Rogers Corp (ROG) 2008 Q3 法說會逐字稿

Good morning. My name is Justin and I'll be your conference operator today. At this time I'd 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 sessions. (Operator Instructions). Mr. Wachob, you may begin your conference.

Good morning, ladies and gentlemen. With me today are Dennis Loughran, Chief Financial Officer; Deb Granger, Vice President Corporate Compliance and Control; Ron Pelletier, Corporate Controller; Bob Soffer, Vice President and Secretary; and Bill Tryon, Manager of Investor and Public Relations. First, Dennis will dispense with the formalities, then we will get right down to business.

Thank you, Bob. I'd 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 Corporation's operational environment. These uncertainties include economic conditions, market demand and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement. I'll now turn it back over to Bob.

Thanks, Dennis. Despite a slowing world economy Rogers continues to perform as projected. Our new products introduced over the last few years, as well as some new applications for our existing products, are making up for the declines in Durel and Flex, allowing us to perform reasonably well considering the external environment.

The third quarter turned out better than we expected. Once again, high-performance foams and power distribution systems led the way with record sales. The high-performance foams third shift in China is now fully operational. This has allowed for a reduction in overtime in both China and the US. Our new lower density high-performance foam products introduced over the last several years are continuing to fuel our growth.

In our printed circuit materials segment, while new applications for our higher frequency laminate such as automotive lane change sensors and Voice Over Internet protocol continue to grow. Sales of our materials into the satellite television application continue to experience a year-over-year decline. However, we are seeing a pickup in these materials for cell phone infrastructure as the China 3G rollout is beginning.

By the end of Q4 we expect almost all Durel EL lamp cell phone programs to reach end of life. We expect a small further decline in Durel as auto-related sales will decrease due to reduced unit sales. Going forward our expectation is to slowly grow Durel in other markets such as out of home advertising in light emitting diode drivers.

We are continuing to fully fund our strategic initiatives and have increased our new business development efforts. When others are pulling back we see these unsettled times as an opportunity to extend our lead on our competitors. We are, however, remaining restrained in our hiring and our spending. Our strong cash flow and solid balance sheet puts us in a position to take full advantage of any opportunities we may uncover. I'll now turn it over to Dennis for the detailed results.

Thank you, Bob and good morning to everyone. Despite the evident challenges facing many segments of the economy, Rogers is happy to report favorable results compared to our published target for the quarter, improving on both top-line sales and bottom-line EPS. In sales our third quarter achieved a level of $101.7 million, just above the high-end of our guidance range, with strength across most reporting segments. With the one continued exception of printed circuit materials where sales into LNB applications showed weakness related to new home sales and the weakened economy.

Excluding the restructured businesses, Durel and Flex, our top line for 3Q 2008 was up 8.5% from year ago results, an improvement over that same metric reported last quarter. Earnings per share of $0.51 reflects a solid manufacturing margin of 31.5%. Our balance sheet continues to provide improving liquidity with cash and short-term investments growing during the quarter to $48.7 million from $43.5 million at the end of Q2 with AR days sales outstanding improving and inventories declining quarter on quarter. Both of those working capital assets aggregated to levels almost $23 million lower than a year ago.

Overall for the third quarter 2008 Rogers reported earnings of $0.51 per diluted share from continuing operations, this compares to income from continuing operations of $0.55 per diluted share in the third quarter of 2007 which included $0.3 million or $0.02 per diluted share of net restructuring charges. The year-over-year change is attributable primarily to lower sales and operating profits contributed by businesses restructured in 2007.

The third quarter of 2008 sales total of $101.7 million represents a decrease of 7.2% from sales of $109.6 million in the same period in 2007 with the decline being driven primarily by lower revenues in our restructured businesses, Durel and Flex, totaling $14.6 million which was offset by growth in our high-performance foams, power distribution systems business unit.

Third-quarter 2008 gross margin was 31.5% versus 28.4% for the third quarter 2007. In the quarter margins improved across our strategic business segments where we continue to focus on cost containment and lean asset management to drive results. The one exception to note is other polymer products where increased spending on product development efforts and thermal management solutions offset positive results in our other businesses in that segment.

Selling and administrative expenses for the third quarter of 2008 and 2007 were $20.5 million and $16.9 million respectively. This increase was driven primarily by one-time costs related to tax reduction programs initiated in 3Q of $1 million; litigation costs totaling approximately $0.6 million, which we eventually expect to recover through insurance; and $3.5 million in additional expense due to annual incentive compensation accruals.

Research and development expenses were $5.7 million in the third quarter 2008 as compared to $5.6 million in the third quarter of 2007. As a percentage of sales research and development expenses were $5.6 million in the third quarter of 2008 as compared to 5.1% in the in the third quarter of 2007. For the full year 2008 we continue to expect an R&D spending level close to our long-standing target reinvestment percentage of approximately 6% of sales.

Other income and expense, which includes income from our joint ventures and royalties less other expenses, amounted to $3.2 million in the third quarter of 2008 compared to $2.2 million in last year's third quarter. The improvement is primarily related to increases in joint venture income of $0.4 million and favorable foreign exchange impacts totaling $0.7 million offset by other net miscellaneous changes of $0.1 million.

Rogers' 50% owned joint ventures had third-quarter sales totaling $32.8 million, up 4.6% from $31.4 million in the third quarter of 2007 led by strength in our two polyurethane foam joint ventures and our Polyimide Laminate Systems joint venture. As a result overall equity income in unconsolidated joint ventures in the third quarter of 2008 as compared to the third quarter of 2007 improved by $0.4 million. The Company's third-quarter 2008 affective tax rate was 17.3%. The Company believes the annualized tax rate for 2008 will be in the 26% range.

For the third quarter of 2008 the Company benefited from certain discrete rate items totaling $1.6 million resulting from the filing of our 2007 tax returns as well as reversal of a tax reserve on a now closed IRS audit year. During the quarter, however, that benefit was more than offset by other one-time related items which are reported in our operating expenses as we spent approximately $1 million on projects related to previously reported long-term tax planning initiatives in respect to our legal entity structure and transfer pricing strategies. And we accrued an incremental $1.5 million in annual incentive compensation to align with updated estimates of performance.

The excellent longer-term news is that our tax planning projects are expected to be finalized during the fourth quarter and are expected to favorably impact the international tax component of our rate structure for 2009 and beyond by approximately 3 to 4 percentage points. As with all tax calculations, that isolated impact may or may not be fully realized in our final annual tax rates due to shifts in income between our various tax jurisdictions and other impacts. However, we do believe 2009 will benefit significantly from the tax structure changes.

Turning to our financial position -- Rogers ended the third quarter with a cash and short-term investment position of $48.7 million compared to $43.5 million at the end of the second quarter of 2008. That improvement related primarily to further reductions in inventory during the quarter. During the third quarter there was no significant change in the status of auction rate securities.

However, as reported in the press release, subsequent to quarter end we received and accepted offers to fully redeem two of the investments at par value along with a third partially redeemed tranche also at par value totaling $4.4 million. Capital expenditures were approximately $5.3 million for the quarter and Rogers anticipates capital expenditures in 2008 of approximately $20 million.

From a balance sheet perspective we continue to have no outstanding long-term debt, although we are supported by available credit facilities totaling $100 million. Our current assets were 3.1 times current liabilities and inventory levels ended the quarter at $46 million as compared to $51.2 million at the end of the fourth quarter of 2007. Accounts Receivable ended with 59.8 days outstanding, an improvement from the 62.5 days reported at the end of the second quarter of 2008.

As we face the prospect of an uncertain global economic outlook our focus on efficient cash management will continue to be in the forefront of our fiscal efforts. This concludes my remarks and I will now turn the call back over to Bob Wachob for closing remarks.

Thank you, Dennis. And now we'll entertain any questions.

(Operator Instructions). Fred Buonocore, CJS Securities.

Good morning. This is Fred Buonocore from CJS Securities. Just wanted to quickly review your explanation, Dennis, on the tax benefit and the related expenses. Did you say that approximately I guess $1.5 million was related to comp expense? And could you flesh that out a little bit more for me so that we understand that a little better?

Sure. When we look at what we accrue in any given quarter related to our annual incentive targets -- we looked at our third-quarter earnings, the discrete items related to tax would definitely have an impact on the annual earnings per share against our AICP targets. So of the $3.5 million we accrued in the quarter, approximately $1.5 million of that would have been related to the discrete increase in earnings from that item. As well as the $1 million that we spent to close out the consulting costs related to implementing the transfer pricing and entity studies of which a significant portion of that tax benefit related directly to the findings of that transfer pricing study.

Got it. So in Q4 should we see selling administrative expense drop down to maybe the levels it was at in the first half of the year or even lower potentially?

That depends on how well we do.

We have a base SG&A excluding R&D of about $17.5 million. And so we look at that as sort of the base recurring number. And then typically the incentive compensation can have an impact on that up or down depending on whether that quarter results moves our total toward target or above.

Got it. I'm sorry, I should have been more specific. Will you see significantly more related to consulting expense in that number? I know you mentioned (multiple speakers).

I'm sorry. We believe we have some small residual amounts, but we believe most of the major cost of those studies are completed as we speak now.

Okay, great. And then additionally on the income from joint ventures, that was a significant sequential jump. Was that relatively unexpected or how do you look at the way we should think about that and the way we should think about the income from JVs going forward?

The JVs -- typically we look at that as an improving metric every year. A majority of that is related to our polyurethane foams joint ventures which have absolutely global similarities to our high-performance foam segment. So it is a strong growth rate, a high margin business. They did have sequentially in the second quarter of 2008 that you're referring to, some startup and relocation expenses related to the Japanese joint venture, RIC. So part of that improvement was an elimination of those one-time costs of startup and relocation of new lines and then basically a fairly strong quarter for the PORON businesses in total.

Great. And then finally, just -- I realize that you won't be giving any outlook officially on 2009 until your next quarter and particularly given the highly unpredictable environment. But can you give us a sense for your outlook for next year at this point in time?

Sure, Fred. This is Bob. It's my belief that the world economy is not going to get better and therefore we are unlikely to do better in 2009 than this year. We in typically are one of the last companies to see the effects of a recession and one of the first to come out. But when it happens it is sharp. And what we are trying to understand is when might we see that. We have not seen the drop-off yet, but I just can't believe that it won't come. So we're preparing for it that. That is -- part of our 2009 planning is to have a plan which allows us to deal with a sales decline if indeed that occurs. It's part of our scenario planning process and risk mitigation.

Excellent. Thank you very much. I appreciate it.

Jiwon Lee, Sidoti & Co.

Just on the fourth-quarter guidance, the drop in sales than you're expecting, Bob, is that mainly because of the end of a product lifecycle from Durel, the $8 million drop? Or were there any other things that were factored into that guidance?

$6 million is the expected drop at Durel. And then the others is we just expect that the fourth quarter will not be quite as strong as the third.

Okay. And I do appreciate you're trying to put your best foot forward on the '09 guidance, but if I can just go back and drill a little more into each of your key segments as to how you think about that business with a particular focus on the circuit materials, high-performance foams and the busbars, please?

High-performance foams is the segment which is most closely tied to the world economy, because that business has applications everywhere. So historically it enters into a sales decline late, but it does experience one. Whereas the printed circuit materials, that it is much more related to very specific items. As we have said, the housing starts and the housing resales certainly has affected in a negative way the satellite TV business. But then there's the wild card there which is how fast does China implement the 3G infrastructure.

Currently I believe China telecom has announced awards of something around $7 billion, but it's unclear as to what time period that's going to be affected in. Is it six months or is it five years? It's somewhere in between those two and we'll just have to wait to see. As we did mention, we have seen some uptick associated with 3G and we'll have to wait and see. Fortunately we have sufficient capacity to deal with a significant upturn, and that really is the wildcard for 2009 is what happens there, how fast does it grow.

And the busbars (multiple speakers)?

Oh, yes, the power distribution. I expect that that business in Europe will slow. However, in China and the rest of Asia that business will continue to grow, especially because we are making significant inroads into the Japanese market which is quite a challenge for anyone who is not headquartered in Japan. And after multiple years we've had success with all the major players there and are seeing increasing orders. So expect that business to do well in 2009.

Okay. So if I look at that custom electrical component segment this year I would imagine still the split between Durel and busbars about 60-40 for the next year. That would reverse significantly towards busbars, correct?

Absolutely. I would expect that Durel will decline at least by $30 million in 2009 from 2008.

Fair enough. And then two quick questions for Dennis, please. Did you mention that you're expecting about a 3% to 4% decline in tax rate next year because of this (technical difficulty) tax study that you did from anticipated 26% or how should we think about that (multiple speakers) next year?

As a discrete item, the legal entity restructuring project will have a 2 to 4 percentage impact on our overall rate and our anticipation would be that that would be off of the annual average rate that we projected of 28% for this year. 26% -- excuse me -- for this year.

Okay. And then you do --

It'll be a very favorable impact.

Okay. And you do expect your joint venture profit contribution to somewhat moderate going forward?

Next year we're expecting, subject to the caveats that Bob put on the economy, we believe it will follow with growth and under normal circumstances would be a slight improvement in earnings.

Okay, fair enough. I'll jump back into the queue. Thank you.

(Operator Instructions).

If there are no other questions I have a few closing remarks. By continuing to invest in new product development and diversifying into new markets we are laying the foundation for faster growth and increased profitability when the world economy revives. In the meantime, we are tightly controlling our expenses including restraining employee additions and maintaining a strong balance sheet. I thank you for your attention this morning and have a good day. Goodbye.

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