Rogers Corp (ROG) 2009 Q1 法說會逐字稿

Good morning, my name is Jean, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation 2009 first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you, Mr. Wachob, you may begin your conference.

Good morning, ladies and gentlemen. With me are Dennis Loughran, Chief Financial Officer, Deb Granger, Vice President, Corporate Compliance and Controls, Paul Middleton, Treasurer, Robert Soffer,Vice-President and Secretary, Ron Pelletier, Corporate Controller, and Bill Tryon, Manager of Investor and Public Relations. Dennis will dispense with the formalities and then we'll get right down to business.

Thank you, Bob. I like to point out 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'll now turn it back over to Bob.

Thanks, Dennis. As expected, the difficult worldwide economy had a significant impact on our top and bottom lines. With indications that the recovery could take significantly longer than previously expected, we chose, even in the face of slightly higher short-term sales, to curtail our production more than previously forecast for the first quarter. This resulted in a $2 million operating profit decline from guidance as we accounted for unabsorbed expenses.

The action did result in an improved cash position for the quarter and a lean inventory situation that will allow us to regain that profit quickly when sales and the need for inventory rebound. Without this, we would have been within our guidance.

On the positive side, our customers appear to have completed their inventory reduction efforts. At the beginning of this year, we believed that there would be a significant uptick in the world economy in the second half of 2009. We no longer hold this view and, therefore, have begun to take steps to further reduce our salaried staffing by about 5%. This is in addition to the 10% reduction that occurred at the end of January. The majority of this additional reduction in force occurred May 4, and will be completed by the end of the third quarter. The severance charge, $1.2 million, will be recorded in the second quarter, and we expect an annualized cost savings related to this new reduction in force, and other expense curtailments, of $7 million.

To continue to move the company towards the return to profitability and growth, we are focussed on a combination of cost control, strategic acquisitions, and investing in new product development.

While short term efforts are extensive, we have not lost sight of our long term vision as we believe the world economy will return to growth, and we intend to be well positioned to excel when that turn-around occurs. Our acquisition, several silicone based product lines from MTI Global, is our first strategic acquisition this year. The Richmond, Virginia operations will be integrated into our facility in Carol Stream, Illinois and in newly acquired Bremen, Germany facility by the end of this year. This acquisition should be accretive to earnings in 2010.

During the remainder of 2009, we will incur about $3.7 million of severance, moving and equipment requalification expenses, with $800,000 of debt in the second quarter. The processes and technologies we acquired are largely familiar to us, and we believe the moves to be straightforward. Though they will take the rest of the year to complete. We expect that several of the technical experts will join Rogers and relocate to our Carol Stream facility.

While the near-term outlook for sales and profits still has its challenges, we are confident that we are quickly taking the necessary steps to return the company to profitability. By using our strong balance sheet to do some prudent, strategic acquisitions, and continuing to fund new product development, we are positioning ourselves for longer-term growth in both sales and profits. Now, I will turn it over to Dennis for the detailed results.

Thank you, Bob, and good morning, again, to everyone. The first quarter has certainly brought home the diverse and significant impacts of the global economies. We operated during the quarter with some facilities curtailed or completely shut down, and some operations running at reasonable levels, but still significantly below a year ago. While there were some rays of optimism during the quarter, the overall lack of clarity in the markets, makes it challenging to determine how long it will take for a full recovery to occur.

We finished the quarter with very mixed results, with some businesses doing well and others doing poorly, with overall topline sales matching the upper end of guidance, but coming in just below the lower end of our range for EPS. In sales, our first quarter achieved a level of $65.5 million, which is at the high end of our guidance range, but at a level equal to 67% of our 2008 first quarter sales of $98 million. The declines were broad-based and impacted all segments, but with uneven results. High performance phones was down 41%. While printed circuit materials and power distribution systems sales were only down in the 9% range.

Overall for the first quarter of 2009, Rogers reported a loss of $0.56 per share which compares to income of $0.48 per diluted share in the first quarter of 2008. The year-over-year change is attributable primarily to the 33% decline in sales and the resulting unfavorable impact on manufacturing margins. The first quarter of 2009 also includes approximately $2.8 million in severance charges related to the announced staffing reductions which are part of our global cost reduction initiatives announced earlier in the first quarter.

Research and development expenses were $5.5 million in the first quarter of 2009 -- excuse me, I missed a page and I'm going to go back. Going back to gross margins. First quarter of 2009 gross margin was 21.3% versus 32.2% for the first quarter of 2008. In the quarter, margins declined across our strategic business segments where our continued focus on cost containment was offset by the impact of lower production levels required to maintain lean inventory levels. In addition, the comparison between the years includes a 2008 first quarter with a 33% higher sales base, which caused a significant disparity in the fixed cost absorption between the two periods.

Selling and administrative expenses for the first quarter of 2009 and 2008 were $16.7 million and $17.8 million, respectively. This decline was driven primarily by cost reductions from staffing reductions and efficiency measures. Reflecting the full improvements that we expect to realize from those measures, on a going-forward basis we believe our S & A run rate will be in the range of $15 million per quarter.

Now R&D. R&D expenses were $5.5 million in the first quarter of 2009, as compared to $5.3 million in the first quarter of 2008. As a percentage of sales, research and development expenses were 8.4% in the first quarter of 2009, as compared to 5.4% in the first quarter of 2008. For the full-year 2009, we expect to achieve spending levels slightly above our long-term target R&D spending level of 6% of sales, in support of our long-term strategic growth objectives. Rogers 50% owned joint ventures had first quarter sales totaling $10.6 million, down 60% from $26.2 million in the first quarter of 2008. Primarily due to weak demand in our two polyurethane foam joint ventures and the continued decline in our flexible circuit material JV. As a result, overall equity income in unconsolidated joint ventures in the first quarter of 2009, as compared to the first quarter of 2008, declined by $1.5 million.

The company's first quarter 2009 effective tax rate came in at 23.2%, which included a benefit of approximately $1 million, mostly related to the favorable settlement of certain tax contingencies during the quarter. Overall, our previously-announced tax planning initiatives relating to international jurisdictions should result in tax rates in the range of 13% to 16% for the remainder of the year.

Rogers ended the first with a cash and short term investment position of $45.4 million, compared to $70.6 million at the end of the fourth quarter of 2008. That decline related primarily to payments during the quarter for 2008 incentive awards, a payment for the Cal Amp settlement announced earlier in the year, and a contribution to the company's defined benefit pension plans.

During the first quarter, the status of the company's investments and option rate securities did not change materially, however, the company did receive par value redemptions of $600,000, as well as an additional par value redemption of $1.2 million, in the second quarter.

Capital expenditures were approximately $2.9 million for the quarter, and we expect total 2009 capital expenditures to be in the range of $17 million. Our balance sheet continues to provide us with a sound financial base, with ARDSO maintaining strong quarter on quarter improvement and inventories declining by about 14% from the end of 2008. We continue to have no outstanding long-term debt, although we are supported by available credit facilities totaling $100 million. Our current assets were 3.9 times current liabilities, and inventory levels ended the quarter at $35.8 million, as compared to $41.6 million at the end of the fourth quarter of 2008. Accounts receivable ended with 58.4 days outstanding, an improvement from 65.9 days reported at the end of the fourth quarter of 2008.

Our lean working capital position and otherwise solid balance sheet continue to provide significant value to us during this difficult economic period. This concludes my remarks and I'll now turn the call back over to Bob Wachob.

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

(Operator Instructions). Our first question comes from Fred Buonocore, from CSJ Securities, please go ahead.

How are you, today.

We're fine, Fred, good morning.

Just wanted to touch base on R&D, if you could elaborate on that a little bit more in terms of running it at that higher than 6% typical rate. If you could give us a little bit more color on that, that would be great.

Sure. What really happened we didn't reduce R&D spending much and sales went down by 33%. Year-over-year. And that caused the increased percentage-wise.

Right. Are there specific initiatives under lying that R&D, R&D spend, or is this just your kind of almost what you would call like maintenance R&D, what you'd typically be doing?

No, actually 70% of our R&D efforts are on new products for either new markets or new applications, and 30% of our efforts are to maintain or grow existing market shares.

Okay. Great. And then can you give us any color on margins by segments at all? I mean, clearly with volumes down, they probably weren't good, but any color you can provide would be helpful.

I believe that all segments lost money.

Got it. That would make sense. And then in the acquisition front, are you seeing any opportunities maybe for some larger acquisition opportunities, given the challenging economic environment, and maybe some maybe stressed competitors. If you can elaborate on that, that would be great.

Fred, we have multiple conversations going on. However, you never know how it will turn out until you reach some kind of an agreement. But we certainly are looking at a range of opportunities, both with competitors and with businesses that would put us into new markets.

Great. I'll jump back in the queue. Thank you.

Our next question is from Tom Lewis from High Road Value, please go ahead.

Good morning.

Good morning, Tom.

Point of clarification, the $7 million in annualized savings that was thrown out early on there, was that specifically to the actions taken in the last couple of days, or is that the sort of the cumulative on the, I guess, two different initiatives?

That's just the actions taken in the last few days, and things we plan on doing through the third quarter.

Through the third quarter.

Right.

And can you remind us of was there a similar figure when you took similar steps a couple of months ago?

Yes, that number was 27 million.

Right. Okay. Thanks. Now , with respect to the acquisition that you just closed, can you tell us -- I mean, silicon -- well, it is a rather ubiquitous material. Can you kind of tell us where it's going to play, and maybe more specifically is it complimentary or synergistic with anything you're already

Yes, we have -- Tom, we have a significant silicon business in Carol Stream, Illinois. This MTI Global, the product lines we purchased, were competitors of ours. And in many cases they took the approach of Rogers minus 20%. They have a foam product line which is the same as ours. So we'll just stop making their product and make more of ours. They have a fair amount of business in solid silicons that are calendared and pressed, and that is quite similar to a much smaller product line that we have, so that will be additive for us.

And then they have a very low dense city silicone foam which is unique in the world, and its major application is in the seat bottoms in railroad cars as it is -- meets all of the flame retardant requirements and is very resistant to taking a compression set, therefore, it has a very long life in seats. And we believe that will be -- presents a lot of opportunities around the world.

In addition, this particular business had next to no sales in Asia, and we expect that our strong presence there should over the next few years generate some significant sales.

Great. Great. Okay. Just last question, with respect to how you manage R&D, obviously if 70% is on new product and new product uptake at the end of the day depends on your customers' decisions to launch new product, can you give a feel for how they are -- my sense would be that a lot of them are either postponing or skipping new product generations altogether. What's your perspective as you manage that part of where you're going to put your R&D effort?

Actually, most of our customers, we see them scrambling to come out with something new that can differentiate them from their competitors, so they're quite responsive and open to new products and new ideas. Mostly because they're really trying to find a way to be different and get their sales growing.

Okay. I'll jump back in queue queue.

Our next question is from Avinash Kant from D.A. Davidson & Company, please go ahead, please.

Good morning, Avinash.

If you see growth going forward in Q2, any particular segment that you see improving better than others.

Actually, Q2 is traditionally our lowest quarter. Last year's sales declined by 6% and 7% in the second quarter. This year we expect them to grow a little, and that's mostly because January was such a terrible month with very little sales. I expect the foams to sequentially do much better, as the cell phones we started to sell into that marketplace, again. That's caused us to begin hiring in China so we can begin to operate a full shift. We have moved to four days of operations here in the US.

On the other hand, I expect a decline in the second quarter on the printed circuit materials segment, from the first, as we sold quite a bit into the 3G infrastructure pipeline. So we've not only sold product that was eventually made into something and sold, but also filled the pipeline. And I expect that that will be in the neighborhood of a $2 million negative in the second quarter.

So you did see meaningful sales to the 3G infrastructure in the first quarter?

Oh, absolutely. The three players in China, China Mobile intends to install 60,000 base stations this year and has already purchased 30,000. They already had 20,000 installed last year in both China, Unicom and China Telecom, will purchase 20,000 each.

Their technology -- those two companies use technology that requires half the number of base stations, but they do have more than twice of our content in them. And they have also purchased about 10,000 each. We expect shortly we'll begin to see orders for the second half of the year.

So basically the amount of orders you saw for 3G in Q1, you could could get that much in the rest of the year somehow, right?

Yes.

Looks like half of the build out is already brought forward, so you could see that come back?

Right. I believe that they intend, they have announced the intend to build as many base stations in 2010 as in 2009.

But this could be more like a $10 million kind of annual business for you roughly?

Yes. Of course, we have declines going on in 2G everywhere, and 3G, to say the least, sluggish in Europe and the US.

Right.

The bright light is China.

Okay. And some of the housekeeping questions for Dennis. Did you give out the depreciation number for the quarter?

It was around $4.3 million.

Off the charges you took, can you break out -- you took overall $5.7 million in charges, how much of that went to SG&A, R&D and COGS?

Well, the severance would have been all SG&A because it is an accrual reserve. And of the $2.9 million, $2 million was absorption, which was cost of sales, and then we had everything else would have been SG&A, about (inaudible) of SG&A.

Okay. So basically other than the two in COGS everything else went into SG&A?

Yes.

Okay. And you talk about the tax rate being 13% to 16% for the rest of the year. Should we think of annual tax rate going beyond this year as somewhere around those levels, or higher?

My range for ongoing years would be 15% to 20%, and it's very -- with our tax planning, it's very geographically based where our incomes are. This year we expect very strong incomes in Europe with our PDS business, and ACM with the 3G stuff. Asia is down a little bit, but the US is down the worst, so our highest tax jurisdiction is the lowest income level, so you're getting slightly lower averages this year than I would expect going forward.

But 15% to 20% on a full year basis is a reasonable number?

We think so. We were looking in the 20% to 21% range, and I would expect that with the recovery taking a little longer, that we might have, less of a strong US presence next year than we would have previously projected.

That's all assuming that nothing changes on the tax front.

Which everybody is hearing about.

Right, right, which is a big debate right now. But at this point is, of course, nothing on that regard, right? That would not change your strategy in any way?

All major changes in tax laws would be looked at strategically, and I can't guarantee there wouldn't be changes.

Right. Okay. That's pretty much it. I'll get back in queue if I have more questions.

Thank you.

Our next question is from Dana Walker from Kalmar Investments, go ahead, please.

The other one-timers in the quarter, are you suggesting that the less good absorption is considered a one-timer or was there something else there?

Less good absorption we think our inventory levels are as lean as we need them to be with our current global structure. And with order rates picking up slightly on average, we wouldn't expect a decline of the size that we saw in the first quarter, Dana, so absorption is certainly related to a percentage of that total inventory decline you see in the balance sheet.

The $0.14 that you describe as not being included in prior guidance, absorption is a large part of that?

Most of it.

Most of it is.

$2 million.

Okay. The joint ventures, which were off almost as sharply or roughly as sharply as your phone business, how would you expect that to trend as the year goes on?

If we take them one at a time, the PLS joint venture had a 95% reduction in sales in the first quarter. I don't expect that to repeat. Unfortunately, the customer had built quite a large inventory and, therefore, he didn't take any goods until the last two weeks of March. I expect him to come back to about 60% of the previous level. In Taiwan, our flex material business, expect that to come back significantly in the second quarter as we see things picking up.

And our foam joint ventures in Japan, we're hiring to be able to operate on a two-shift base circumstances, that is up from one. In China, we are operating a full shift on the joint venture. So expect those to come back, and we'd be hopeful they would get back to break-even in the second quarter.

Is there something, though, about how those businesses account for their bottom line where the normal effect on profit would have been softened in Q1? It doesn't appear that navigation into much uglier results based on the type of volume declines was very evident.

They account for accounting the way we do, because they're a part of our GAAP results. They do have a much lower cost structure and flexibility in moving labor costs out, so but their actual results are what flow through us.

Okay. With the follow-on steps that you're taking addressing the cost structure, would you update your sense for what break-even looks like, and I presume break-even -- the conversation needs to focus on a steady state production pace rather than one where you're bringing production and inventory levels down. Is that not correct?

Yes, Dana, and I would expect that we are in this $65 million to, say, $68 million per quarter break-even range, by the third quarter.

And what types of presumptions does that make for joint venture contribution.

That has the joint ventures adding a few $100,000 in profit.

So we're primarily looking at the consolidated result break-even, at that $65 million to $68 million?

Yes.

Bob, what types of assumptions are you making from MTI revenue-wise in your Q2 guidance.

$3 million in Q2, $1.5 million a month. Last year I believe they did $22 million, so we're assuming something less.

The change in cash levels from year-end, you would have been cash flow negative, I suspect, based on your profit profile. But it would appear that your payables and your accruals were meaningfully different at the end of March versus where they were at the end of December.

That's correct, when you look at the major one-time items for incentive, Cal Amp and then a major first quarter pension contribution, when you -- as you take the balance sheet and back those three things out, we're probably cash-neutral or slightly cash-positive.

We did pull down payables quite a bit, I believe.

Yes, because most of that stuff had been accrued for in payables. That is where it came out of.

One of the reasons for pulling down payables is that we have been able to get a significant number of discounts if we pay in 10 days, as there are a lot of people who need cash quickly. So it's to our benefit to pay as fast as we can and collect as many discounts as we can.

The Cal Amp payment, though, would have taken place in Q1 even if it was reflected in your liabilities then at the end of the fourth quarter?

Yes.

That partly explains it as well. Would you provide a present-day look at the foam business, and kind of feeding off of Tom's earlier question about products -- new products and whether folks are more likely or less likely. Can you talk about how you see the foam business position, given the new product nature of some of what you've been up to.

Sure, on the polyurethane side, the nine-pound density foam continues to gain market share and grow. And the soft seal, which is the 5-pound and 6-pound density material, had quite a little setback in the first quarter, but we expect those to come back and continue to grow in the second quarter and beyond.

And on the silicone side, the underfloor application in the passenger rail cars, as we've seen our first sets of orders and expect that to total more than $1 million this year. And then the new things, which is the railroad seats, we've had some initial activity that's very promising in places outside the United States.

The BISCO business, would it be fair to assume that that has not been as sensitive as your pour-on business?

That was true until March, and then just about every application dropped off. So that it was very low March, but we saw April come back about 30% from March, so it's rebounding pretty quickly.

Last question for me, if you would talk about some of the newer thinks in your quiver that you would expect to have some effects later this year and in 2010.

One would be the new application in solar farms where during the quarter we received our first order for bus bars in China, and that totalled $250,000, $300,000. I would expect that to go well beyond $1 million dollars this year. That along with the wind turbine applications are providing a fair amount of growth in the bus bar business.

In the advance circuit materials, the newest thing to happen is that China has turned on their first satellite to allow satellite TV. Now, they have about $0.10 per, but we expect that there could be 20 million subscribers before the year is over, and that obviously could keep growing for quite a few years at that rate, so that's a little glimmer of hope there, of something new.

What type of generation would they be putting in, versus what you're doing here in the US and in Europe?

Well, this is the simplest and smallest since there is just one satellite, there is just one horn. It goes all the way back to the original application where there's about two square inches of material per unit, and I don't expect that there will be three or four TVs in Chinese homes for some time.

Be an optimist, Bob. Thank you.

Thanks.

(Operator Instructions). Our next question comes from Jiwon Lee from Sidoti and Company, please go ahead, please.

Can you hear me.

Yes.

Yes.

I couldn't hear you for a little while. Couple of quick questions, please. The MTI Global, what was sort of the margin structure like before you bought it? Is that sort of kind of near your average high-performance foam business? Or is it a little higher or lower?

It was a money loser.

Okay.

When we move it and remove the overhead, it will be very similar to our existing high-performance foam margin.

Okay. So that unprofitability plus your charges relating to moving to different facilities, are why you're anticipating that business to be accretive by 2010?

Yes, expect it -- we'll actually make money in the second quarter, because we've already reduced expenses very substantially, but then there is the $800,000 charge which makes it a net loss.

And, Bob, in terms of your development or the OEM design activities that you're ramping up R&D dollars for, could you help us a little bit or pinpoint what markets and specifics you're trying to sort of get back to or be more aggressive about?

We're not actually targeting specific markets, but instead we keep very close track of all opportunities out there and monitor the number of design end wins we have compared with last year. And in the first quarter we had 20% increase in design wins, and at an average dollar amount during the first year of 15% higher than last year. So that makes us feel like we will have some growth coming along.

Of course, it's always tempered by other things reaching into life, but that's a good sign. And we're having increased number of opportunities and we're winning in increasing number.

That's helpful. Finally, for Dennis, what was the amount of pension contributions for the quarter, and how should we be thinking about the bottom line impact for the rest of the year?

Pension contribution was a $8 million contribution for the first quarter.

Okay.

We typically make one lump sum during the year. We pulled it forward this year to gain advantage on having it in the fund during whatever run-up in the stock that we anticipate might happen during the year.

Okay. That's's all for me. Thank you.

Our next question comes from Fred Buonocore from CJS Securities, please go ahead.

Follow-up for Dennis, and I'm sorry if you said this in the prepared remarks, but could you give us a sense for on our interest income, what is basically your blended interest rate at this point across your investments?

I say it is 150 basis points or less on average. We've got the auction rate securities which are a very low penalty rate at this point in time with the interest rates being low, and our base investable cash we have in fairly secure instruments as at this point in time. We're at the lower end of the interest rate curve.

Got it. Makes sense. Thank you very much.

And our next question comes from Ralph Reis, he's a private investor, please go ahead, sir.

In view of the fact that the shareholders are taking a beating and you're cutting back on personnel, might I suggest that management take a cut in salary until this whole mess is straightened out.

Well, Ralph, we froze salaries. There are no increases this year.

I'm talking about a 25% decrease.

We'll think about that.

I'm sure you will. Thank you.

I show no more questions in in the queue at this time. We have a question from Dana Walker, from Kalmar investments, please go ahead.

If we were to focus on your core categories looking at back, let's say, a year ago. If you were recognizing that none of us know in what time frame or to what degree markets will recover, do you see any impairments or change in your ability to address those markets as you gauge your customers today, so that if those markets were to recover unit wise, that you would fully participate.

I don't see any impairments, Dana. I do believe that we will experience some price reductions, though, along the way. That's clearly a focus of most all of our customers. In fact, the majority of them have completely replaced their supply chain staff so that they have all new people who have no relationships, who will only want to talk about a lower price. And we're familiar with how that's done, since we're doing something similar.

And, yet, in your key categories you have very high share, do you not?

Yes, we do.

and are delivering something that's a marketplace largely cannot deliver outside of your halls?l

That is correct. That is why we haven't talked much about having to lower prices in a major way.

Thank you.

You're welcome.

At this time I'll turn the call back to Mr. Bob Wachob, for closure.

Thank you. I'd like to leave you with one last thought, and that is 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're tightly controlling our expenses and maintaining a strong balance sheet. Thank you for your attention this morning, and good-bye to everyone.

This does conclude today's conference call. You may now disconnect. Thank you very much.