Rogers Corp (ROG) 2007 Q4 法說會逐字稿

Good morning. My name is Darla and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation fourth-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Mr. Wachob, you may begin your conference.

Good morning, ladies and gentlemen. With me are Dennis Loughran, our Chief Financial Officer; Deb Granger, Vice President, Corporate Compliance and Controls; Paul Middleton, Treasurer and Bill Tryon, Manager of Investor Relations. 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 statements. I will now turn it back over to Bob.

Thanks, Dennis. The quarter turned out much better than we expected in early November. The higher-than-expected sales were driven by growth in High Performance Foams, Power Distribution Systems and Durel declining significantly less than expected. For the year, total sales declined by $14.5 million, but the decline at Durel and Flex exceeded $43 million.

Looking ahead, as stated in the news release, we expect Durel and Flex Material sales to decline by $50 million to $60 million in 2008. Now we have taken steps to restructure these businesses in order to help adjust for the lower revenues. We have essentially completed a transfer of EL to our Suzhou facility and we have transferred many of the commodity Flex Circuit products to our joint venture in Taiwan. However, the remaining transfers may not continue as sales volumes have declined and the production machinery at our joint venture needs long runs to be profitable. At the current level, we are able to fill all Flex orders from the U.S. at our minimum staffing level of two 12-hour shifts working three days.

Our strategic businesses remain strong. The continued shift by consumers to high-definition TV is causing our business with the low-noise, block-down converter manufacturers who use high-frequency materials for satellite TV dishes to continue to grow. We are also seeing initial production of automotive lane-change sensors. We expect this new automotive sensing application to be a rapidly growing area, adding several million dollars of sales for Rogers' high-frequency materials in 2008.

The wireless infrastructure business is expected to remain sluggish, except for network builds occurring in Brazil and India. Any infrastructure growth will be in 3G and WiMAX systems as 2G sales will continue to decline. Finally, high-frequency material sales for backplanes and backbone Internet switches are expected to continue growing.

The addition of a new polyurethane foam machine in Suzhou was very successful with the new capacity coming on stream in Q4, allowing us to achieve record sales at High Performance Foams. As more products are qualified on the new equipment, we should be able to reduce our finished goods inventory for polyurethane foam. The biggest advantage of the new equipment is it will allow us to better serve our Asian-based customers.

For all of 2007, we introduced 12 new products with potential 2012 sales of over $170 million. New product sales in 2007 totaled 35% of sales or about $150 million. It is our efforts in new business development, our new thermal management systems business is an example, and our new product development that will drive our growth over the next five years. We continue to believe that a long-term 12% compounded annual growth in sales is attainable. I will now turn it over to Dennis for the detailed results.

Thank you, Bob and good morning again to everybody. Rogers finished 2007 with strong results in the fourth quarter for both sales and EPS and exceptional results in balance sheet management and cash generation. These results were needed to ensure a solid base for an upcoming 2008 that has us facing the certainty of having to overcome significant loss of sales and profits from our Durel business, as well as the uncertainty of a global economy that has everyone wondering where it will take us.

In sales, our fourth quarter achieved a level almost $8 million above the midpoint of our guidance range with strength across all reporting segments except for printed circuits, which experienced a slight fall in demand during the fourth quarter. Earnings per share of $0.48 per share reflected the highest manufacturing margin of the year at 31%.

Our businesses culminated an outstanding year of balance sheet improvement with inventory levels reduced by over $22 million from their peak early in the first quarter, a reduction of 31%. In addition, accounts receivable was maintained at approximately 67 days despite continued pressure for extended terms in Asia.

Free cash flow of over $34 million was generated, representing a high point for the last 10 years and a fourth straight year of improvement. Overall, the fourth quarter of 2007, Rodgers reported earnings of $0.48 per diluted share from continuing operations for the fourth quarter of 2007. This compares to earnings from continued operations of $0.80 per diluted share for the fourth quarter of 2006.

The year-over-year change is attributed primarily to lower sales and the resultant loss of contribution related to the Durel business decline. In addition, higher commercial expenses were experienced in the fourth quarter of 2007, resulting primarily from additional professional service fees and a number of charges isolated to the fourth quarter.

Going forward in 2008, we expect our quarterly average SG&A costs to be approximately $17 million with the first quarter of 2008 approximately $1.5 million higher than that target due to higher equity compensation expense during that period.

The fourth quarter of 2007 sales total of $108.7 million represents a $12.2 million or 10.1% decrease from the same period in 2006. With the decline being driven primarily by lower revenues in restructured businesses -- Durel and Flex -- totaling $20 million, which offset growth in our High Performance Foams and Power Distribution Systems business units.

Sequentially, total quarterly sales for the Company were down slightly at 0.8% with small improvements in High Performance Foams at 2% and Custom Electrical Components at 4.8%, offset by a quarterly decline in printed circuit materials at 7.5%. As reported in our earnings release, the Custom Electrical Components sales level for the fourth quarter was supported by higher volumes for mature cell phone programs, totaling approximately $10 million to $15 million on an average quarterly basis, which we do not expect to continue in 2008.

Fourth-quarter 2007 gross margin was 31% versus 28.4% for the fourth quarter of 2006. For the full year of 2007 and 2006, the gross margin percentages were 26.8% and 31.6% respectively. 2007 results include approximately $7.9 million in inventory charges and accelerated depreciation expense related to the restructuring activities undertaken in the second quarter. In addition, operating margins for 2007 were achieved while reducing inventory over $22 million since the first quarter.

Selling and administrative expenses for 2007 and 2006 were $73.2 million and $62.2 million respectively. The increase was driven primarily by restructuring charges of approximately $2.4 million, increased equity compensation charges and increased professional service fees, as well as annual merit increases.

In addition, our planned spending levels for 2007 were based on expectations of sales increases that did not occur and the spend rate was not adjusted until the second half of the year when we implemented our restructuring and cost reduction programs.

Research and development expenses were $7.4 million in the fourth quarter of 2007 as compared to $6.3 million in the fourth quarter of 2006 and increased slightly from $24.2 million for the full year of 2006 to $24.7 million in 2007. As a percentage of sales, research and development expenses were 6.8% in the fourth quarter of 2007 as compared to 5.2% in the fourth quarter of 2006. On a year-over-year basis, R&D expenses as a percentage of sales were up slightly from 5.4% in 2006 to 5.7% 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 the timing of cash flows for major initiatives. As commented by Bob in our press release, 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 $3.1 million for the fourth quarter of 2007 compared to $5.8 million in last year's fourth quarter. We experienced $0.6 million in higher JV income due to better performance from our foams joint ventures, higher commission income from our PLS joint venture of $0.4 million, offset by lower royalty income and an increase in other net charges related primarily to the realignment of our legal structure in China, as well as certain other one-time charges across our businesses.

Rogers' 50% owned joint ventures had fourth-quarter sales totaling $35.3 million, a record for any quarter, up 20% from $29.4 million in the fourth 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 fourth quarter of 2007 as compared to the fourth quarter of 2006 from $2.6 million to $3.2 million. On a year-over-year basis, equity income decreased slightly from $8.6 million in 2006 to $8.1 million in 2007. This year-over-year decrease is due primarily to a combination of lower Flex Circuit profitability through our RCCT joint venture, somewhat offset by improvements in Rogers INOAC Suzhou Corporation, one of our High Performance Foams joint ventures during 2007.

The Company's 2007 effective tax rate, including restructuring costs, was 13.2% and excluding restructuring charges was approximately 22%. The Company believes the tax rate for 2008 will be in the 28% range as foreign tax holidays continue to expire.

Turning to our financial position, Rogers ended the fourth quarter with a cash and short-term investment position of $89.6 million compared to the third-quarter total of $66.1 million. This increase in the quarter stemmed largely from collection of accounts receivable and substantial reduction in inventory levels, $8.2 million during the quarter, offset by stock repurchases of $2.9 million and capital expenditures of $10.9 million. Capital expenditures were approximately $31 million for the year and Rogers anticipates capital expenditures in 2008 of approximately $35 million.

In accordance with the $50 million stock buyback authorization issued by the Board of Directors on February 15, 2007, the Company purchased approximately 67,000 shares of stock for $2.9 million in the fourth quarter of 2007, bringing the total buyback under the program to approximately 810,000 shares at a cost of $35.5 million. Average cost of $43.83 per share in 2007. On February 15 of 2008, Rogers' Board of Directors approved a new $30 million buyback program.

Our balance sheet continues to be a strength of Rogers, especially entering a period of questionable economic vitality. We continue to have no outstanding debt, although we are supported by available credit facilities totaling $100 million. Our current assets ratio maintained an excellent level of 3.6 times current liabilities. Inventory levels ended the quarter at $51.2 million compared to $59.4 million at the end of the third quarter of 2007. With the further reduction during the fourth quarter, we achieved a total reduction of over $22 million for 2007. Accounts receivable ended with 67.3 days outstanding, which is an increase of eight days or 13.4% compared to the 59.3 days at the end of the third quarter, with year-end collection timing being the only real major factor in that difference. We expect to average between 60 and 65 days in 2008.

All totaled, we are very proud of our performance in asset management, capital spending control and cost reduction efforts in 2007, which provided Rogers with cash generation totaling the 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 back over to Bob Wachob for closing remarks.

Thank you, Dennis. Now, we will entertain any questions.

(OPERATOR INSTRUCTIONS). Avinash Kant, Broadpoint Capital.

Good morning, Bob and Dennis.

Good morning.

I had a few questions. In your prepared remarks, you did talk about roughly a $50 million to $60 million drop in revenues versus last year due to certain productlines. Now, you said it may not be compensated. Does that mean we should expect a year-over-year revenue decline in calendar year '08 and if at all yes, then by how much?

We do expect a year-over-year decline as we don't believe the other businesses can grow by $50 million to $60 million in this current environment. We have not made a projection as to what the decline will actually be. We are going to have to take this one quarter at a time as the economy I think is going to be changing quite a bit during the course of the year.

Okay. Now given what you see at this point though, would you expect -- and especially the traction from the new products -- would you expect the second half to be better than the first half in calendar year '08?

I don't know because I don't know what the economy is going to look like. We will be driven by the U.S. economy.

But barring any broad economic slowdown seasonally, how have things tracked for you second half?

Seasonally, the second quarter generally is the lowest quarter. The third sometimes is the highest and sometimes the fourth is the highest. It kind of depends upon how our customers are feeling, bullish or not so. The first is generally just mediocre as you can see based upon our forecast here.

And second typically the weakest, right?

Yes, yes. In this year, expect that Durel will have its most significant declines in the second half.

Second half?

Because the second quarter is generally when phones reach end of life and third quarter is when new ones begin to ramp and there will be more reaching end of life than there will be new ones ramping.

Okay. Now in terms of margins, your gross margins improved significantly this quarter. Should we expect similar margins going forward in calendar year '08 and how would you guide us there?

We expect, even with a sales decline, to be able to hold the gross margins in that same relative area, plus or minus a point.

Very good. And in terms -- if I'm -- just looking at the quarter, just one clarification. If we took out the extraordinary charges for the quarter, I think the operating EPS would have been $0.49 for the fourth quarter, right, not $0.48?

Yes, I think that's about right because the accelerated depreciation charges were pretty much offset by the sale of inventory that we thought was obsolete, but turned out they bought it anyway.

And one final question if I may. The joint ventures, how should we expect their business? Would it be tracking in line with your business?

Yes.

Perfect. Thank you so much.

James Chen, BB&T Capital Markets.

Hi, everyone. On the new products, can you give a little bit more detail on the new big projects like thermal management solutions or battery separators? Are they contributing -- how much sales did they start to contribute and what is your expectation, your timeline, if you can update on those couple of major new projects?

Sure. A couple of thoughts here. We expect the thermal management business in 2008 to be in the $2 million to $3 million range and then double or triple that in 2009. I do not expect any business in the membranes as that product is still just being evaluated. So these things take time.

But let me give you a couple of examples of some new products and what their sales history looked like. This would be by year. $400,000; $400,000; $600,000; $1 million; $1.3 million; $1.5 million. Another one, which was much more successful was $200,000; $300,000; $1.5 million; $4.4 million; $7.6 million; $13.3 million.

One of the issues here, if you noticed, both the one that became very large and one that didn't, they looked pretty similar during those first two years. So it is hard for us to tell early on what the big winners are going to be. And as you can see by the string there, once this starts, this continues for quite a long time. We don't actually count something as a new product until it reaches a $500,000 worth of sales because, if we used a much lower number, we would never have anything -- our new product sales would always be very low because sometimes the gestation period is two or three years here.

So other things. To give you an example of things that we expect to contribute, some in 2008, but significantly more in 2009 and 2010. There is a high-frequency material that is a three and four mil thick that is able to deal with very, very smooth copper, which will find a lot of applications in the digital marketplace. We have an antenna material, which has received some good evaluations. I talked about the thermal management systems there with the aluminum silicon carbide and the thermal interface materials.

On the foam side, you can look at Soft Seal. Soft Seal is a five pound per cubic foot product. It actually has one of the quickest starts that we have ever had in that it exceeded $1 million in its first year. We will see how that continues. I expect it to continue. We have a new material for flexographic printing specifically aimed at the corrugated market. We have a nine pound per cubic foot PORON material that has already achieved a couple million dollars worth of sales and appears to be growing very quickly.

On the silicone side, we have [RGrips] and I would expect that to break the $1 million mark in 2008 and achieve several million dollars in '09 and '10. And then, of course, a couple of silicone products aimed at the transportation marketplace, specifically trains. One is an underlayment for floors and the other is the gangway material meeting all the new flame and toxicity requirements.

So there are a few of the products that we expect to contribute. The part I wish I knew is which one is the big winner. We never seem to know that early. Well, we think we know and it generally turns out something else was the big winner.

So I guess bottom line, most of those projects are still checking with your expectation so far, but they are still a couple of years from now to really realize the major benefits from those new projects?

Right.

Next question is on the CapEx guidance. I think you guys raised up a little bit on this CapEx guidance. Is there any specific reason for that?

The biggest single piece of capital in 2008 will be the construction of a building in China for our high frequency and the installation of multiple presses there and associated equipment. That will be almost half the total capital spending and the rest you can view mostly as maintenance.

And we did accelerate that project a little bit to try to get a little more full benefit quicker. So the construction and ordering of equipment was -- I think we had talked maybe in the mid-20s from a preliminary estimate, so that did move to 35 when we pulled some more of that money into '08.

Okay, that's helpful. And overall in the business in China, like the urethane, the second line over there, can you give some color in terms of how fast the sales ramp up or maybe like how quick you can load up the plant in China? Is that something like urethane foam demand is strong, you can load up like within a couple of months or so of startup or you have to wait for a year or so?

Actually, during the fourth quarter, we ran a full shift and I expect that we have enough business in China to fill that -- if we were to make everything that's sold in China -- to fill that machine to 50%, but we will make sure that we are balancing production between the U.S. and China, keeping into -- taking into account intellectual property issues and optimizing the workforces in each location. We will endeavor to minimize over time in the United States.

On China again, is there any impact for the weather in January? Is there anything --?

We found out our employees can shovel snow a lot.

Yes, our roofs were designed to hold a maximum of 20 centimeters of snow and we hit 22 centimeters, so I have some pictures of 40 of our salaried employees shoveling a roof. But we did close for two days.

Only two days? So you won't have any financial impact there. And on the tax rate, you also increased guidance like up to 28% for '08. You talk about a tax holiday. What kind of churn -- does the tax holiday keep expiring? Are we expecting kind of moving up more in 2009 on the Board or you have more tax holidays?

I believe that the first time we projected for '08, we did say in the 26% to 28% range. And as we have been there multiple years and looking at the allocation of our income between taxable entities, we are looking at next year's mix and we still have a good deal of profit in China that is taxed at U.S. tax rates because the IP is owned. So going forward, we have active projects, looking at how to formally swing profitability to a lower tax entity between some of our IP-related products, but it takes a little bit of research to make sure that we are not risking any long-term impacts of putting IP and ownership in entities where we would rather not have it long term. So we hope we can beat that rate long term, but that is where it sits right now.

Okay, great. Thank you for your help.

Jay Harris, Goldsmith & Harris.

Good morning, gentlemen. The sales decline that you are projecting in Durel and Flexible Circuit Materials, how much of that do you think will be realized in the first quarter?

I expect about a $10 million decline in the first quarter.

And you indicated to an earlier question that you thought the majority of that decline would occur in the last half of the year?

Durel will accelerate in the second half.

Well, if you consider all the materials declines, would the second quarter be -- would it be spread evenly on a quarterly basis over the year or would we have less in the second quarter than the first and then the majority in the last half?

This is all predicated on when things reach end of life and as we have all experienced in the last two quarters, our customers don't seem to be able to get this even close, so kind of at a loss. I can tell you what they tell us, but so far it has been so wrong that we have twice now exceeded sales by 8% in the quarter because it didn't happen the way our customers said it would.

And is that due to the fact that -- phasing out certain productlines more slowly?

Their sales are turning out to be better than they thought and one of the issues here is -- I have been through this before. This is typical. It declines more slowly than they say, but one day, it stops. It doesn't go to a slow decline; it stops. So the cliff is sharp and the key is when do you think it is going to be. We are guessing second quarter.

Got you. What percentage of your cost of goods sold comes out of China now?

I think we produced about 25% of our sales in China.

And how will that ratio change over the next year?

I believe that should go up to about 30%.

And where -- in your share buyback program, you spent all of that money last year between $43 and $44 a share.

That is what it averaged. We spent it at a wider range than that.

Yes, I hear you. Given the fact that the stock is so much cheaper at this point in time, are there factors that -- and if so, what are they -- that will limit the speed with which you resume your share buyback program? Are you concerned about trying to maintain your net worth above a certain level or seeing it grow on a consecutive quarterly basis or don't you care?

We have historically only purchased shares during the open window, which is three weeks after the announcement and we are at that point. We are constrained by the rules associated with what percentage of the shares traded we can buy, but we are also looking at a corporate 10(b)5-1 plan.

So there are no balance sheet constraints in your thinking at all?

Absolutely not. This is only a small portion of the cash on hand.

And when do you think you'll be filing your 10-K?

Next Thursday.

All right. Thank you very much.

Jiwon Lee, Sidoti & Co.

Knowing what we know now, how should we look at your high-frequency circuit materials in '08, especially in conjunction with several key markets that are important to you and some of the new smaller markets that you're trying to target?

We expect to see growth in 2008 in the single-digit area.

Okay. And in terms of your sale or moving of Flexible Circuit Materials to the joint venture, could you give us an update to where you are in terms of your negotiation there?

Well, the high-volume stuff has been moved, but some of the other things have declined to the point at which we're probably not going to move it because it is not economical to make it on the machinery that exists there. Those machines run 2.5 times faster than ours in the States, so we need some pretty high-volume stuff to make it worth while turning it on.

That's helpful. And in terms of your PORON, can you give us some sense as to your joint venture, sort of where they are running in terms of their own capacity, including their new line in China?

There was a point during the fourth quarter where our joint venture in China was completely full and our machine was being utilized to make some product for them.

I see. Your machine in China, you mean?

Yes, but now that the -- there is a new machine in Japan that was started up in the fourth quarter, but only had limited availability because there were only a couple products approved. That capacity constraint in the joint venture will go away as that new machine comes up, but we will also be greatly limiting the amount of material we're going to make on a machine built in 1983. It is only half as wide and runs one-third the speed.

I see. And the sales and distribution between you and the joint venture, how does that roughly work?

If it is an Asian-headquartered company, that is our joint venture's customer. If it is a U.S. or European or Chinese-headquartered company, it is our customer.

That's helpful. And finally, Dennis, your options expense, should we look at post first-quarter expenses sort of kind of similar to what you did last year? In other words, the first quarter was a bit accelerated and should we kind of expect that level to get cut more than half going forward? How should we look at that expense?

What happens in the first quarter is an accounting issue. Anyone who receives an option who is age 55, because they could retire and because our options fully vest upon retirement, we must account for the complete expense in that quarter as opposed to amortizing it over four years, which is how the options vest.

So one thing to keep in mind is that, as we began 2006, we had very little in the way of option expense. So one quarter of the expense in 2006 occurred. In 2007, it was one quarter of 2006 and one quarter of 2007 and then in 2008, it will be one quarter of 2006, 2007 and 2008. So in 2009, we will reach a plateau. Until then, it will continue to grow somewhat. Although, as you know, option tranches also drop off.

In my comments, I had said that, just to reiterate for everyone, we were looking at about $18.5 million to $19 million in the first quarter and then in the range of $17 million.

Equity compensation.

Total SG&A. I mean that impact that I had mentioned there was the equity piece of that being heavier in the first quarter versus the remaining three quarters.

That's very helpful and clear. Thank you very much.

Tom Lewis, Century Management.

First question, talking about your printed circuit board decline, I was hoping you could shed a little light on the extent to which that was -- I mean can you tell the extent to which that was seasonal in nature or were there other factors at work, end of life and such?

The decline is -- the majority of it is associated with the Flex and the Flex materials have become commodities. There is huge excess capacity with the Korean manufacturers having built a lot of new capacity and they seem to be able -- willing -- I shouldn't say able -- they seem to be willing to just keep taking the price down regardless. So we have seen a 20% to 25% price erosion during the course of 2007. On the high-frequency side, sequentially, sales were down some and that was due to softness in the infrastructure for cell telephones.

Okay.

Which is pretty normal in the fourth quarter. It always seems to be inventory adjustment time.

Yes, there seems to be a pattern this year that in September and October, people were marveling at strength relative to seasonal expectations and by December, it seemed to be ending early and that would -- but it sounds like there are other factors at work in there too, which you've described.

Also on the matter of your inventory coming down by $22 million, on the one hand, I am thinking -- I am inferring something detrimental as you go into inventory levels. On the other hand, I heard a potential positive and perhaps you sold some inventory that you had marked down as obsolete. Can you kind of tell us what the net benefit -- or whether that was a plus or minus for you?

Absolutely no negatives in that connotation. We did start the year with heavy inventories in both our Durel and our Power Distribution Systems and I think our foams business was probably the leanest, but it was all good for the year. We basically brought every business down to levels that they can sustain the global supply chain. Some of the benefit has been being able to produce PORON in China. For example, you have less in-transits and we hope, in 2009, even our high frequency business will have less in transit when we start manufacturing there. So to us, in the 8.5 week to nine week range is where we got to and we are targeting to move that down in 2008 also as we lean out these places and as they get used to operating with leaner inventories. It is a learned process to get the forecasting people, the supply chain people to be moving quicker and leaner and getting those dollars out of the system was a positive to us completely for '08 -- for '07, excuse me.

So you spoke earlier to the -- you mentioned the prospect of inventory coming out of High Performance Foam, but are you suggesting that there is room ahead on this lean curve, broader across the enterprise and on that same -- in that same vein, are there any other factors that are going to affect your working capital requirements other than obviously the pace of business?

As we produce more in China, our inventories will come down. The way to think about this is it is six weeks on the boat from the U.S. to China. Our leadtimes are generally two weeks. So you can eliminate -- by making it in China -- in other words, making it where the customer is buying it allows us to reduce our inventory significantly. And over the last few years, as our sales grew dramatically in China, our inventories went up because we had to sell from stock and we had to guess as to what they were going to buy. So the total transit time was eight weeks -- six on the boat and two to get it off and through customs. So that is why it is going to keep coming down.

I just want to make sure I clarify, our High Performance Foams business is our leanest business totally in inventory, so what we would look to avoid is actually building inventories from that level as they grow further in Asia. So to me, they stay as lean as they are and some of our other businesses that are moving bigger chunks of their manufacturing like high frequency and even our power distribution business, which has operations in China, as they grow, most of that manufacturing will be in China and keep their levels lower.

I expect also -- if indeed the economy slows, then, once again, many more of our suppliers will be willing to put in consignment inventories. It is a cycle we go through. We always ask for consignment. In good times, they say no; in bad times, they are anxious to try and lock us in.

Okay. And the last question is just a little arcane. The thermal management I guess caught my attention for the first time and that could mean a lot of different things. Is that an electronic application or are we talking about people keeping their feet warm?

It's an electronic application. The aluminum silicon carbide, for example, is used in lids for power amplifier chips used in the cell phone infrastructure, for large server chips that are generating 100 watts of heat, those kinds of things and the thermal interface material actually is injected underneath the chip inside the package, so it gives you a continuous thermal transfer from the chip to the package to the board.

So by injected, you are saying that it sounds like it is something that gets in there and goes in liquid and solidifies?

It's a grease.

It is a grease.

[Car] grease? Okay, sure.

It is a grease. The R&D guys hate it when I call it grease.

Sure. But some grease we can all understand. Okay, thanks a lot.

Dana Walker, Kalmar Investments.

Now, Bob, you didn't want to mention that heating pad application you have with the national recall going on for Icy Hot?

No, he is sitting on that pad right now.

A couple of questions. With some very well-noted dislocation in mobile handset marketshare that has been taking place before our eyes, what effect did that have on your business, both in terms of sales, as well as logistics?

It actually affected Durel and the Flex Material business. It had no measurable effect on the High Performance Foam business.

And the effect on Durel or on Flex would've been negative?

Yes. Both Durel and Flex are negative.

You have seen the benefit of the end of life not ending quite as quickly as you might once have thought. What type of expectations are you now building? You said that, year-over-year, you expected about a $10 million decrement in Q1, how does that look though sequentially?

We plan on Q3 being substantially lower than Q2. We will have to wait and see if that happens, but that is what we are planning on is major end of life in Q2.

But if we were to compare your '08 first quarter to your '07 fourth quarter in Durel and Flex, how might that look?

Well, those together are down about $10 million.

So the $10 million you cited before is a sequential number; it is not a year-over-year number?

Yes.

It would be a lot worse year-over-year.

Yes, a whole lot bigger year-over-year.

Recognizing that these are fleeting dollars, is there some chance that the tone of business there sustains somewhat longer, somewhat higher than you thought?

Yes and we will have to see what happens here as -- we had some issues with a contract that we were unwilling to sign. We made an independent proposal, which apparently was acceptable. So we are in the process of bidding on some things that we were not allowed to participate in. We will see what happens; who knows the end result.

The $40 million to $60 million in potential decrement year-over-year, that is a higher number than I think we have heard before and I suspect that is because you have had more benefit in the latter part of '07 than you once thought.

Yes.

Can you remind us how you have restructured Flex and Durel so that -- I believe you had a tough time making money certainly in the early part of the year in both of those businesses in the U.S. Can you talk about the total Company effect though even on lower volume as you see it?

Sure. Durel has, except for the second quarter when we had the write-off, Durel was profitable in every quarter and actually generated $25 million worth of cash. And Flex, on the other hand, has lost money every single quarter. What we did in the restructuring is that we reduced the employment dramatically at Flex to the point at which we were operating three days, 24 hours, because the machine, once it is turned on, must run continuously. That's how we get down to, in effect, two 12-hour shifts and we have written off the majority of the assets of Flex.

Durel, we reduced the employment in the U.S. by several hundred. In total, I believe we have reduced employment across the Company by more than 300 people during the second quarter and a little bit of the third. We have ceased manufacturing -- essentially ceased manufacturing any Durel product in the United States. It is all manufactured in China, except for a couple of part numbers, which we significantly raised the price.

So those are the main things we did. We took about $8 million, $10 million out of the corporate expense line also in the second quarter. So we saw some benefit to that in the second half. Not all of it, but some of it. So those are the things we did anticipating that these two businesses would be substantially smaller. Then we had to resize the headcount and the assets to match much lower expectations.

If Durel made money in '07 though, now that you are fully in China with a lower headcount, how would you expect Durel's bottom-line comparisons to look?

I don't believe it can make as much money as 2007 because sales are going to be very substantially lower, but I would expect, at least in the first half, that it will be a moneymaker and then we will have to see about the second and whether or not we have to take any action.

I believe you have made the argument that your Flex business, as it is now constituted, ought to be a positive swing for you.

Yes.

How does having to make --?

May I step in and make a comment?

Yes.

When Bob talks about these businesses, we do fully allocate corporate overhead to both those business units. They are obviously absorbing a smaller share because some of it is based on sales, actual usage of services, those kinds of things. But even in a constrained manner in '08, Durel will be a positive cash contributor and contribution contributor with the overhead structure we have got set for '08 and Flex, to a smaller extent, would be the same case.

How does --?

They both -- go ahead.

Pardon me, Dennis. How does having to sustain some level of production to meet the -- that which can't be run on a rapid line in Taiwan, how is that going to affect the way you expect Flex to play out from a bottom-line standpoint?

It really has no effect because we are able to make those products with the existing workforce. In other words, we were down to the minimum workforce, but they were not fully occupied. They are more fully occupied by making some of these products that we did initially plan to transfer. So it is a wash because there is little difference here. We can think of it as no labor associated with the incremental sales.

The $8 million to $10 million in corporate expense reduction, where would we see that in your income statement?

Some of that -- and I will use maybe half of that total -- is flowing through as business unit profitability improvement and their plans for '08 versus '07.

So gross margin.

Gross margin and operating margin also for those businesses. Some of it being SG&A. And the rest is in that -- when you look at our '07 SG&A versus -- which we were sitting I think at about $73 million and us being able to try to predict a number of $70 million, unfortunately, in that number of $70 million, we are going to have increased equity compensation, merit increase roll-throughs, but that number, as we look at next year versus this, we have probably got that $4 million or $5 million in corporate SG&A being offset by those other costs to allow us to come down $3 million even net of cost increases in equity comp.

Let me ask one last question and then I'll get back into the queue. Although Dennis in your explanation about the effect that bringing inventories down, you talked about it not being a negative because of what it does to the Company's invested capital and liquidity, as well as improving your overall operations.

In the past, and maybe this is not something that we should get used to looking at, but you have made a point of comparing the effect that either higher inventories or lower inventories sequentially had on your P&L, because of the effect that it had on the way you put costs into inventory.

That's right.

I presume we are going to get away from that because you are hoping to run on a leaner basis on a go-forward.

Without running leaner in '08, Bob indicated in his earlier comment that we expect to be able to stay at about the same operating -- excuse me -- manufacturing margin of 31%, what we achieved in the fourth quarter. And looking at '08, we think we can get there also. So without reducing that inventory, part of that 31% is actually producing the material we sell in '08.

So that if we ended up building inventory in '08, which we wouldn't want to do from a working capital standpoint, you might even improve on the 31%. We think that part of the improvement in '08 will be maintaining production at the sales levels as opposed to declining inventory, and that does offset some of the lost contribution from Durel and Flex in our overall ability to sustain that 31%.

If we were to net all this out, and as an addendum to an earlier question asked, reducing inventory has a negative effect on your gross margin.

Yes.

Even though there may have been some low-cost inventory or some written off stuff that flowed through that might have partly offset that.

That's right. And part of the --.

So your gross margin in Q4 if you were not bringing inventory lower by $8 million would have been higher than 31%.

It absolutely would have been.

If you, therefore, maintain a static relationship between takeaway and inventory levels in '08, if your operations properly reflected what was going on in the mix of your business, there might be a positive bias to your gross margin in '08.

All things -- all things being equal, that is correct. And I think in our estimation of '08, looking at the negatives that we will have to offset in terms of the gross margin lost, a big chunk of positive contribution from Durel which on a contribution basis was higher than that 31%, is something that we are having to offset.

Understood. All right, I'll get back in queue. Thanks.

Avinash Kant, Broadpoint Capital.

I just wanted to doublecheck; maybe I didn't get it right. So when you say most cell phones come to end of life in Q2, does that mean the impact on your revenue is in Q3 or Q2 itself?

Q3. There is always impact in Q2 because it is a low quarter, but the biggest impact would be Q3.

Okay. So for the end of life at least, that will happen in Q3, right?

Sometime during the second quarter, multiple phones will reach end of life, but it won't be on April 1st. It will happen before June 30th. It will be somewhere in between, so you will see some effect in second quarter, full effect third quarter.

And that is our current thinking based on limited information from our customer base.

And now, Dennis, you talked about R&D expenditure being roughly 6% of revenues, and you say it could vary. What would you expect R&D to be in calendar year '08?

6%, absolutely. I mean, when we say variability, it is quarter-to-quarter, but we are absolutely trying to target 6% in total. And we have underachieved that due to spending. I mean, I think we were at 5.7, I believe, in '07. So plus or minus a couple of percentage points we have been within that target.

If I am looking at it on a quarterly basis, in the fourth quarter your R&D went up significantly. What was that for?

I believe we had some technology acquisition costs that got expensed all in the fourth quarter, as opposed to being spread throughout the year, Avinash. So that was just a one-time quarterly blip as we would describe it.

Okay, good. What is the share count as I am showing you have in your next quarter guidance, in the March quarter guidance?

Same as year-end.

Okay.

And that assumes a dilution based on the stock price where it is currently at today.

Right.

One of the issues here is if -- we are at a point which I don't think any more options actually come out if the stock drops, but some could come back into the mix if the stock goes up into the 40s. What the dilution calculation is all about, I mean how many options do you count? Make it low enough, we can lower the share count. That is not my preference.

I would agree. Now, a final question. Of course, in terms of visibility, though, how much visibility do you get in overall business?

When we start the month, 40% to 50% of what we actually sell on the books.

For that month.

For that month. So we don't have a lot of visibility. We also have a significant amount of sales that come from consignment inventories, which we have zero visibility until after it occurs. They tell us once a week what they use. They forecast what they're going to use, but we don't listen anymore because they can't get within a factor of two or three on a weekly basis.

So the visibility is not real good. That is why we don't like to talk about anything more than a quarter, because that is kind of risky in itself.

Perfect. Thank you so much.

(OPERATOR INSTRUCTIONS). Bob Fetch, Lord Abbett.

Good morning. I don't think you touched on most of these, but can you elaborate on the High Performance Foams progress, as well as the outlook in the medical wound care area and how that is proceeding?

Yes. In the medical wound care area, we have concluded that we will need to be both bacterial and viral barrier, and that will take some more development. The bacterial test we can pass, but that doesn't give us enough advantage to break in. So we need to finish the development and see if we can't also become a viral barrier.

We are making some significant progress here in materials such as the Soft Seal, which is the 5 pound per cubic foot material. We are having a very rapid sales increase there.

And the primary application there?

That is as gaskets. A lot of it is actually in cell phones. It allows the cell phone maker to use much less expensive molders who can't hold tolerances nearly as well and also use thinner cases, which saves them money also. So we are able to sell that at a premium.

And it's a lot cheaper than higher-cost plastic?

Oh yes, yes, absolutely. We are also making a lot of progress with the nine pound density material, which came out a little earlier than the five. That is a little farther up the curve and is larger and therefore, is growing in absolute dollar terms at a greater rate. On the silicone side, our RGrips are gaining some traction. We will see -- I am hopeful that, in 2008, it goes well past the $1 million mark and we have some of our first orders for the under-floor layment and the railroad cars, trains to meet the new toxicity and smoke requirements.

So in the case of the Soft Seal, is it largely a mix upgrade where you are just displacing an existing product that is not as high value added?

There is some of that, but there is also a gaining of marketshare. There were some inferior products out there that were extremely soft. They had issues with dust; therefore, made them hard to fabricate and also taking compression set. But in some cases, they were deemed good enough because they were soft enough and now that we have something that has all the proper properties, including the softness, we are gaining all that business.

Just continuing to focus on cell phones as we go to these higher-performance phones and the need for access, high-speed Internet applications and things of that sort, how or in what way is that impacting you folks?

The high speed -- the Internet, we are seeing a reasonable amount of business in the switches that are switching 12 billion bytes of data per second. It's that level that they need to use our kind of material in the backplane. Of course, these are large boards with many layers, all of which means that's a good thing for us because it's a lot of material.

Okay. On the infrastructure side, you mentioned India and Brazil and was that for both 2G and 3G?

Yes.

Okay. And as far as China, what are you seeing, if anything yet, at this stage?

One of our directors actually lives in China and participates in the telecommunications industry. His explanation to us is that, every five years, the Chinese government reorganizes and they have a change of power and that is happening now. When that is complete, they will then reorganize the telephone companies. There will be fewer and when they have done that, then they will release licenses. So we have a few signposts here to watch for that will tell us when it is going to happen, but based upon the need for those two things to happen first, I don't think it is real soon.

So it will be before the next time they host the Olympics.

Yes.

In regards to the largest cell phone manufacturer, are you making any better headway in terms of penetrating them as an account?

We have a large amount of high-performance foam being sold into that account and we also have a fair amount of high-frequency materials being sold into the infrastructure applications for that account. Durel is going away at that account.

And what sort of development or marketing spend do you still have in regards to Durel? I know you have mentioned in the past some potential other applications -- billboards and potential in the IC area and so on.

We expect to go into production in March of a lamp that will backlight a license plate in Germany. That is being introduced during the first quarter. So there is a plus there. We will have to wait and see how big that becomes.

That is sold with the car?

No, it is different in Germany. I believe the number is 10 million new license plates a year and it is not by the government, but private companies actually make them and so they are now allowing backlit and so the people we are working with have been introduced or are in the process of introducing a backlit license plate.

So the country is not demanding say greater light to identify the plate itself or anything like that?

No.

It is more cosmetic in fashion?

Fashion. It's a fashion thing.

Okay.

And then the other area is large area lamps for out-of-home advertising. These could be as large as three feet by nine feet.

And on the license plates, is it just around the exterior?

No, it is the whole thing.

So it would be almost like the razorback lighting, you kind of see it behind the letters or numbers?

You'll see it -- the letters will be black and you will see it everywhere accept the letters.

So does it appear fairly bright then?

Yes. They use a [cold]-forming process, what is going on here, including the lamp.

Okay. As far as SG&A, what quarterly run rate should we be expecting this year? I know you had talked previously -- I think last quarter of targeting $15 million, but is it going to be --?

For '08, the quarterly run rate we think is about $17 million and $18.5 million in the first quarter with the comp expense higher in the first quarter.

Okay, $17 million average or --?

$17 million for the final three quarters will be the average. First quarter, $18.5 million is our best estimate now.

Okay. And on the -- in the automotive area, the collision avoidance lane change, is that a single customer or is that broadening out fairly rapidly?

That is broadening out to multiple customers now. The collision avoidance or the active cruise control is still dominated by one company, but then the lane change has multiple companies involved.

And are they tier 2 suppliers that you sell to or 1?

They would be tier 2.

In both cases?

In both cases, in all cases. We don't have any tier 1 sales in the automotive area.

There has been a lot of discussion in years past of the introduction and money spent on implementing Six Sigma and the number of black belts you have there. Have the issues you have had to deal with the last years been difficult to see much further progress along those lines?

We have had progress, just not as much as we do in times when sales are growing real fast because you can use Six Sigma to increase your productivity and therefore, gain a lot of additional profits. In times of sales going down, it is a little harder, but we managed to improve profitability through the Six Sigma efforts by more than $3.5 million in 2007 above what it would have been without the effort.

Okay. So you were still able measure the positive impact?

Yes.

It's the key aspects of our manufacturing improvement in China. I mean bringing those operations up to U.S. standards, Six Sigma was a big piece of that and even though the capacity is not being fully utilized, it will allow us to ramp them up much more quickly than if we hadn't installed Six Sigma there.

And then last question. You folks went out of your way to prepare for a presentation this past May in terms of what some of your objectives and targets would hopefully be in five years. And I guess now it is four years and yet sales targets up toward $900 million and $7.00 in earnings. How would you characterize those objectives today?

I think our sales objectives are a little lower than that, but the earnings objectives are pretty much the same. In other words, we expect, with the mix of business that we see four or five years from now, to be a richer mix than we previously did. Most of it being that the lower-margin business, such as Durel, will be a much smaller portion of the total.

Relative to I guess what we have experienced in the last few years, the volatility of those sales ought to be somewhat less as well.

Absolutely.

And with the expectation then that we could see I guess gross margins hopefully sustainably in the mid-upper 30s and net margins in the double-digit range.

Certainly hope to be there in four or five years, yes.

Thank you.

Dana Walker, Kalmar Investments.

Just brief, Bob, you have talked in the past about how you thought there was a Durel prospect that would be handset-based in the out periods. Are you less keen on that today?

I think it is a long shot and it deals with [dead] front and whether or not we are able to gain access to what is called polymer-dispersed liquid crystal display technology. If we are, then it is possible to backlight that with a multisegment EL lamp. In fact, it is the preferable way. And that could be huge, but the probability isn't real high. So I have tended to talk about it less. There is always a potential winner out there and that is one.

As well perhaps you would opine on your views on the wireless infrastructure market and how it affects your high frequency business in that expectations for '07 may have been more robust than where things played out.

In total, I believe we ended up about where we thought we would. Just it was better in the first half than it was in the second half. And I believe there is a few things going on now associated with WiMAX and LTEV, long-term evolution. Long-term evolution appears to be the direction that most of the service providers are choosing for fourth generation and they are beginning evaluations in that. Now, this means there could be business as early as 2009, potentially '10 and '11. These things never seem to happen as fast as they say. And we are in a very good position, whether it is WiMAX or it is LTEV, with our high-frequency material.

In the same way that you saw more material per board, would that relationship continue?

Potentially in LTEV, but maybe less in WiMAX, but then the antenna becomes more important in WiMAX and therefore, a bigger opportunity for us.

Final question relates to acquisitions. It has not played an active role in your game plan and they haven't all worked. What role would you expect acquisitions with asset prices coming down and your liquidity rising to play?

We are always looking, but I would not -- I would not call us what the investment bankers call a strategic buyer. Meaning you pay whatever it takes to get it. If asset prices continue to come down, there could be opportunities for us out there. I don't want to pay for what is going to happen in five years. I'm willing to pay for today.

Thank you for sharing your thoughts.

There are no questions at this time. Any closing remarks?

Yes, I would like to leave everyone with one last thought. That is that, over the last few years, I believe we have significantly improved our future prospects and as we have said, we continue to invest heavily in new business development efforts, increase our R&D spending and we are expanding capacity in our growing segments. We are confident that, over the long term, we will see benefits from those actions both in terms of sales and earnings growth and it does remain our goal to continue delivering increasing sales and earnings for our shareholders. Thank you and good day.

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