Rogers Corp (ROG) 2007 Q3 法說會逐字稿

Good morning. My name is Phyllis and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation third-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). Mr. Wachob, you may begin your conference.

Thank you. Good morning, ladies and gentlemen. With me today are Dennis Loughran, Chief Financial Officer; Bob Soffer, Vice President and Secretary; Deb Granger, Vice President of Corporate Compliance and Controls; Paul Middleton, Treasurer; Bill Tryon, Manager of Investor and Public Relations and Pete Kaczmarek, Vice President of High-Performance Foams division. 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 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. The quarter turned out much better than we expected back in early August. Higher than expected sales were driven by high-performance foams, high-frequency circuit materials, power distribution systems and Durel. The third quarter is historically when pipeline filling for new cell phones normally occurs and when the satellite TV companies build inventory for the holidays. Thus, some of the sequential sales increase was customer inventory building.

Durel sales forecasting continues to be a challenge. But at least this time actuals were better than forecasted. I expect our fourth-quarter sales will not be as high as the third quarter as we believe the seasonal pipeline filling for cell phones and for satellite TV occurred in the third quarter.

As mentioned in our last conference call, we have notified all customers that EL lamp production in Arizona will end in December.

The qualification of our Durel Suzhou factory for the automotive marketplace is progressing satisfactorily. Currently, we expect to complete the Durel restructuring, which began in the second quarter, by the end of the year. We have begun to transfer the manufacturing of our commodity-based flexible circuit materials to our joint venture in Taiwan. Most of this transfer will be complete by the end of the year. However, the remaining business will only transfer after some equipment, which our JV has purchased, arrives. After the commodity flex products have been transferred to the JV, the only remaining flex circuit materials products that will be produced in the US will be some specialty materials. The restructuring of our flexible materials business should be substantially complete by year-end.

As you saw in the release, our joint ventures had a particularly strong quarter led by our two polyurethane foam JVs in China and Japan. We continue to introduce new products at a record pace such as [RO4233XM], high-frequency laminate specifically targeted at antenna applications, thermal polyurethane foam for bandage backing, Soft Seal, a gasketing and cushioning material and R/bak, thin tapes designed for flexographic printing applications.

In addition, our Thermal Management Solutions business is now sampling customers with prototypes and we expect to be production-ready in all three productlines by the end of the year.

Pete Kaczmarek will speak in some detail about the results and prospects for our high-performance foams business a little later this morning. I now turn it over to Dennis for the detailed results.

Thank you, Bob and good morning again to everyone. Rogers has come through a quarter that started with many question marks, but also with a strong commitment to overcome the business challenges of the second quarter. I believe our financial and operational results will attest to the fact that we have followed through on our commitment. We have done what it takes to renew our focus on what it will take to grow and sustain our sales and profitability.

In commercial spending, we successfully and quickly aligned our spending with lower sales expectations for 2007. All of our businesses have focused on balance sheet efficiency and have improved our accounts receivable and inventory levels as committed.

Constraints on capital spending have been successfully implemented without sacrificing critical growth projects. Our businesses have stayed focused on meeting customer needs and sales and margins have exceeded expectations. This all having been done while the announced major restructurings have been in progress for Durel and flex business units with both targeted for completing moves to lower-cost, more efficient business models by the end of 2007.

During the quarter, we also focused on critical growth initiatives. High-performance foams worked with our RIS joint venture to successfully accelerate our ability to produce foam from our second production line in Suzhou in the fourth quarter this year.

Our startup enterprise, Thermal Management Solutions, has also advanced toward getting their manufacturing facility production-ready by year-end 2007. Both of these represent substantial accomplishments to support future growth for Rogers.

With regard to our overall financial results, as you read in the press release, Rogers reported final GAAP income from continuing operations for the third quarter of 2007 of $0.52 per diluted share. The quarterly GAAP income compares to earnings from continuing operations of $0.97 per diluted share in the third quarter of 2006.

GAAP net income from continuing operations for the third quarter of 2007 was $9 million, which includes $324,000 or $0.02 per diluted share of net restructuring charges. In the third quarter of 2006, the Company had no impairment charges.

The third quarter of 2007 sales total of $109.6 million represents a $12 million or 9.8% decrease from the same period in 2006 with the decline being driven primarily by declines in restructured businesses, Durel and flex, totaling $21 million offsetting growth in our high-performance foams, power distribution systems and high-frequency business units.

Sequentially, total sales for the company were up 12% with double-digit growth reported in all three strategic segments, the strongest being high-performance foams at 17.8%, followed by custom electrical components at 15.2% and printed circuit materials at 10.8%.

As reported in our earnings release, the custom electrical component sales level for the third quarter was favorably impacted by an unexpected $3.6 million increase in sales of Durel products from a few mature cell phone programs.

Third-quarter 2007 gross margin was 28.4% versus 31% for the third quarter of 2006. For the first nine month periods of 2007 and 2006, the gross margin percentages were 25.4% and 32.8% respectively. 2007 year-to-date results include approximately $8.2 million in inventory charges and accelerated depreciation expense related to the restructuring activities undertaken in the second quarter. In addition, the current and year-to-date operating margins were achieved while reducing inventory by $9 million and $14 million respectively in those periods.

Selling and administrative expenses for the third quarter of 2007 totaled $16.9 million versus $15.4 million in the third quarter of 2006. For the first nine months of 2007/2006 the reported costs were $53.7 million and $46.1 million respectively. Excluding one-time events, the figure for 2007 would be $51.7 million resulting in comparative percentages of sales for the first nine months of the two years at 16% and 14.2% respectively.

As mentioned at the outset of my comments, we are well on the way of accomplishing our spending constraints to align overhead costs with our sales expectations. Our SG&A spend rate for the third quarter, excluding restructuring charges, achieved a reduction of $3 million below our pre-restructured levels.

Research and development expenses were $5.6 million in the third quarter of 2007 as compared to $6 million in the third quarter of 2006 and decreased slightly from $17.9 million in the first nine months of 2006 to $17.3 million in the first nine months of 2007. As a percentage of sales, research and development expenses were 5.1% in the third quarter of 2007 as compared to 4.9% in the third quarter of 2006. On a year-to-date basis, R&D expenses as a percentage of sales were down slightly from 5.5% in 2006 to 5.4% in 2007.

We continue to target a long-term reinvestment percentage of approximately 6% of sales into R&D, although year-to-year expenses may be slightly above or below that target depending on timing of cash flows of major initiatives.

As you heard in last quarter's comments from Bob Daigle, our Chief Technology Officer, we have a full portfolio of technology and new business development projects to support our long-term growth targets.

Other income and expense, which includes income from our joint ventures and royalties less other expenses, amounted to $2.2 million in the third quarter of 2007 compared to $2.1 million in last year's third quarter. We experienced $0.7 million in higher JV income due to better performance from our foams joint ventures offset by lower royalty income of $0.3 million, lower commission income from our PLS joint venture of $0.2 million and a combination of other less significant items.

Rogers' 50% owned joint ventures have third-quarter sales totaling $31.4 million, up 21% from our $25.9 million in the third quarter of 2006, led by strength in our two polyurethane foam joint ventures. As a result, overall equity income in unconsolidated joint ventures increased in the third quarter of 2007 as compared to the third quarter of 2006 from $1.4 million to $2.1 million. On a year-to-date basis, equity income decreased from $6 million in the first nine months of 2006 to $4.9 million in the first nine months of 2007.

The year-to-date decrease is due primarily to a combination of lower flex circuit profitability through our RCCT joint venture, offset by improvements in our high-performance foams joint ventures, Rogers Inoac Suzhou Corporation and Rogers Inoac Corporation during 2007.

During the quarter, the Company experienced a favorable tax rate due to the effect of several discrete tax adjustments booked during the quarter, the most prominent of which was the cumulative amount required to adjust our year-to-date tax rate to our latest annualized estimate, which the Company now expects to be 21% to 22%, excluding the effects of restructuring charges.

Turning to our financial position, Rogers ended the quarter with a cash to short-term investment position of $66.1 million compared to the second-quarter total of $64.1 million. This increase in the quarter stemmed largely from collection of accounts receivable, a substantial inventory reduction level, $9 million during the quarter, offset by stock repurchases of $8.7 million and capital expenditures of $3.4 million.

At this point, with the impact of our capital constraint targets for the year and timing of large infrastructure projects, our overall expectation of capital expenditures in 2007 stands at approximately $25 million to $30 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 approximately 214,000 shares of common stock in the amount of $8.7 million during the quarter.

Our balance sheet is in better position than any recent comparable period. We continue to have no outstanding debt and our current assets reached a level of 3.73 times current liabilities. Inventory levels ended the quarter at $59.4 million compared to $68.3 million at the end of the second quarter of 2007. With that reduction, we were close to achieving our total stretch target of $15 million in reduction from our peak level of February this year. For the remainder of 2007, we will continue to aggressively pursue strict inventory targets to retain this cash benefit through year-end.

Accounts receivable ended with 59.3 days outstanding, which is improved compared to 68.6 days at the end of the second quarter as increased focus on Asia accounts brought that region to its best level this year at 70 days outstanding.

All totaled, if we perform as expected for the fourth quarter our asset management, capital spending controls and cost reduction efforts will have improved Rogers with cash generation totaling the third best level in the past 10 years despite the operating performance issues encountered and overcome during the year.

This concludes my remarks and I will now turn the call over to Pete Kaczmarek, Vice President of High-Performance Foams, who will talk in some depth about the prospect of his business over the next few years.

Thank you, Dennis. Good morning. I am pleased to be here today on behalf of the high-performance foams team worldwide to share some information with you regarding the HPF operating segment. I would like to make a few comments and I would be happy to address your questions.

As you may know, high-performance foams is comprised of two main material technologies -- silicone foams and composites and urethane foams and composites. Composites are combinations of our foam materials with a variety of films, fabrics and other substrate materials. These composites form a rapidly growing percentage of our sales.

We build upon these material technologies to create product families that are used in a very broad array of applications cutting across all of Rogers' core markets. Some examples of applications are gasketing, cushioning and sealing in the portable communication and other electronic devices, cushion mounting tapes for flexographic printing, foams and composites for consumer footwear, foot care and other consumer applications, insulating and sealing tapes for railway and aerospace applications and a very wide variety of industrial uses for gasketing, cushioning and sealing.

As mentioned earlier, we achieved record sales in the third quarter primarily driven by increased penetration in the portable communications market. Our worldwide marketing and sales teams have done a great job working with portable device designers in all the major OEM centers to influence design-ins of our materials and this is the time of year where we see the biggest impact of that effort as production of new models surges in advance of the holiday buying season.

I am pleased to say that along with our joint venture, Rogers Inoac Corporation, we are also making significant progress in penetrating some of the key contract design and manufacturing houses that are taking on more and more of the design works from the OEMs.

I should mention that in HPF, our sales do not rely significantly on any one OEM or device model. A typical cell phone for example might have as many as ten different pieces of our products in it and each is generally quite small. A typical content in a phone might range from $0.01 to more than $0.10. When you think about it, that seems like a pretty inexpensive insurance policy for a cell phone designer to ensure that the phone is reliably protected from shock, vibration, dust and moisture. A diversification across models and OEMs worldwide makes all those little pieces add up to a significant business for us.

Much of our success in this segment has come from new products. Over the past few years, we have introduced five new products for this market, each focused on emerging design needs. Our latest introductions are successively thinner versions of a new product technology we call Soft Seal, which was developed to address the design challenges in increasingly thin, feature-packed devices that are becoming more and more popular. We are seeing rapid acceptance of these new products even in their first year of introduction.

Another reason for our success in this market is that we are innovating in the ways that we are reaching our customers. This year, we began delivering product training and design tools via Web seminars sometimes known as webinars, which are proving to be very popular among designers all over the world. We are also providing improved online design tools to make it easy to pick the best Rogers product for a given application.

In the transportation market, we are benefiting from new applications in commercial aircraft, trains and subway cars. For example, we have done a lot of work to understand the light rail market and we are starting to see some new design wins that should play out over the next year or two.

This past quarter after one of the quickest development cycles in our history, we launched the first of a new family of products for railway subfloors. This product meets the most stringent flame, smoke generation and toxicity standards in the industry and is also lighter than any other product we have offered before, which makes it a more economical choice from a fuel consumption standpoint.

Also during the third quarter, we saw the first significant wins for our newest family of the R/bak brand of cushion tapes for mounting flexographic printing plates, which we launched in the first quarter of the year. We've received a lot of great feedback on the print performance and the long life of these products and we are ramping up our commercial efforts to expand our sales worldwide.

Over the next few quarters, we will be adding several new products to address some other significant niches in the flexographic printing market and I expect to see continued growth for us there. It is a big market and right now, we have a pretty modest overall marketshare.

All in all, by the time this year is over, HPF will have launched a record number of new products across all of our core markets, even in the midst of this record demand. That speaks to the hard work that our marketing, development and operation teams have put in to accelerate the product development process. Those products will really help drive our growth over the next few years.

I would like to make mention of another very important milestone we reached in the third quarter. In August, we completed installation and started up our newest line to manufacture PORON urethane products in Suzhou, China, more than three months ahead of schedule. Several products have been approved by customers and this line is already beginning commercial production, which is just in time as our demand in that part of the world continues to increase. Our team in China and a lot of people who supported them in Japan and in the US did a fantastic job with that line and we are very proud of them.

You have heard us talk about Rogers' efforts to reduce working capital. The HPF segment has been a significant participant in that effort over the past year. Last year at this time, we were building finished goods inventories as a precaution during labor negotiations with the union in our Connecticut facilities. After reaching a successful labor agreement, we began the process of rightsizing our inventories and we have reached that point now. However, we believe there is an opportunity to further reduce worldwide finished goods as the new China line comes up to speed since we will not have as much product in transit on the water as we have in the past. We will be working to complete that effort over the next quarter.

I want to make a comment about the operations teams that we have in our US facilities and what a great job they have done satisfying customers and improving productivity over the past several years.

Going forward, as our China line gets into full swing, our US production teams will be continuing to supply our growing business in North America and in Europe making specialized products that require particular skill and experience and increasing new product and process development. We intend to keep them busy helping us to grow and diversify the high-performance foams business into the future.

Before I close, I wanted to give a little color to the new products we are working on for launch over the next few quarters. In active development are several new products for the communications, computing and consumer electronics markets. First is an even thinner, more compressible product that we believe will also significantly simplify the design challenges for our customers. Another is a truly electrically conductive foam with excellent compressibility that is a real unmet need, and one that is growing over time.

In the transportation market, we will be adding thicker versions to our new family for railway interiors and a composite foam fabric product for flame-rated applications in train gangways.

We are continuing development of our family of products for healthcare applications too. This year, we launched a foam and film combination that can be used as a wound dressing backing. Among other attributes, it is highly breathable, which promotes faster healing. Key healthcare OEMs are currently evaluating it for next-generation products.

In development are other products that go even further, combining excellent breathability with bacterial and possibly even viral barrier properties. Those are just a few examples.

You can see that we have a robust new product and new application pipeline and we are really starting to see the results of our increased focus on market development and diversification over the past several years. In fact, I mentioned that 2007 was a record year for new product launches and we believe that 2008 will be even better. I will turn things back over to Bob now. Thank you.

Thanks, Pete. At this point, we will be happy to entertain any questions you might have.

(OPERATOR INSTRUCTIONS). Avinash Kant, Broadpoint Capital.

Good morning, Bob, Dennis and the whole Rogers team there.

Good morning.

A few questions actually. I would start with maybe a quick question with Dennis. Just breaking up the extraordiaries here, it looks like if you don't count the discontinued operation, your GAAP earnings were $0.52. And if you took out the extraordinary items, the numbers would have been $0.54. You also talked about the positive tax impact, but you didn't give how much of -- how much was it actually? What was the amount of positive tax impact?

About $0.05 per share diluted.

So that would come out to in terms of millions, how many millions -- was that almost $1 million?

About $800,000 or $900,000 I believe.

So I'm saying should we count that as extraordinary or--?

It's a discrete item for the third quarter, so we had an 18.5% net tax rate for the quarter because we had to take the cumulative impact for the first nine months and get the year-to-date rate correct at that 21% to 22% level. So when you look at the rate for the fourth quarter, it would be back at our annualized impact of 21% to 22%, excluding anything that might happen in the fourth quarter.

Okay. And so is that the way we should look at taxes in the next year also or we should model differently?

I will tell you, I believe there were substantial enough changes in terms of our filing positions and things that we have to implement to actually get our tax rate -- get our programs to where we would have our actual tax rate for next year. It is hard to project without getting our annual plan put together and see where our incomes are going to fall. Our average tax rate depends a great deal on both the geography and the business transactions as they flow through our lower tax jurisdictions as opposed to US and so I would say we have been predicting somewhere in the high 20s. I suspect if the geographies and those business transactions fall where they did this year, all things being equal, we might come in slightly less than that. So I am thinking a range of 25% to 28% is the best I can do at this point.

And if you sell more to Asia, your tax rate is lower?

Yes. Excuse me. If we sell more in Asia from tax-protected lower tax jurisdictions, our tax rate is lower. Things we produce in the US and sell into Asia typically has a US tax rate impact.

Okay, perfect. Now coming to the business side, of course, it looks like HPF is doing quite well here. And now you have seen a strong growth in the current quarter. Should we see this as a trend into fourth quarter and beyond or should we see this business kind of flattening -- the upside would have been a bit higher this quarter. Is that --?

Well, this is historically the peak of, as Bob said, when there is a lot of inventory building around cell phone and other electronic device manufacturing. The pattern is changing over time. It's really tough to predict because the Chinese New Year holidays are becoming a more significant buying season in the global economy. So I would say that, generally speaking, we see a bit of a decline, but a lot depends on what kind of inventory positions and what the buying season looks like.

So of course, while the peaks have been in the third quarter, I could see that over the past few years every year, the peak in the third quarter has been higher than the previous one at least. So that does show the growth. When do you expect the new products to start hitting in and the impact from that showing up in any material way?

Typically, there is about a 12 to 18 month period of time from when we launch a product to the time that we really start to see design wins and start to see them ramp into production. We have been a little surprised with our Soft Seal products, that that time gap has been a little bit less, a year or a little bit less. But I would say you could expect from time of launch 12 to 18 months before you know whether you have a real winner or not.

Perfect. Thanks so much right now. I'll ask questions later on.

Jiwon Lee, Sidoti & Co.

Good morning. So if we just include the net -- exclude the net charges in the third quarter, was third-quarter pro forma gross margin about 27.7%, right?

Yes.

The first question is then what is the current Durel utilization?

Less than 50%.

Okay. And then how should we look at your gross margin in '08? There are obviously a lot of different moving parts going on here. Your inventory sales on Durel should go down and you have the urethane foam extensions and perhaps later on high-frequency expansion and finally, I think you still have a certain [low] $1 million of accelerated depreciation, so how should we massage all these things and look at your gross margin next year?

Well, I believe next year since we are forecasting that Durel will probably have a $40 million sales decrease, it will be difficult for us to exceed the sales this year. However, I believe our gross margins will rise as the sales increases are going to come from the most profitable businesses.

And Bob, you are alluding mainly on the urethane and other high-performance foam. That margin has now grown above and beyond your high-frequency circuit materials with maybe a gap of 10-plus basis points, correct?

Yes, well, you are looking at a -- in the -- in the circuit material area, you are looking at a combination of flex materials and high-frequency. I think you will see a significant change in that reporting segment next year.

And a little more color on the high-frequency market. I think you alluded that the satellite TV side, you are expecting perhaps a little bit of a slowdown starting from the fourth quarter, but then I think there was some positive on your digital applications as you said in your press release. So could you give us a little color on your satellite TV market going into fourth quarter and '08 and also the strength that you saw in the digital applications and how should we think about that business next year?

Sure. One of the bigger areas is in the cell phone infrastructure in 3G. We saw that slow in the third quarter and we expect it to be slow also in the fourth quarter. However, the satellite TV area, as they are implementing more of the high-definition channels, more and more people are switching and when they make that switch to the larger number of high definition channels, those systems use twice as much of our material as the old system. So even at constant units, we have a doubling effect going on here. So this has been very rapid growth and we just expect that it may not be quite as high in the fourth quarter, but we believe that in the longer term, meaning next year, it will be larger than it was this year.

On the digital side, the digital side is really a set of applications that are associated with the Internet and the switching of data in systems that are at 10 gigabytes, that is 10 billion bytes of data per second or higher and here, were used in very large, high layer, countback [planes] and we have had considerable success here and that continues to grow pretty rapidly.

Okay. So is that mainly on the digital side, Bob, is a function of sort of a stronger market or do you think that you are taking some shares or--?

We have most all the business at 10 gigabytes and above switching and it is only recently that systems have been introduced that will switch at that speed. They are reaching -- now reaching the point at which our materials are becoming very important.

Okay. And last two questions. There was not a lot of mention of your fourth segment, which is the polymer product. You didn't put a lot of color into this and I think it has been rather unprofitable. So what is your expectation from this segment for next year?

I believe that segment will be in the breakeven range. It is not one of our growth areas and we continue to evaluate what we should be doing with these businesses in the long term.

Okay. Because I think it is a hodgepodge of sort of smaller productlines, yes?

It is. They are all fairly small businesses.

Okay. And finally to Dennis, have you guys thought about your CapEx expectations for '08 now that some of the spending appears to be sort of kind of getting pushed out?

Yes, we are in the midst of putting our capital programs together. We will have a pretty substantial carryover against the, I think, almost $50 million worth of approved authorizations of which we are spending against now. If we spend at the $25 million to $30 million level, we will probably have an incremental $10 million of infrastructure probably that would get carried into next year. So we will have a constrained level of capital in line with our cash generation capabilities and we will hold to a level that will allow us to maximize our cash generation in line with our growth expectations for those projects. I wouldn't expect it to be much higher or lower than the $30 million to $35 million level given all that we think we have to get done next year.

I guess most of the pushed-out expenditure relates to your kind of high-frequency plan?

They have both equipment and infrastructure in high-frequency that are top dollar in terms of the type of products we have in our slate right now, yes.

That is all for me. Thank you.

Tom Lewis, Century Management.

Good morning. Just a couple of quick questions getting at your sales trend. You mentioned something like $21 million in the third-quarter comparison of, as I took it, the discontinued products. When we're looking at the difference, $20 million swing between the sales guidance you gave us for the fourth quarter and where it was last year, is there a comparable figure you can give us for discontinued products fourth quarter year ago?

Tom, I believe discontinued products was only $2 million.

All right.

And it would have been similar in the fourth quarter.

Okay. Well, then let me -- all right. Well, I guess I will have to look at the transcript to see where that $21 million came from.

We were talking about the change in sales level on restructured businesses. The discontinued -- the technical definition of discontinued operations is only the elimination of our polyolefins business.

Okay, okay. So is it, what, a semantic technicality here, but if I am trying to make sense of why your revenues are trending the way they are as we get out into the fourth quarter for whatever reason, I mean, can you give us a sense -- I mean, what the figure you are going to be talking to that was $21 million in the fourth quarter, what is it going to be in the fourth quarter? Do you have that?

Not off the top of my head, no, because I don't have off the top of my head. Maybe someone here has the fourth quarter of 2006 number? We have it here. We just have to find the right piece of paper.

All right. And another piece to that, I mean, is there anything -- can you give us a sense of how much of that is sales that would have -- you are talking about sales that are going to your joint venture, that they migrated out of the top line and into the --

Okay. The flex materials, although we are having our joint venture manufacture them, we will continue to sell them, so the sales do not go away.

But do they flow through the top line?

Yes, they do. What is changing here -- the vast majority of the change is associated with Durel and one major cell phone program --

Yes, I understand this.

-- declining. That is the source of almost all it. The flex is declining also, but not nearly the magnitude of Durel.

Okay. So there's no --

Fourth quarter of 2006, we did about $123 million and with the guidance that you have seen, I think that gap is most likely mostly Durel, a little bit of flex because their sales levels will be slightly lower not related to the transaction, but mostly due to the market, offset by year-on-year growth in our core strategic businesses.

Okay. All right. Well, that's what I was trying to clear up, thank you.

(OPERATOR INSTRUCTIONS). Bob Fetch, Lord, Abbett.

Hi, good morning. Can you just repeat what you expect CapEx and depreciation to be for the next two years?

Our current depreciation rate is running about, excluding accelerated depreciation, about $21 million. We are probably going to be in the $25 million to $30 million range for '07 and we would expect that next year probably not to exceed the $30 million to $35 million range. Our CapEx -- I mean our depreciation would probably grow a little bit in terms of the capitalization of things we are doing this year in probably the $1 million to $2 million range at most because we also will have assets obsoleting off the list and losing depreciation.

Okay, so $1 million to $2 million over what CapEx this year?

$1 million to $2 million over the depreciation of $21 million this year.

Okay.

CapEx would be in the neighborhood of $30 million to $35 million next year versus $25 million to $30 million this year. So think of it is about a $5 million increase in CapEx.

And I guess what is that for -- two new lines?

No. Most of the increase will be associated with the high-frequency building and press sets that will go into China.

Okay, in the existing Suzhou location?

Yes, in the existing location. That expense, in all likelihood, will be spread over 2008 and 2009.

Okay. So where might '09 end up being most likely at this stage?

I would think in the $30 million range. We should begin to move backwards on the CapEx and more closely mirror the depreciation level by 2009.

Okay. In the EL line, can you elaborate a little further whether you are making some progress in some of your nontraditional areas that have been spoken about at times, including automotive interiors and things of that sort?

We are making some progress both in the advertising area, although, of course, it is really early, but also in the integrated circuit area where we have several potential new applications that it is a little too early to talk about, but things outside of the powering of EL lamps.

So when you look at those opportunities, are they relatively short product development cycles, meaning they might come to fruition in 12, 18 months as opposed to two years or more?

Yes, we would expect that if they come to fruition, they will be 2009 sales of some significance.

Okay. You clearly pointed out satellite TV for your printed circuit materials. Can you break out the relative importance of satellite TV versus infrastructure versus other in that division?

Other? I would say that other is the biggest, infrastructure is maybe 80% of that and satellite TV, at least this year, would be about 75% of the infrastructure.

Okay. And can you elaborate a little bit further on infrastructure and what you see going on in say 3G markets, as well as any military applications, which I guess are in other?

Right, yes. Military would be in other. We see 3G picking up in 2008. There seems to have been a big pause here in the US. Of course, at some point here, China will actually start installing 3G and that will, of course, be a large chunk of sales in the tens of millions of dollars in all likelihood.

So you really haven't seen that impact yet?

No. There was one big demonstration order given to ZTE. We were the supplier of the materials, but that was a one-time event so far.

So is that potentially where the biggest upside to current forecasts could be next year?

Yes.

Okay.

In the military side, of course, the defense contractors continue to get more orders and we have a lot of applications in radar systems and guidance systems. We believe that will continue to grow. It is a slower rate. It is in the 8%, 10%, 12% range.

Okay. When you look at printed circuit and custom electrical and high-performance foams, can you give us a better sense for what the gross margins are generally in those areas so we can have an idea as mix changes what to expect?

Sure. Foams are the highest, significantly above the reported average. The printed circuit materials is, at this point, about the average and the custom electrical components, of course, is below average.

And are we talking the current average at what you just reported at 28% or where you ought to be at 35% or better?

That applies both to today and to the future.

Okay and you said printed circuit was at corporate average?

At the moment, yes, due mostly to the influence of the flex circuits part of it.

Okay. You talked about utilization at Durel. Actually what is the utilization for printed circuits right now?

On the high-frequency side, we are on a five-day basis in the 80% range and, of course, flex is very much underutilized.

Okay. Will there be any benefit from any incentive comp accrual reversals in the last quarter?

We have no incentive comp accruals, did not anticipate anyone earning a bonus except for our power distribution system people who are having a record year. They will earn a bonus. No one else will.

Okay.

Bonuses, I think you know -- if we don't make more money than the year before, there are no bonuses.

So will that be the simple target for next year then, improvement over '07 or do you have to make up some of the difference from '06?

Of course, I would like it to be GAAP, but I do not believe that the Board will allow GAAP. I believe it will probably be -- the baseline will probably be set at the non-GAAP number, improvement from there.

And obviously you got some upside for some period of time in the microwave area, but it seems like you have been making more consistent steady progress in the foam area in recent years. Can that piece or ought that piece, when you look out say three to five, can that grow equally or better or faster than the other divisions?

I think --

Well, I think we have been growing, Bob, at probably a compounded rate of 12%, 13% over the last six, seven years. One of the things about the foams business is that it is very diverse. It is very broad across a lot of different markets that some are up when others are down. We aim to at least keep up that pace and if some of these new products hit, go better than that.

And on the high-frequency materials, I would expect that it should continue to grow a little faster than the foams.

So you would or wouldn't then expect foams to become a larger percentage of the overall sales base?

Yes, I would expect it would become a larger percentage, that both the high-frequency materials and the foams will continue to become a larger percentage of the total.

Because it clearly has been more of a consistent piece from your other --

Both of those have been pretty consistent. The flex part and the printed circuit material area has masked the steady progress of the high-frequency.

Okay and then as you noted earlier, can you now refresh us now that you are overachieving in the R/bak area what the potential market potential may be?

That was your word. Well, the market for printing cushions is still growing probably 3%, 4%, 5% a year because flexographic printing is still the most economical, high-volume, high-quality, printing method. We are still a relatively small player, especially in the thin tapes, the highest, the largest and the highest-growing segment of the market, but we have got products that provide excellent print quality and we are starting to demonstrate that customers can also see better productivity with our materials as well. So it is a matter of getting that out there and we have to increase our distribution worldwide as well.

So what do you think the served market is and what percent are you actually of that?

It is in the region I think of $200 million worldwide and like I said, growing some and we are a pretty modest player today.

Okay. Well, if you end up getting a fair share of that then that would be a nice sales increment to the total.

Yes, it would. We have been working at that a long time.

And now let's assume that you have got the right product, what is the acceptance cycle like? Is it long from this point forward?

Well, the way it works in printing is that each printing house really lets the printing operators and managers who do the actual work more or less specify which cushion mounting tape they are going to use. And if they like it and it seems to improve their productivity and their print performance, they will ramp it up pretty quickly.

The complexity in this market though is that it is typically sold through distributors who distribute a variety of products to those print shops and so getting their salespeople educated and up to speed takes some time as well.

And in regards to the various initiatives you have got underway, since there have been a couple of them in the last few years, what is the biggest operational challenge that you folks have next year?

For R/bak or just in general?

No, in general.

As I mentioned at the beginning, the products that are under development are increasingly complex combinations of foams plus films and adhesives and other substrates and just adapting the manufacturing technology to those kinds of products and being able to ramp them up quickly is probably the biggest operational challenge.

And in regards to the buyback, I guess you guys are about two-thirds of the way through it. Do you have any anticipation on when that would most likely be completed?

Currently, we think the stock is no longer severely undervalued, so at this price, we are not likely to be purchasing more.

Okay.

I think we may be done for the year. At least, I hope we are done for the year.

All right. Thank you.

Avinash Kant, Broadpoint Capital.

Just a quick follow-up. I wanted to estimate -- in the past, you have talked about the loss of electroluminescent lamp business from one of the key customers. Has there been any change in your projection for the calendar year '08 for that particular business or what do you expect now?

Our projections have not changed. What has changed is that we project selling more this year than we thought four months ago. Therefore, the drop between this year and next year will be larger.

Perfect. And one clarification I didn't get. You were talking about being in different cellular phone components and, of course, for the HPF business, you said you could be almost having one to 10 components in each cell phone and the opportunity you said was $0.01 to $0.10. Is that for each component or for overall all those 10 components?

That's overall content in any given phone model.

Perfect. Thank you so much.

Dana Walker, Kalmar Investments.

Good morning. The SG&A number, if we were to back out $1.1 million, how does that run rate compare to the type of sizing that you were describing as you were describing a pared back expense structure?

That would put us in the neighborhood of a $60 million run rate, which would be pretty close, but not quite, to our target of 14%. We will need to grow into that as I don't believe we are going to be able to pull that down much more, maybe a little, but not a whole lot.

$15 million a quarter is roughly where you see the recurring level?

Yes.

I don't think I heard this number explicitly, you probably don't want to be explicit, but as you talk about digital product applications in high frequency, roughly what proportion of your high-frequency business might that account for now?

In the mid single digits percentagewise.

Growing at what clip?

At least twice the rate of the business overall, which, of course, is what you expect if it's smaller, it grows faster.

Agreed. Your flex business, if we were to use Q3 as a baseline as you reformat how you go to market and what will happen in the P&L given your selling relationship with the joint venture, could you describe the P&L effects that we might see in the first half of next year compared to what we saw in Q3?

Yes, I believe the P&L will look better. It will have a negative effect on -- slight negative effect on gross margins, but a positive effect on operating earnings.

We will see in the P&L -- we will see revenue.

Yes.

And I presume you won't have product costs.

We will because we will be purchasing the product from the joint venture. So the product cost will in effect go up some, but then the only expense we will have associated with it is selling expense.

Will there be any income in your joint venture line?

Yes, the joint venture's income will go up because of this.

Given what we know about the size of that business, has it been -- I presume it is a red affair at the moment.

Yes, it is.

You would expect this to become a profitable business line for you under that relationship?

Yes, it's the only reason we would do this is to turn it into the black.

What is the swing potential at the bottom line annualized?

A few million dollars.

Pretax?

Yes.

That's real money. You have talked in the past about how whether you were producing at the pace of sales, overproducing to the pace of sales or underproducing, the effect that that has had on your gross margin and on your bottom line. What would have been the dilution on gross margin in Q3 given that you were underproducing vis-a-vis your sales pace?

The estimate we have got is between 2% and 3% on gross margin.

We have talked about how flex and the changes there will mildly pressure gross margin going into '08, what will the effects that you are taking -- or the steps that you are now taking on Durel do to gross margin in the first half of '08 versus where we are now?

The gross margin will increase and the reason is is that we will be done producing automotive in Arizona at the end of the fourth quarter and therefore, there will be a larger gross margin that is produced in China.

Would you expect the Durel benefit and the flex detriment to offset or would one be stronger than the other?

Pretty close to offsetting each other.

That's all I have today. Thanks.

Jiwon Lee, Sidoti & Co.

Hi, just a quick follow-up question on that joint venture flexible circuit materials move. If it is not competitive information, could you tell us if you move these products to a joint venture what would be the rough sort of cost savings in terms of the sales dollars?

Well, the joint venture has excess capacity. Therefore, this will -- for the joint venture, this would be a benefit -- after material and labor, all the rest of the money would flow to the bottom line after we get a significant discount for the selling into our territory.

And Bob, what was the logic of sort of buying this product back from joint venture? Why not just joint venture handle everything?

There are some very specialty products that the joint venture is not capable of manufacturing and those products are sold in the United States. They carry a different kind of margin and a different customer base and therefore, it makes perfect sense to us to continue to use that equipment that is fully depreciated to manufacture those products and also to allow us to develop some new things, which will address other kinds of markets that have no relationship actually to flex materials as we know them today.

I don't think I asked the question actually the right way. I guess the question that I really wanted answered was by moving your flex materials to joint venture, how much cost competitive would you be if it is the same product? That was sort of kind of my question.

The joint venture's costs are 15% to 20% below our costs partly because their machines run more than twice as fast, partly because the labor rates are significantly lower and in addition because our joint venture generates -- our partner generates his own power. All those are significant expenses here and they are all lower and the joint venture partner is a copper manufacturer and makes some of the raw materials that we are able to use. So this is the typical vertical integration that occurs in Asia with large companies, large chemical companies.

Okay. So what you are saying is that joint venture makes the product, but it is going to impact top line all the way to the bottom line even next year. Is that sort of kind of how I should look at this?

Yes.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. Are there any closing remarks?

Yes. I would like to leave you with one last thought. After the second-quarter restructuring, we have improved our sales outlook. We have begun to increase our gross margins and we are introducing new products at a record rate. Continuing down this path significantly improves our prospects over the next two to five years. Thank you and good day.

This concludes today's Rogers Corporation third-quarter conference call. You may now disconnect.