Rogers Corp (ROG) 2007 Q1 法說會逐字稿

Good morning. My name is Lawana and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation first-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, the Chief Financial Officer; Bob Soffer, Vice President, Treasurer and Secretary; Deb Granger, Vice President, Corporate Compliance and Controls; Paul Middleton, Corporate Controller; and Ed Joyce, Manager of Investor Relations. 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 of forward-looking statement.

I will now turn it back over to Bob.

Thanks, Dennis. The first quarter turned out close to what we had predicted, with both sales and earnings ahead of the high end of our guidance. The strength in the portable communication market drove us to record sales and profits in 2006. However, the current weakness in this market, including OEM inventory reductions, coupled with at least one very significant program beginning to wind down and price decreases, will keep us from achieving record sales and profits in 2007. We do anticipate another good year, however, and expect to deliver significant value to our shareholders.

During 2007, we plan on reducing our work in process and finished goods inventories as we focus on cash generation. We will limit our capital expenditures to projects which will drive our growth over the coming years.

Positive highlights of the quarter were the continued strength in the satellite TV market and awakening of the communication infrastructure market late in Q1, led by China third-generation activity, and continued growth in the Asian locomotive market. We also experienced substantial growth in semiconductor packaging applications.

Our operations ran smoothly during the quarter. Our power distribution systems' production in China was moved into our new building, as they had become space constrained in their previous location. Installation of our joint venture's second pour-on polyurethane foam manufacturing in Suzhou is progressing smoothly and is ahead of schedule.

Our new thermal management solutions business has finished construction of its manufacturing space in Arizona and is beginning to install production equipment. We expect to be producing prototypes by August.

During the quarter, we introduced three brand-new products, which we believe have in total fifth-year sales potential exceeding $90 million annually. One was the new electroluminescent lamp, which is 70% brighter, or 35% more power-efficient, whichever the customer prefers. The second is a new inverter which improves lamp brightness by using less power. And the third is a thin, flexographic printing tape that allows longer press runs and faster press speeds without operator adjustment for any given print quality.

We plan on 2007 being a record year in the number of new product introductions, which follows a record year in 2006. During the remainder of this year, we expect to launch at least seven additional new products. Since successful new products drive much of our growth, these launches bode well for the future.

Our joint ventures were particularly weak this quarter, as they suffered from a slow portable communication market, with customers working off substantial inventories, along with a weak hard disk drive market. And we expect this to continue in Q2.

As we look toward the remainder of this year, we expect our 175th year of operation to be a solid year where we continue adding shareholder value.

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 to everyone again. As Bob's comments indicate, we have been through an eventful quarter and have a lot of significant market and business issues impacting our results.

On the financial side, during the quarter one of the most significant activities we tackled was the adoption of Financial accounting standards Board interpretation number 48, an interpretation of FAS 109 called FIN 48. The interpretation, which is effective for fiscal years beginning after December 15, 2006, introduces a new approach that significantly changes how enterprises recognize and measure tax benefits associated with tax positions and uncertainties related to income tax positions in their financial statements.

While the initial adoption adjustment, which will be reported in our 10-Q, will be recorded as an adjustment to retained earnings, Fin 48 will have an ongoing impact on the effective tax rate, primarily with upward pressure, due to the new level of assessment being placed on uncertain tax position accounting.

With regard to our overall results, as you read in the press release, Rogers reported final GAAP earnings for the first quarter of 2007 at $0.54 per diluted share. The quarterly GAAP earnings compare to $0.74 per diluted share in the first quarter 2006. GAAP net income for the first quarter 2007 was $9.5 million, which includes $2.6 million of pretax expense for long-term equity-based compensation, compared to $0.5 million in similar charges booked in the first quarter of 2006, which was the first quarter of application of the new equity-based compensation rules.

As we proceed through 2007, we expect the quarterly total for long-term base compensation to be lower than in the first quarter, ranging from between $1 million to $1.5 million per quarter. Going forward, we do expect the 2007 total for equity compensation charges to be higher than 2006 by approximately $1.9 million, primarily due to the layering impact of annual awards in the second year of this new accounting treatment. The relevant estimated increases have been included in our second-quarter guidance.

The first quarter of 2007 sales total of $115.8 million represents a 12% increase over the same period in 2006, with growth driven by Custom Electrical Components and Printed Circuit Materials, offset somewhat by Other Polymer Products, which declined due to restructurings implemented in the second half of 2006 for the polyolefin business. Sequentially, total sales for the Company were down 5.5%, primarily due to lower demand in Custom Electrical Components and seasonal factors.

First-quarter 2007 gross margin was 30.4% versus 35.2% for the first quarter of 2006. The margin decline reflects the negative impact of higher product pricing to pass through raw material cost increases and the continued impact of subcontracted no-margin secondary operations that were not in last year's first quarter, both having the effect of diluting margin. In addition, the Company had lower levels of manufacturing utilization, which was implemented to prevent inventory build, given the sequential softening experienced in the quarter. The first quarter of 2007 did show a 260 basis point improvement in gross margin compared sequentially to the fourth quarter of 2006 of 27.8%, primarily related to product mix among segments.

Selling and administrative expenses for the first quarter 2007 of totaled $19.3 million versus $17.4 million in the first quarter of 2006. The increase reflects higher equity-based incentive compensation, previously mentioned, increased selling and commission costs and higher wages due to staffing increases and wage inflation. Even with the higher dollar level of spending, our SG&A expenses as a percent of sales declined slightly to a level of 16.7% from 16.9% in the first quarter of 2006.

Research and development expenses for the first quarter of 2007 were $5.7 million as compared to $6 million for the first quarter last year. The research and development spending rate as a percent of sales was 4.9%, lower than the prior year first quarter of 5.8%. The decline relates primarily to our controlled spending to lag sales growth with our target spending so that resources allocated do not inadvertently get ahead of our ability to fund. We continue to be committed to a long-term rate of spending of 6% for R&D and are aggressively pursuing new technology and business development efforts, as mentioned by Bob.

Our other income and expense, which includes income from our joint ventures and royalties less other expenses, amounted to $1.9 million in the first quarter of 2007 compared to $2.9 million in last year's first quarter. The change is due primarily to lower joint venture income, down $1.6 million, and lower royalty income, down $0.3 million, mitigated in part by favorable foreign exchange of $0.6 million.

Rogers' 50%-owned joint ventures had first-quarter sales totaling $22.1 million, down 27% from the $30.1 million in the first quarter of 2006. As stated in our press release, the year-on-year comparison is negatively impacted by backlog-reducing catch-up reduction in 1Q 2006 in our foams venture that did not reoccur this year. The joint venture results were further negatively impacted in the first quarter of this year by excess inventory in the supply chain and a slowdown in hard disk drive and portable communications markets.

We achieved a first-quarter effective tax rate of 23.9% compared to 22% in last year's first quarter, and very close to our fourth-quarter rate of 2006. However, going forward, we are currently projecting upward pressure on the effective tax rate resulting from the substantial impact of Fin 48 on our tax positions, as well as a maturation of tax holidays in the Company's lower tax jurisdictions.

Turning to our financial position, Rogers maintained a strong balance sheet, although ending the quarter with a reduced cash and short-term investment position of $60.8 million compared to the fourth-quarter total of $81.8 million. This reduction in the quarter stemmed largely from stock repurchases, capital expenditures and bonus and commission payouts for the 2006 record year. At this point, with carryover projects and new authorizations, our overall expectations for capital expenditures in 2007 stands at approximately 30 to $35 million.

In accordance with the stock buyback authorization issued by the Board of Directors on February 15, 2007, or up to an aggregate of $50 million in market value of common stock, the Company repurchased 287,000 shares of common stock in the amount of $13.9 million during the quarter.

Our balance sheet remains very strong. We continue to have no outstanding debts and our current assets reached a level of 3.6 times current liabilities. Inventory levels ended the quarter at $71.5 million compared to $70.2 million at the end of the fourth quarter. For the remainder of 2007, we have established targets for all businesses to aggressively pursue inventory reductions, with a goal of returning $10 million in working capital by year-end.

The cash receivable ended with 68.3 days outstanding compared to 67.8 at the end of the fourth quarter, driven by increased sales to our longer credit term customers in Asia and sequentially softening in sales.

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

Thanks, Dennis. We are now prepared to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Jiwon Lee of Sidoti & Company.

Good morning. Several questions for you, Bob. First, the EL Lamp sales -- is that more of a function or sort of Motorola's declining in maturing product lines, as much as a share loss that you are experiencing?

Some of our customers have concluded that the fact that they do business with us is their proprietary information, so I will not be able to refer to any customer or program. I don't want to get sued for having hurt anyone's business.

Our decline in the portable communications market is primarily associated with a very large program that is beginning to wind down. It is not a loss of share, but instead, during this quarter, a reduction in the quantities shipped for the one particular program.

In addition, in the second quarter, we will experience a significant price reduction in that same program, which will drive down the sales, and the volume in that program will also go down.

Otherwise, the rest of the programs are pretty much steady.

Okay. As the year goes on, how should we look at your EL Lamps and inverter trends, particularly in regards to the handset market?

I expect during the course of the year that the portable communications segment will continue to decline.

Okay.

As we were driven by -- in 2006 by 100% share in an extremely large program, and that program most likely will reach end of life by the end of this year.

Okay. A little more comment on the inventory, Bob. A little more color on where it is. Is that mostly this particularly large customer's unpopular programs, your EL Lamp inventory there, or is there something else? I think you built some foam inventory, as well as perhaps some high frequency.

So going forward, first of all, where the inventory is and how do you plan to reduce that?

I expect in the Custom Electrical Component segment to have a significant reduction in inventories, as that is the segment that we expect will have a sales decline. That is a -- as you see in the second-quarter forecast, the negative of that is that we will produce even less than we sell. So we will experience underabsorption of overhead.

I don't believe we will see a large reduction in printed circuit materials inventory. As that segment continues to grow, we will have a reduction as far as days of sales outstanding. In our High Performance Foams, I expect to see a continued reduction in inventory as we work off the inventory built in preparation for a potential strike.

Also expect sales to remain relatively flat in High Performance Foams, as some of our Asian customers have some very significant inventories that need to be worked off.

Okay. And moving along to the joint venture operations. How should we look at that going forward throughout the year? Obviously, you have had a terrific year last year, but it seems to be sort of going hand in hand with the sequential softness that you experienced and will experience in the second quarter.

One of the joint ventures uses a distributor for a large portion of their sales, and that distributor lost control of their inventory management. So our joint venture will have another slow quarter while that distributor works off their inventory.

The hard disk drive market is fairly soft, which impacts one of our major customers for one of the three joint ventures. And of course, one joint venture has a large amount of sales associated with portable communications, and the first quarter is historically low, followed by an even lower second quarter; and we certainly are seeing that.

One of the things we see in the portable communications area is that some of the customers choose the second quarter to try to leverage their suppliers by stopping buying as they reduce their inventories, and tell everyone that if you don't lower your price, we won't do business with you again. Followed by the third quarter of, well, we didn't really mean that; we do need you and here are some orders. We've seen that now for four years in a row; I expect this trend to continue, at least as long as someone in the supply chain buckles under during those times of threat.

Okay. Fair enough, Bob. On high frequency that you are beginning to see some traction at the end of the first quarter, how do you -- you seem a little more optimistic about that trend continuing the rest of the year. How should we look at that business, especially coming out of Asia, and your ability to grab higher market shares there?

In the communication infrastructure marketplace, at least as far as 3G is concerned, we believe we are designed into everyone's system. And in the first few months of the quarter, first quarter, the OEMs appeared to be pulling down inventories. And then that seemed to end toward the end of the quarter.

In addition, there was a press release by China Mobile which indicated that they planned on spending $5.2 billion on 3G infrastructure, and that they had placed a demonstration order with one of the Chinese suppliers. That was a significant benefit to us, at least on the booking side. Most of that didn't ship until April.

We think this continues -- 3G is [continue] to roll out, never as fast as was predicted. Since we have three to four times as much material in 3G as we do in the second generation, any growth at all is multiplied for us.

Fair enough. And Dennis, you talked about the effective tax rate being adjusted upward. Any more specific items on how much of an increase that we should be building into our model?

It's not definitive at this point in time, but we think the upside pressure could be in the 3% to 4% range. We are going through, actively pursuing changes in our programs and implementing with our consultants things that can alleviate some of the pressure. But the positions we've had to take with Fin 48 in terms of the more likely probability of liability having to be incurred affects how we have to accrue liabilities going forward, some of which are programs that have been untested by federal audit and so we've got a little bit of uncertainty in our positions and we've had to record larger liabilities as of year-end. And we think that going forward that the tax rate will be implemented the same.

I could have more questions, but I will jump back into queue and ask others to jump in here. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Dana Walker of Kalmar Investments.

Good morning.

Good morning, Dana.

How did you do against your inventory plan in the quarter?

We didn't do as well as we would like, specifically because in the Custom Electrical Components, the sales declined faster than we had predicted. And you might ask, well, but we beat the sales in our guidance, and that is because some of the other sectors did better. So except for the Custom Electrical Components, we met our targets.

What type of an inventory goal would you have by -- when would you expect to see your inventory in dollars bottom? And how low a goal compared to the Q1 level have you set?

We would like to take out at least $10 million of inventory. I expect that we should be able to get there by the end of the third quarter.

In what timeframe would you expect the hard disk drive business to act better, or is that beyond your ken?

I really don't know when it is going to get better. Historically, these things last for one or two quarters; then things begin to grow again.

This weakness began in your Q1, or did it start in Q4?

It started in Q4.

Can you talk about, from a personal communications or handset point of view, can you talk about your placement -- involvement in the imminency of how this might play out for new programs across the breadth of your productline?

Yes, I think so. I think we can comment on that. We are qualified on at least 12 to 15 new programs. Whether or not we get any business from those is going to depend upon pricing. So it remains uncertain and it is subject to some negotiation. That is those programs, should we receive even half of those, would be good news. But it is not enough to overcome this one program that is declining.

It is unfortunate, when you look back, that on the biggest program in the cell phone industry, we had 100% share. That was wonderful. Now it is going down and we are seeing the other side of it and we have already made significant adjustments in that we have lowered the employee count by 180 people, and we have -- all of our production for cell phones is currently in China, which we completed that during the first quarter.

When you were asked to make price concessions on that program, is that strictly in EL or does that touch pour-on and flex as well?

EL is the only product in which we deal directly with the OEMs' purchasing people. Everything else, we are supplying a material that someone else fabricates into a part. So we are insulated on the materials side from the purchasing tactics of the OEMs.

Do the purchasing tactics of the OEMs -- does the price that you have to offer on a concession basis, would it apply to new programs?

No.

So it is strictly a recognition that for this product to be more price competitive, because they are not able to price it (multiple speakers) as well as they once did, you need to participate in that.

Right. And when a program becomes very mature, they have had sufficient time to qualify addition sources -- and you know the game. They find the lowest price in the world and they say, if you don't meet it, you don't get any. And of course it is not really true, but that is the game they play. And our job is to get as much money as we can.

One last thought -- can you offer some broad thoughts about your pour-on business and your BISCO business, given that they are more diverse than strictly [derived-demand] plays on handsets? You've mentioned the new flexo tape that you are introducing. Talk, if you would, more expansively on those two products.

Yes. For the first quarter, the High Performance Foam segment, that was the highest sales for any first quarter ever. And it was driven by some new applications in the transportation area. Certainly, airplanes are doing very well and trains and railcars, especially passenger cars, are doing quite well, which is driving some of the business.

But in total, this business is our most economically sensitive business, because you sell into such a -- just about every place. When we see the U.S. economy slow, which I think everyone knows that occurred in the first quarter, we see a slowing in U.S. sales. However, that was more than made up by growth in Asia and some actual strength in Europe.

Going forward, I expect this segment to be able to grow at 12% compounded annual rate over the long-term. We are continuing to work on new products to try to raise that rate of growth. You will hear more about those as the quarters pass. Our preference here is to not talk about our new products until we have introduced them. For me personally, then I don't have to answer why it didn't get introduced this quarter, if something went not as smoothly as we (inaudible).

One last thing. You mentioned at year-end, as people were focusing on your profit margins, on a particular run rate of revenue that might support a higher level of profit than we saw, that you had been adding to the people within Rogers. Did I hear you say a few moments ago that you have taken 180 people out?

That was primarily on the operation side. Yes, we have reduced by 180 people, all of which were in the United States. That was part of our transition from the U.S. to Asia.

Okay. But those 180, sadly, would not be the same 100 or so -- those 100, I presume, were in the grow-the-business side rather than on the manufacturing side?

Yes, the 100 were on the salaried side, which means the most expensive side. And the 180 were on the hourly side, which is somewhat less expensive.

Okay, thank you.

[Steve McNeil] of [Dennison]

Good morning.

Good morning.

As it relates to the significant program you referenced, what was the total revenue for that program in '06?

We don't talk about things in that kind of detail.

But your sense is that that essentially goes to zero this year -- or by the end of the year?

Well, you never know. Some of these programs tend to live longer than predicted. But what we are told is it will reach end of life by the end of the year; but those predictions historically aren't very good.

Okay. Are you still using Hansung for manufacturing on that program or is that production being done in-house?

We have brought everything in-house. As some of you know, that was -- I think all of you know -- that was part of our strategy. We knew that there was a bubble there. And so that is why we used the contract manufacturer and the bubble is over. We have placed no new business with the contract manufacturer.

How many lines in China are you -- remind us again how many EL lines you have there, and how many lines --

We have 16, 16 in China.

Is it four in Arizona?

12.

Okay. 12 in Arizona. How many lines are currently being utilized today?

We are running at around 50% of capacity.

So is that like 100 in China and zero in Arizona? Or how does it break out by geography?

We still make our automotive products in Arizona.

So, would it be safe to say capacity declines further from here, based on this program winding down?

Yes, subject to receiving new programs. But as we pull down inventory, the utilization of our capacity will go down.

But obviously, for any new programs, you guys don't need to invest any incremental dollars in capacity there?

No, I don't expect any investment of any significance in capacity for the portable communications marketplace.

Okay. In the press release, you mentioned accelerated program terminations. Can you provide a little more color around that, please?

That relates primarily to this one very large program. But also just --

Just -- okay.

All right. But also to several smaller programs that were not successful for the OEMs, so they brought them to end of life because they hold enough inventory for the future lifetime of those products. It's a typical thing that happens, I guess.

As an example, we have one program in which in the third quarter of 2006, based upon the customer's production planning sharing with us, we've produced product for their needs. We now have enough that will last us through fourth quarter of 2007. Just as an example of how they miss on the downside as much as they miss on the upside.

Okay. So --

We have no (multiple speakers) risk. They are going to take the product because they are obligated to take it. It's just that we won't make any more of it.

Okay. But it is not like there are any programs that were in development that got terminated prior to --

No.

-- launch or anything like that?

There is always one or two. I shouldn't say no. There is always one or two that never quite make it. But it is not significant.

Is it possible for you to quantify -- and I know or the past 12 to 18 months you had been moving capacity over to Asia and you'd spent some capital doing that on the new lines and so forth. And now that the program has effectively reached end of life, is there any way to quantify what your return was on that investment? It's maybe hard to kind of call that out as it relates to a specific program, but I'm just --

We are still reasonably busy in our facilities in China.

Okay.

That is why we moved as much as we could to our lowest labor cost area, so that we could mitigate any decline. Our intention is to keep our China facilities as busy as possible.

Okay. And then one last housekeeping item. When do you anticipate filing the 10-Q?

This Friday.

Friday.

We have until next week, but we believe we will be able to issue this Friday.

Okay. Thank you.

You're welcome, Steve.

Mark Keeler of Paradigm Capital Management.

Good morning, everyone.

Good morning, Mark.

Bob, you talked about three new products that you launched in Q1. One of them was an inverter, one of them was an EL lamp. Is the EL lamp targeted toward the keypad product?

Yes, among other places.

And you said it was brighter and/or used less energy. Just update me, how close are we to being bright enough with EL lamps to backlight displays again, color displays?

That will never happen, my belief is.

Okay. You are just not going to get there.

No. They only transmit 3% of the light that is generated and we just -- the EL technology cannot get there.

Okay. And then about the seven products that you anticipate being introduced in the rest of this year, I'm not looking for a timeline on the introduction, but I would appreciate some color on what markets they are really focused on.

Mark, I would really rather wait until we can talk about their introduction. As you might imagine, we are working on more than seven, and I'm not sure which ones actually will make it and which ones will have a delay.

Okay. But is there a conscious move in the R&D aspect of the business away from cellular communications and more toward other diverse markets?

There is a conscious move across the whole company to diversify into other areas. Cell phones, just because -- well, the whole portable communication area, it grew so fast and it became 40% of our total business. I would certainly like to see it at much less, and the way I'd like to get there is to grow other parts of the business. That is why we are concentrating on new business development efforts in areas such as alternative energies, health care and security.

Okay. Thank you very much, Bob.

You're welcome.

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

Yes, thank you. I'd like to leave you with one last thought. And that is, over the last few years we have significantly improved the Company's prospects and we continue to invest heavily in new business development efforts, increase our R&D spending and expand capacity for key growing products.

We are confident that over the long-term we will see the anticipated benefits. both in terms of sales and earnings growth, and it remains our goal to continue to deliver increasing sales and earnings for our shareholders. Thank you and good day.

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