Rogers Corp (ROG) 2007 Q2 法說會逐字稿

Good morning, my name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation second-quarter earnings conference call. All lines 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 are Dennis Loughran, Chief Financial Officer; Bob Soffer, Vice President, Treasurer, and Secretary; Deb Granger, Vice President of Corporate Compliance and Controls; Paul Middleton, Corporate Controller; Bill Tryon, Manager of Investor and Public Relations; and Robert Daigle, Chief Technology Officer.

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

Thank you, Bob. I would like to point out to all our listeners that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in Rogers' operations and environment. These uncertainties include economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement. I will now turn it back over to Bob.

Thanks, Dennis. Although not at an acceptable level, the second-quarter earnings before restructuring charges turned out slightly better than our revised guidance due to slightly higher than anticipated sales. The volatility we have experienced in sales and earnings, both on the upside in 2006 and now on the downside in 2007, is primarily caused by the ramp-up of one very large EL cell phone program in 2006 and now its precipitous decline, which occurred much sooner and faster than we expected. Specifically, a 75% decline in the customer's production forecasts for 2007.

At the same time, the price has dropped very significantly. Due to the drop in the yield sales forecast, we are likely to sell from inventory for the remaining life of this program. After this program declines, we expect much less volatility in our overall business, as we have no other single piece of business in any of our product lines that exceeds $10 million in the annual sales.

In our flexible laminates business, we now have almost all the export licenses, so we can now ship product to most of our customers. The business, however, is expected to be smaller as we were unable to ship to any of our Asian customers for most of the second quarter. Thus, they sourced product elsewhere. Over time, we expect to slowly rebuild these sales.

Currently, we are evaluating outsourcing the commodity portion of this business. We expect to reach a decision during the third quarter.

Our joint ventures had a strong quarter, with our two polyurethane foam joint ventures doing extremely well due to share gains with some of their key OEMs in the cell phone market.

We continue to introduce new products at a record pace that target existing served markets, like flexographic printing and portable communications, and products that address new markets, such as healthcare, semiconductors, and alternative energy. Bob Daigle, Chief Technology Officer, will speak in more detail about this a little later this morning.

We look forward to making steady sequential earnings progress for the rest of 2007, which will set the stage for a much improved 2008. I will now turn it over to Dennis Loughran for a closer look at the financial details of the quarter.

Thank you, Bob, and good morning to everyone again. As you have all read in the press release, Rogers culminated activities to record restructuring charges related to our Durel and flex circuit businesses, as previously announced. The total impact of the restructuring, including the $12.9 million in the second quarter and $2.7 million over the next three quarters, results from applications of GAAP accounting rules that required both discrete onetime write-offs and charges as well as prospective acceleration of asset amortization and depreciation over the remaining anticipated useful life of certain assets related to these businesses. At this point, based on business conditions as we know them, we have accounted for all cash and non-cash charges related to necessary restructurings.

With regard to our overall results, as you read in the press release, Rogers reported a final GAAP loss for the second quarter of 2007 of $0.26 per diluted share. The quarterly GAAP loss compares to earnings of $0.23 per diluted share in the second quarter of 2006. GAAP net loss for the second quarter of 2007 was $4.3 million, which includes the $12.9 million or $0.47 per diluted share of restructuring charges. In the second quarter of 2006, the Company recognized impairment charges of $11.3 million, or $0.52 per diluted share.

The second-quarter 2007 sales total of $99 million represents a 5.5% decrease from the same period 2006, with the decline driven by Custom Electrical Components, with EL declines overpowering tremendous growth in our power distribution systems business unit and Printed Circuit Materials, primarily in flex circuits. Sequentially, total sales for the Company were down 14.5%, primarily due to lower demand in Custom Electrical Components and Printed Circuit Materials segments that led to the need for our restructuring efforts.

Second-quarter 2007 gross margin was 16.4% versus 32.4% for the second quarter of 2006. For the first six-month period of 2007 and 2006, the gross margin percentages were 23.9% and 33.8%, respectively.

The 2007 results include approximately $9 million in inventory charges and accelerated depreciation expense related to the restructuring activities undertaken in the second quarter. Excluding these charges, manufacturing margins in the three- and six-month periods ending July 1, 2007, would have been approximately 25.5% and 28.1%, respectively.

The year-over-year decreases in margins are primarily the result of the decline in business in both Printed Circuit Materials and Custom Electrical Components reportable segments, as both the electroluminescent lamp and Flexible Circuit Materials businesses experienced significant declines in sales volume and pricing pressures due to increased competition. These decreases were partially offset by an improvement in margins in the other polymer products reportable segment.

Selling and administrative expense for the second quarter of 2007 totaled $17.6 million versus $14.2 million in the second quarter of 2006. For the first six months of 2007 and 2006, the costs were $36.9 million and $31.6 million, respectively. As a percentage of sales, 2007 expenses were 17.7% and 17.2%, respectively for the second quarter and the first half of the year as compared to 13.6% and 15.2%, respectively, for the comparable periods in 2006.

2007 results include approximately $0.8 million in costs associated with the acceleration of certain contract expenses related to the second-quarter restructuring activities. 2007 also includes additional costs associated with certain legal accruals, stock compensation expense, and professional service fees. The 2006 results were impacted by certain nonrecurring positive adjustments, including the recognition of an overbilling for costs associated with our workers compensation liability.

Research and development expense remained flat at $6 million for the second quarter of 2007, as compared to the second quarter of 2006, and decreased slightly from $12 million in the first half of '06 to $11.7 million in the first half of 2007. As a percentage of sales, R&D expenses were 6.1% in the second quarter of 2007 compared to 5.7% in the second quarter of 2006. On a year-to-date basis, R&D expenses as a percentage of sales were down slightly from 5.8% in 2006 to 5.5% in 2007.

We continue to target a reinvestment percentage of approximately 6% of sales into R&D activities each year. We're focused on continually investing in R&D. As you will hear from Bob Daigle in the next few minutes, we believe that technology is both the cornerstone of our past success and the basis for our future potential.

Other income expense, which includes income from our joint ventures and royalties less other expenses, amounted to $1.7 million in the second quarter of 2007 compared to $2.6 million in last year's second quarter. The change is due primarily to lower royalty income of $0.3 million; unfavorable foreign exchange of $0.1 million; lower commission income from our PLS joint venture of $0.1 million; and a combination of other less significant items.

Rogers 50% of owned joint ventures had a second-quarter sales totaling $26.2 million, up 10% from $23.9 million in the second quarter of 2006, led by strength in our two polyurethane foam joint ventures. However, overall equity income in unconsolidated joint ventures declined slightly in the second quarter of 2007 as compared to the second quarter of 2006, from $1.6 million to $1.5 million, primarily related to increased pricing pressure at our RCCT joint venture, partially offset by the strong results at our RIC and RSC joint ventures.

On a year-to-date basis, equity income decreased from $4.5 million in the first half of 2006 to $2.7 million in the first half of 2007. The year-to-date decrease is due primarily to a combination of lower flax circuit profitability through our RCCT joint venture as well as the success of our high-performance foam joint ventures, Rogers Suzhou Corporation, INOAC Suzhou Corporation, and Rogers INOAC Corporation in the beginning of 2006. In particular, RSC experienced strong sales volumes in the beginning of 2006, as a result of orders that accumulated during the startup of that entity in 2005 that were fulfilled during this time. Once those orders were filled, production levels declined in the second quarter of 2006 to levels that are more consistent with the normal sales volumes expected and achieved during 2007.

During the quarter, the Company experienced a favorable tax rate due to the effect of the restructuring charges and due to overall softening of income projections. The Company expects its annualized tax rate excluding the effects of restructuring charges for the year to be 26%.

Turning to our financial position, Rogers ended the second quarter with a cash and short-term investment position of $64.1 million compared to the first quarter total of $60.8 million. This increase in the quarter stemmed largely from collection of Accounts Receivable, slightly lower inventory levels, offset by stock repurchases of $10 million and capital expenditures of $9 million. At this point, with the carryover projects and new authorizations, our overall expectations for capital expenditures in 2007 still stands at approximately 30 to $35 million.

In accordance with the stock buyback authorization issued by the Board of Directors on February 15, 2007, for up to an aggregate of $50 million in market value of common stock, the Company repurchased 242,000 shares of common stock in the amount of $10 million during the quarter.

Our balance sheet remains very strong. We continue to have no outstanding debt; and our current assets reach the level of 3.7 times current liabilities. Inventory levels ended the quarter at $68.3 million compared to $71.5 million at the end of the first quarter of 2007. For the remainder of 2007, we will continue to aggressively pursue inventory reductions, with the goal of returning $10 million in working capital by year-end.

Accounts Receivable ended with 68.6 days outstanding, which is relatively flat compared to the 68.3 days at the end of the first quarter.

This concludes my financial remarks, and I will now turn it back over to Bob.

Thank you, Dennis. Bob Daigle will now tell us about our new product development and new business development activities. In short, the things which will drive our growth two to five years from now.

Thank you, Bob. Good morning, everyone. Over the past few years, we have build a strong engine for growth and now have over 30 significant new products under development with a total fifth-year sales potential in excess of $500 million. This is a 50% increase from three years ago.

In addition to projects aimed at strengthening our position in current markets, our new business development teams have identified significant opportunities for growth in three new strategic markets -- semiconductors, healthcare, and energy.

During the first half of 2007, we launched seven significant new products with a combined fifth-year sales potential of over $120 million. For our Printed Circuit Materials segment, this included new RO4000 materials with improved electrical performance for high-definition satellite dish applications and base station antennas. We also introduced a new bond ply material for building more complex, high-speed digital circuit boards.

Looking forward, we have a considerable amount of effort focused on utilizing the thin dielectric materials capabilities that we developed for the mobile phone market to provide differentiated solutions for high-performance semiconductor packaging applications. We see a significant need for better materials in this market and a willingness to pay for effective solutions. We expect to launch several new products for this market during the next 12 months.

We also have several new high-frequency circuit material products under development that will again raise the performance bar in base station infrastructure applications and provide better electrical performance and improved reliability for high-speed digital multilayer boards. Several of these products are also expected to launch to during the next 12 months.

For our Custom Electrical Components business, during the first half of 2007 we launched a new keypad lamp with 70% higher brightness and increased robustness. We also launched a new low-noise semiconductor inverter that draws less power and can provide increased brightness for larger keypad lamps.

For the future, we have multiple projects aimed at providing new, innovative solutions for handset keypads and multiple projects aimed at expanding both our lamp and custom semiconductor business beyond keypads. These efforts also include new automotive applications beyond instrument clusters.

For our High Performance Foams segment, we launched thinner, more compliant PORON materials for LCD display dust sealing applications and new R/bak products designed to provide superior print quality and flexographic printing. We also launched the first of what we expect to be several new products aimed at the professional wound care market. Our new [DermaBac] product provides a bacterial barrier with high breathability, high conformability with a soft, comfortable feel, and is resistant to staining. This is the first of several new products that will make up a new and exciting healthcare product line for our High Performance Foams business.

Going forward, we have projects that will build on our family of highly-differentiated handset gasketing materials. We have new products coming to broaden our professional wound care offerings, and we have new products utilizing our silicon technology that meet the new, more stringent smoke and toxicity requirements in the mass transit market.

We also have a new consumer product line based on our transparent silicon technology currently used for nonslip decals in the handheld market. This product will be test marketed in the marine market under the [ShipGrips] brand name.

In addition to the efforts aimed at expanding existing businesses, we have several initiatives underway aimed at building new businesses for Rogers. For our newly-formed Thermal Management Solutions business, we have three new product families we plan to launch later this year. The first is based on technology we acquired for making complex pressure infiltrated aluminum silicon carbide composites. These low thermal expansion, highly thermally conductive metal matrix composites can be used in applications ranging from semiconductor lids to complex heat sinks and spreaders and semiconductor power controls for hybrid vehicles.

The second is a family of high-performance thermal interface materials for semiconductors based on patented technology we license from a large OEM that is producing these materials for our internal use. We believe this product outperforms other products currently available on the market. With this license, we are able to market these materials worldwide.

A third product line we plan to introduce this year is insulated metal substrates. These products are being developed to address thermal management issues in emerging applications for high-power, high-brightness LEDs.

Combined, these three new platforms will form the foundation for our Thermal Management business. We are continuing to find significant unmet needs and believe we can be the industry's innovation leader.

Another new business development opportunity we are very excited about is battery separator membranes. As you may have read in a recent press release, we signed an agreement with Optodot, a small startup with intellectual property related to cell gel membranes. These materials appear to have properties that will significantly improve the safety of lithium ion batteries and enable higher power density batteries. If successful, this will allow us to participate in this $100 million-plus market with a highly-differentiated product.

Hopefully this overview gives you some sense of why we are bullish about the future in spite of the recent sales decline in the handheld market. Thank you, and now I will turn it back over to Bob.

Thank you, Bob. Now we will entertain any questions you might have.

(OPERATOR INSTRUCTIONS) Brian Murphy with Sidoti & Company.

Good morning. It's Brian Murphy for Jiwon Lee. I was wondering if you would give us some color on what urethane foam customers are served by the joint ventures.

The joint ventures' territory is all of Asia except for China. China belongs to us. So they serve people such as Samsung, LG, Toshiba, Toyota, and a really long list. Because in the polyurethane foam business generally the applications use $10,000 to $50,000 worth of material per application, so that creates a large customer base.

Okay, great. With the headcount reductions, how should we be thinking about operating expenses going forward for maybe the next couple of quarters?

They will be going down. But as we move the production of Durel for automotive applications to China, we will see that reduction, but that will take us until the end of the year. Generally, this same situation with the flex business -- we will gradually, during the third and fourth quarter, see a decline in expenses as we transition the business.

Okay, great. That's it for me. Thank you very much.

(OPERATOR INSTRUCTIONS) We have no further questions.

Well, thank you for attending today. We look forward to talking to you next quarter with hopefully some better results. Thank you and have a good day.

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