to be an avenue of say greater penetration and higher potential sales?

Exactly, exactly. We have the dominant position with inverters in that area and we are growing in the lamp side. And with the other really big player, we are dominant in lamps and have a growing position in the inverters.

On the locomotive side, are we talking solely about busbars or are there other products you are selling there?

Well with the locomotive often comes passenger cars, in which case we then talk about silicone foam. But in the locomotive itself, at this moment, it's just power distribution components. But we would expect to eventually have some very significant business associated with thermal management. Because those integrated gate bipolar transistors -- they call them IGBT's that are switching a couple thousand volts, generate a huge amount of heat. That is where our aluminum silicon carbide will come into play.

And will we be measuring sales there as well in terms of square footage of product?

This stuff is pretty expensive and it comes apart. So it's molded to a net shape. We will talk more about parts than we will about square footage. And it's fairly expensive if we were to think about it on a square footage basis. It's pretty expensive stuff.

And will you be making the parts or be selling the material to the guys who are shaping the parts?

Actually, we will be making the parts. The technology we have acquired -- we have two different pieces of technology right now. One allows us (technical difficulty) very intricate small part to a net shape which means no machining. It's a big deal in this area because silicon carbide doesn't machine very easily. And the other piece of technology allows us to make large parts on a continuous basis. And since they are large of course they can be in that shape also. So we have both ends of the spectrum here. One we own, one we have an option to buy. We are -- we have signed a contract to be the selling agent to that.

Okay, and just a couple of last product-related ones. If 3-D is a little bit slow in the meantime there is continued expansion interest in Wi-Fi and WiMAX and Sprint, just to name one service provider who is currently spending billions of dollars to roll out WiMAX. Are your products meaningful for the same reasons in that market as they are in cellular infrastructure?

Yes, we have products that will be in the antennas. In some cases we are in the power amplifiers. The new application is that with some of the chip manufacturers, they're using our very thin printed circuit materials to create the package for the chips.

Which is the bigger opportunity then, with the chip manufacturers or the antennas and amplifiers?

The antenna amplifiers would be bigger because there's one set of chips. An antennae is much bigger than a chip, of course. And power amplifier is smaller than an antenna but bigger than a chip. The other side of it is the materials sold for chip packaging carry a much higher price.

Okay, there eventually will be a lot more RFID tags sold. You're selling material though into the existing tags?

We have a little material in the tags, mostly in military applications. But we have a lot of material going into the readers that read the tags.

And there will be a number of readers per location, right?

Generally every door has two, one on each side. Think of it as a warehouse and the warehouse, every single door they have, where a truck might come in, that's where they're going to try and read what's in the truck.

But when they extend it to physical location within the buildings, they will be multiple located to get 3-D read around the building, so that will be an expansion later on.

That's right, a couple of years from now.

Just last -- there's a major computer manufacturer who's going to be introducing its own cell phones. What sort of content might you have in those?

I believe we have about $0.40 worth of material in that phone.

Obviously, the volumes won't be there relative to some of the other existing programs you are in. .

Yes, $500 or $600 in volume is -- I think what I read is it will be 10 million units, pretty small compared with 1.1 billion cell phones.

(OPERATOR INSTRUCTIONS). Bill [Heasey], ICM.

Just a clarification question. You said that you were taking a $0.12 hit from the stock compensation expense per share. That's for the whole year?

That is this quarter.

That is just this quarter?

But this quarter is bigger than the rest. New accounting rules require that -- certainly anyone who is 55 must count their total expense in the quarter in which they receive the option. That's because they could retire at 55. Figure that logic out, because the option is worth nothing but indeed we have to use the Black Scholes value.

Since we only had a partial first quarter last year each of the three quarters proceeding after the first would be closer.

To run rate? I'm just trying to get a sense was that (multiple speakers) -- as we get --

It will be larger each quarter than last year by I think is it $300,000 or $400,000 each quarter versus last year for two, three and four.

So a couple -- say $0.02 or $0.03.

Okay, so that will be a more normalized rate.

Yes, and we can expect that to go on for both 2007 and 2008 and 2009, at which point then everything is stabilized because we have four years behind us and nothing changes.

Russ [Piaza], [Quant Street] Capital Management.

Could you go into a little color on the demand for the older models with the [Dorals] going in and kind of what your experience has been with newer other customers or how many customers that you are dealing with at this point?

Sure, on the handset side, we actually have an increasing number of customers. And the old products are continuing to sell. I don't know how long that lasts because I don't know how much lower than $29.95 you can make a cell phone. And the newer ones certainly have been slower than anticipated. Actually in most of the manufacturers, they all seem to have high hopes for all their new models and they're okay but nothing like what they thought they would be.

Have your margins stabilized on these older models -- older probably being a year but whatever?

Yes, because we continue to be able to improve our yields and in some cases we have been able to reduce the number of layers, which then improves our capacity, which could allow us to make the same number of lamps, for example, with fewer machines, therefore fewer people, or make more with the same.

And that has caused us to rethink our expansion, where we had talked about adding eight more machines during 2007, we believe we have improved our capacity to the point at which we don't have to.

And not to beat a dead horse here, but could you kind of just give us a little more flavor maybe what you think the business is going to look like for the Doral with these older models in the second half of the year?

I think the older model, that they decline in the second half of the year, and that indeed the new models as they continue to lower the price, will pick up the slack, and in total, there will finally be about 10% more cell phones sold in 2007 than in 2006. And we will gain a little share there also. So we will do better than the market in total, our belief.

Again, the number of customers you work with now versus let's say last year, and then what that's going to look like maybe by the end of this year?

I would say we have two or three additional customers. They're mostly in China and Taiwan. It's all the really big players we have always been with. We're just extending to some in China and Taiwan who are trying to move up the food chain a little bit.

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

Yes. I would like to leave you with one last thought and that is that over the last few years we have significantly improved the Company's future prospects. As you know, we continue to invest heavily in new business development efforts, increased our R&D spending, expanded our capacity and are growing products. We are actually planning some more expansion. We have introduced over a dozen new products in the last couple years. We've added some new organizational talent throughout the Company. And certainly in 2006 we saw some of those anticipated benefits, both in terms of sales and earnings and it certainly remains our goal to continue delivering increasing sales and earnings. Thank you and good day.

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