Rogers Corp (ROG) 2009 Q2 法說會逐字稿

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

Thank you. Good morning, ladies and gentlemen. With me today are Dennis Loughran, Chief Financial Officer; Deb Grainger, Vice president Corporate Compliance and Controls; Robert Soffer, Vice President and Secretary; Ron Pelletier, Corporate Controller; and Bill Tryon, Manager of Investor Relations. First, Dennis will dispense with the formalities and then we'll get right down to business.

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

Thanks, Dennis. I think of the last six months as being like renovating a home after a hurricane. We've cleaned up the debris, swept the floors, washed the windows and emptied the trash. The structure has been reinforced, the roof repaired and the systems refurbished to be more efficient. Now after two small additions, our acquisition of MTI and investment in Solicore, the house is in order and it fits the size of the current family living there. It has never been more streamlined; no more repairs needed.

While we were fixing the house we were also preparing for the future. 10 new products were introduced in the first half of this year and we expect a total of 17 to be introduced by year end. Additionally, we are supporting over 30 new product development programs. On the sales side we've had 85 design wins to date in our core businesses versus 67 in the first half of 2008. And the average size of these wins is $165,000 per year versus $145,000 in 2008. Surprisingly over 45% of these wins were in Asia, with 28% in the US, 27% in Europe.

The future definitely looks brighter than it did at the beginning of the year. Looking ahead we see three major growth areas which will provide a wealth of opportunities for Rogers. The three areas are -- one, the proliferation of video, both wireless and wired. Two, sustainable energy. A few examples -- wind turbines, solar farms, lithium ion batteries, smart power grids and hybrid and electric vehicles. And third, mass transit.

During the quarter we made a strategic investment in Solicore, the world leader in thin lithium ion batteries. They're a promising startup company that is rapidly growing sales into secure credit and debit cards with multiple credit card companies and one of the biggest banks in the US as current customers. We've also entered into a joint development agreement with them that, if successful, could result in higher volume, lower cost manufacturing processes for these products without large-scale capital expenditures. This is one example of our strategy to invest in late stage startup companies.

We were profitable in June and that performance gives me added confidence projecting that Rogers will return to profitability in the third quarter. I'll now turn it over to Dennis as he has a lot of details to go over.

Thank you, Bob, and good morning again to everyone. To say the least, we have come through a very eventful second quarter. You will all have seen by now the official results published last evening which indicate that the continued -- excuse me, which indicate the continued impact of the recession with substantial year-over-year declines in topline sales, a $25 million decline, and bottom-line EPS, on a GAAP basis a decline in EPS from continuing operations of $0.41 per share to a loss of $4.31 per share. And even on a non-GAAP basis to a loss of $0.02 per share.

However, at this point everyone understands what the business climate has done to our year-over-year results. There will be continued negative comparisons for a period of time until our topline fully recovers. The most critical story is what is happening to us right now.

Although not as definitive as we would like, we did see a change in direction for sales and earnings during the second quarter with notable performance improvements in High Performance Foams and our JVs, all of which turned in substantially better results than our first quarter, contributing to a total increase in non-GAAP EPS of $0.36 per share when compared to the first quarter.

The quarter also encompassed some significant decisions regarding business platforms and their underlying assets which we determine to have sustained permanent impairments in the quarter. Overall, as we announced last week, we incurred net charges of $67.2 million during the quarter. However, we believe that these significant events, both the improved operating performance and the recognition of the impairments required to redirect certain businesses, mark a turning point for the Company.

Our guidance projects a return to profitability in the third quarter and, more importantly, we believe that our leadership positions in the markets we serve and our continuing efforts in technology and new business development will help drive profitable growth as the world economy continues to recover.

Getting to the details of the second quarter, our sales achieved a level of $67.4 million, down $25 million or 27.1% from the second quarter of 2008. Excluding a substantial impact from the Durel and Flex business end-of-life declines, which total over $12 million, the year-over-year decline was approximately 17%.

The results for the quarter came in at the low end of our guidance range but, more notably, at a level equal to 103% of our 2009 first-quarter sales of $65.5 million. That improvement, although encouraging, was driven largely by High Performance Foams, which was up 48% from the first quarter. However, Printed Circuit Materials sales declined 19% with lower sales into wireless infrastructure. And our remaining businesses were relatively flat in total compared to the first quarter.

Overall for the second quarter of 2009 Rogers reported a loss of $4.31 per share compared to earnings from continuing operations of $0.41 per share for the same period in 2008. As reported in the press release dated July 27, 2009, included in the net loss for the quarter are net charges of $67.2 million or $4.29 per share.

Excluding those one-time net charges non-GAAP EPS was a total of $0.02 loss per share; that figure represents an $0.08 per share improvement to the upper end of our second-quarter guidance which was a range of $0.10 to $0.20 per share loss excluding special charges, and that was even though sales came in at the lower end of the range.

The non-GAAP performance in the second quarter also compares favorably to our first-quarter 2009 results which was a reported GAAP loss of $0.56 per diluted share or a non-GAAP loss of $0.38 per share excluding $2.8 million in severance charges. The sequential improvement is attributable primarily to improved sales and the resultant favorable impact on manufacturing margins, but also due to the impact of our announced cost reduction efforts which are on track to deliver an annualized rate of $34 million in savings.

Second-quarter 2009 gross margin was 25.3% versus 32.8% for the second quarter of 2008 reflecting the significant decline in sales and capacity utilization year over year. The gross margin will improve as production levels increase, as we saw with the second quarter comparing favorably to the 21.3% gross margin reported in the first quarter 2009.

We had improved margins across all our strategic business segments as compared to the first quarter of 2009 performance with the greatest improvements occurring in High Performance Foams as manufacturing utilization increased to absorb the 48% increase in sequential sales. All of our businesses continue to focus on cost containment and maintaining production levels at levels required to sustain lean inventories in line with our corporate target of nine weeks of supply.

Selling and administrative expenses for the second quarter of 2009 and 2008 were $18.8 million and $18.2 million respectively. The 2009 figure includes $3.6 million of one-time charges. Excluding those charges the resultant decline of $3 million was driven by cost savings from staffing reductions and efficiency measures implemented during the year. We expect to realize continued benefit from those measures in the future and believe our SG&A -- [S&A] run rate will be in the range of $15 million to$16 million per quarter going forward.

Research and development expenses were $4.2 million in the second quarter of 2009 as compared to $5.9 million in the second quarter of 2008. As a percentage of sales research and development expenses were 6.2% in the second quarter of 2009 as compared to 6.4% in the second quarter of 2008. For the full year 2009 we continue to expect 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 second-quarter sales totaling $23.2 million, down 20.5% from the $29.2 million in the second quarter of 2008, but up a significant 120% from the $10.6 million booked in the first quarter of 2009. The sequential rebound was primarily due to improved demand in our two polyurethane foam joint ventures.

Overall equity income and unconsolidated joint ventures in the second quarter of 2009 as compared to the second quarter of 2008 increased by $0.1 million despite the year-on-year decline in sales. However, the Q2 results were an improvement of $2 million when compared to the first quarter of 2009 due once again to the substantially improved sales in our polyurethane foam joint ventures.

Other income and expense, which includes income from royalties, commissions and fees less other expenses, amounted to a net loss of $0.2 million in the second quarter of 2009 compared to a net gain of $1.1 million in last year's second quarter. The net decline is primarily related to net foreign exchange differences totaling approximately $1 million and approximately $0.2 million related to declines in commissions from our PLS joint venture.

Our second-quarter effective tax rate was 290.4%, which includes a $53.1 million charge to establish a valuation allowance against our US deferred tax assets and was partially offset by a $3.4 million benefit recognized on the asset impairment charges taken in foreign jurisdictions. Tax expense, excluding those two discrete items, was $0.6 million in the second quarter.

In this quarter and going forward we will not be able to recognize a benefit on US operating losses due to the write-off of the Company's US deferred tax asset, but will incur expense on our earnings in our foreign jurisdictions. As a result we believe our tax rate will be in the range of 3% to 6% for the remainder of 2009.

Rogers ended the second quarter with a cash and short-term investment position of $38.4 million compared to $45.5 million at the end of the first quarter of 2009. That decline related primarily to the $7.4 million cash payment made on the MTI acquisition during the quarter. The status of the Company's investments in option rate securities totaling $42.4 million did not change materially in the quarter; however, the Company recorded a charge of $0.5 million due to the adoption of new accounting standards in the quarter.

Capital expenditures were approximately $3.6 million in the quarter and we expect total 2009 capital expenditures to be approximately $16 million. Our balance sheet continues to provide us with a sound financial base with accounts receivable DSO maintaining its improved levels and inventories declining by about 10% from the end of 2008. We continue to have no outstanding long-term debt.

However, our capacity to borrow money under our credit facilities may be negatively impacted under our current terms given recent financial results. We are working with our bankers to ensure maximum funds availability, but we continue to generate cash and have access to other sources of liquidity if necessary. Our current assets were 3.2 times current liabilities and inventory levels ended the quarter at $37.6 million as compared to $41.6 million at the end of 2008.

Accounts Receivable ended with 60.2 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 as we continue to focus on recovery and profitable growth. This concludes my remarks and I'll now turn the call back over to Bob Wachob.

Thank you, Dennis. Now we'll be happy to entertain any questions.

Avinash Kant.

A few questions about revenue growth guidance, Bob. It looks like you are guiding revenues up but very slightly. Given what we've been hearing from the semiconductor food chain it looks like the chip guys have been reporting very strong growth in the second quarter. Given that you have more than 50% explosion to electronics food chain, would you expect some upside in the September quarter guidance that you're talking about?

It's pretty early to be able to tell. Currently the July, which is over, ran at about the same rate as the first quarter. So that makes me cautious. The big upside is the 3G activities in China and we now have orders, but there will be no significant shipments until September. This is very different than what happened in the first quarter when they placed the orders and wanted shipments immediately. They seem to be going much slower in this third round of the build out.

I see. So if you were to ship all the orders that you have for 3G that could be some upside, but you're not counting on that, right?

I believe that the vast majority of that will ship in the fourth quarter. That would be an added $3 million or $4 billion.

Fourth quarter, right?

Yes.

Okay, because that my next question. At this point of course everybody has very little visibility, but people are -- some of the chip companies in Taiwan are talking about slightly sequentially down fourth quarter. And I don't know if one of your customers is talking about the fourth quarter at this point. What kind of body language are you getting from them?

Our customers aren't talking much about the future at all. We're now in the situation where about 30% of what we ship in a month is on the books when the month begins. It used to be in the range of 40% to 50%. So at least what we see out there is it's still very much reactive. The one place where it's not reactive right now is in the 3G stuff for China where they placed orders for significant future deliveries.

A quick question for Dennis. Dennis, could you provide us with the depreciation number for the quarter? And what was the headcount at the end of the quarter.

I think we were at about 1,600 employees worldwide and the number for the depreciation is -- hold on a second, about $4 million or $5 million -- $4.5 million, Avinash.

Okay. And what was the headcount at the end of the previous quarter?

1,700.

Okay, perfect. Thank you so much.

Fred Buonocore.

Good morning, gentlemen. Just wanted to follow up on Avinash's question related to guidance. So you're basically -- a slight uptick in revenue guidance for Q3, but you see a good improvement in profitability. So I guess this is to imply that you're expecting to see gross margin improve some dramatically? Can you give us some more background on the profitability improvement you're looking at?

Yes. By June all of our cost reduction initiatives were in full force and we were receiving all of the benefits. That was not the case until June. And I expect to see those benefits during the whole quarter.

Got it.

And as you can see, in the second quarter there was quite a significant improvement in gross margin.

Should we expect to -- I mean, I guess we'd see something similar to that magnitude.

Yes, a little better. A little better at the low end of guidance, quite a bit better if we got all the way up to the 73.

Great. Okay, and can you talk a little bit about cash flow expectations for the balance of the year and full year?

Our net cash flow to me is going to be determined on growth in sales. We're at pretty lean inventory levels in accounts receivable. And so you could actually end up being slightly negative if we do have to grow inventories to support what we expect to be a fourth-quarter run rate which we don't have right now. But in general we generate about as much cash out of working capital as we can. And it's all determined on the profitability flowing through and growth and those working capitals through the end of the year.

Of course. And then, Bob, can you talk a little bit about new products and elaborate on some of those numbers that you put out at the beginning of the call and maybe when we can expect a lot of the new products that you've introduced over the last couple of years to really start to benefit results. Should we start to see some decent benefit in 2010 off of recently released new products?

Yes. Products released in 2008, a couple of those are beginning to see some significant sales. One is called -- it's a Poron product called ThinStik. ThinStik is a Poron cast on and pressure sensitive adhesive. And there we have 13 design wins this year. And while sales are not above $1 million yet they will be with those 13 design wins and that continues to make good progress.

Soft Seal had a lot of design wins, three of which will be more than $1 million each and two of which will be more than $500,000 each. And some of those were in -- they were all in cell phones, but some of them were in smart phones also where we see lots of potential opportunities.

Other things that are happening are that finally the chemical/mechanical planarization, and this relates to semi conductors, we had our first order this year. Last year it was well over $1 million and this year it, until now, had been nothing. And we're seeing that pick up quite significantly. So that ties in with the semi conductor people beginning to have some positive results.

We're also seeing some real success in mass transit areas with our silicon materials. We recently received a $1.5 million order for foam that will be used and gaskets in 75 passenger train cars, so that's $20,000 a car. And that's, we believe, only the beginning.

In addition, Poron in particular, had some real success in sports, leisure and the apparel market place with some significant design wins with new products in the work footwear area and the aftermarket insoles and, of all things, baseball caps where the material called ProZorb, Poron ProZorb which is a moister absorbent, is used in the headband of baseball caps. As someone told me, when we have high definition TV if the cap gets wet and dirty you can see it, so they bought more expensive caps. Amazing how that could be more than $1 million, but it is.

And on the high frequency Printed Circuit Materials have had some interesting things. The Patriot missile is seeing a resurgence and we have a $1 million order for that as it's being sold to countries other than the US. We have a ship radar system that is in excess of $1 million and then a chip packaging application for one of our high frequency materials that also will be in excess of $1 million.

It's been a while since we've had this many design wins with new products and existing products where they've been in excess of $1 million. So it gives us some encouragement here. I'd be projecting a little more if July had been a little better. I'd like to see some pickup before we start saying that we're going to have significant sales growth. But with the design wins we have we feel pretty confident that things are going to get better.

Clearly. And that was very helpful, thank you. And then just finally, can you talk to us a little bit about the MTI Global acquisition, how that's going and what the outlook is for that business?

That's on schedule, we still expect to have it completely consolidated by the end of the year. We also believe that the consolidation expenses are likely, instead of being $3.7 million will probably be closer to $2.7 million, so we're doing a little better there. And the sales are beginning to increase; certainly the first month was disturbing because it was so low.

But then that kind of thing happens often as the seller ships everything he can ship and get in a box just before the sale date. Once we got past that sales are coming back at about the level we expected. So we feel pretty good about all this. And we've had -- the important technical people have all agreed to stay with Rogers and move to Chicago.

Very good, thank you very much.

(Operator Instructions). [Russ Piazza].

Good morning, Bob. Did you mention as one of your growth areas wired video?

Yes, think of that as broadband, the Internet. One of the things that is going on here is the increasing amount of video going across the Internet is causing the switch speeds to move up from 10 GB per second to 40 and then eventually to 100. That's going to require a lot more of our type of material for the backplanes as they'll -- to switch at those kinds of speeds they'll need to use high frequency materials. And recently we introduced a product called Theta which was a halogen free high speed digital laminate and bond [ply] specifically for that application. And that was done in partnership with Hitachi.

So this is the first time in telecommunications you've been outside of the wireless world then?

We have about $5 million currently in the wired end at the very high-end switches. So it's there, it just hasn't been a huge part of what we were doing. But now -- as many things, as things get faster more things come toward us.

And speaking of things getting faster, could you update us on the thermal management business?

Yes. That business is making some really good progress. I expect before the year is out that they'll be qualified at the three largest manufacturers of what are called insulated gate bipolar transistor modules. These are large semiconductors switching high-voltage, high current used in trains, hybrid cars, electric cars, variable frequency motor controllers. That is a very rapidly growing business and we are making really good progress on being a qualified there.

And what about on the chip side?

We have a couple new applications and orders on the chip sides. As you might imagine, the chips business was pretty slow for a while. But now some new wins are being introduced and we're receiving those orders. So we're feeling encouraged here that this business is about to start moving ahead.

And as time has gone on and you've learned a little bit more about MTI, what do you know about it now that you didn't know when you bought it?

I'd rather not say negative things about others. But I believe that there is more opportunity than we thought to improve the operations and lower the cost. And there are more opportunities than we thought to sell those products into other parts of the world. So we believe we have more opportunity now than we thought when we first bought it. And of course we never quite thought that we would end up having to book a $2.9 million gain. This is the second time that's happened to us.

One other thing we may be able to confirm is the broad acceptance of their customer base to having Rogers supply these products now. We thought that might be the case, but we've been able to confirm that in the month since we've owned it.

Nice. Thank you.

Fred Buonocore.

Just a quick follow-up; I'm sorry to make you repeat yourself. But you talked about on the EL lamps as well as the flexible circuit material, that being I guess a $12 million or greater than $12 million impact in the quarter in terms of the sales decline?

Yes. Last year to this year, yes.

And are those collectively almost done? I mean, when do we see that impact just go away?

First quarter next year.

Okay.

Since it's been in a steady decline we'll continue to see that until the first quarter.

Very good. I appreciate it and we look forward to seeing you at our conference in a couple days.

Great. Thank you, Fred.

I would now like to turn the call over to Mr. Wachob for closing remarks.

Thank you. By continuing to invest in new product developments and diversifying into new markets we continue 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 joining us this morning. Goodbye to everyone.

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