Rogers Corp (ROG) 2009 Q3 法說會逐字稿

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation 2009 third-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to Mr. Bob Wachob. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. With me are Dennis Loughran, Chief Financial Officer; Deb Granger, Vice President of Corporate Compliance and Controls; Bob Soffer, Vice President and Secretary; Ron Pelletier, Corporate Controller and Bill Tryon, Manager of Investor Relations. First, Dennis will dispense with the formalities and he 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 Roger's 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. Last quarter, I said we were done fixing the house after the hurricane and we were preparing for the future. Q3 was proof that we took the right actions as results for the quarter continue to improve as it progressed. Almost every Rogers business showed progress during the quarter fueled by improvement in many of the markets where we participate.

Two of the strongest market examples were cell phones where two of our new PORON products, SoftSeal and ThinStik, had rapid growth and also strong demand for our high-frequency circuit material in the China satellite TV market.

We also did not detect any inventory build at our customers during the quarter. We have continued forging ahead with new product introductions with a year-to-date total of 12 and an expected record total of 17 by year-end.

Looking forward, we believe most of our customers are cautiously optimistic about the future; although they continue to watch their inventories very carefully. Round three of the 3G buildout in China is progressing at a moderate pace unlike the frantic pace of round two in Q1. We are being cautious in our Q4 sales forecast as it is unclear how strong business will be during the last two weeks of December, a time which historically can have significant volatility.

As we announced previously, Rogers made a $5 million investment in Solicore, the leading manufacturer of three volt, thin film, lithium, ion batteries and we are excited about the opportunities for these devices in a range of markets through smart cards, to music playing gift cards, as well as controlled release of medicine from transdermal patches. Rogers is leveraging its technologies to jointly develop the next-generation batteries. In addition, Rogers' manufacturing capability has the potential to help propel this late-stage startup forward at a rapid pace.

Looking ahead, there are multiple trends and events that could have a strong positive effect on Rogers' sales in the future. A few of these events and trends are when will India release the 3G infrastructure build? When and how fast will the 4G buildout occur in the US? And will the growth of smartphones accelerate due to some recent new phone introductions? When each of these happens, and they will, there will be a positive upside for Rogers. I now turn it over to Dennis to go over the details of a very good third quarter.

Thank you, Bob and good morning again to everyone. The third quarter is poignant for one significant fact. We seem to have left the bottom of a terrible economic cycle behind. As you know, we started with modest expectations for the quarter with an original sales guidance range of $68 million to $73 million. After our September 15 guidance update, which raised our sales guidance range to $74 million to $77 million, we continued to experience additional sales strength ending the quarter with official published revenues of $81 million.

So, after a dismal first half of 2009, sales have firmed and trended up nicely in the past three months. The increase from our original guidance levels was driven foremost by high-performance phones, which deliver the most significant improvement to expectations with strength in all segments, especially in applications for portable communications.

Printed circuit materials also came in higher on the strength of sales into the satellite TV market for LNBs in China and into defense applications. This strength came even though sales for Chinese 3G buildout were slow in Q3. The service providers awarded next phase 3G buildout contracts late in the quarter to equipment suppliers; however, orders are only starting to roll in at a measured pace.

Power distribution systems also delivered a strong quarter, much the same as it has all year, showing real consistency during an otherwise volatile year.

Led by these three segments, we achieved a sales level of $81 million in the third quarter of 2009, down $15.3 million, or 15.9% from the third quarter of 2008. Excluding a substantial impact from the DUREL and flex businesses' end-of-life declines, which totaled approximately $11 million. The year-over-year decline was approximately 5%.

Overall, for the third quarter 2009, Rogers reported a profit of $0.40 per diluted share compared to the earnings from continued operations of $0.46 per diluted share for the same period in 2008. As reported in the press release, included in the net profit for the quarter are net charges of $0.04 per diluted share of one-time integration expenses associated with our silicone foam acquisition, which was consummated in the second quarter of this year. Excluding those one-time net charges, non-GAAP EPS was a profit of $0.44 per share. That figure represents a $0.10 per share improvement to the upper end of our third-quarter updated guidance range of $0.28 to $0.34 per diluted share, excluding one-time charges.

On a sequential basis, the non-GAAP performance in the third quarter represents a significant improvement from the second quarter of 2009 when we reported a GAAP loss of $4.31 per diluted share and a non-GAAP loss of $0.02 per share, excluding one-time items. Third-quarter 2009 gross margins was 30.4% versus 31.7% for the third quarter of 2008 with a small decline attributable primarily to the significant decline in sales year-over-year.

Our margins were positively impacted by our productivity improvements and cost reductions over the past six months, which allowed us to achieve such a minimal decline and a significant sequential improvement as compared to Q2. If you compare this quarter's gross margin performance against those of the past several years, including 2006 in which we achieved the highest annual sales volume in the Company's history, the 30.4% compares very favorably, even to historical quarters with sales from $15 million to $40 million higher in total.

Selling and administrative expenses for the third quarter of 2009 and 2008 were $16.4 million and $20 million respectively. The 2009 figure includes $0.4 million of one-time integration expenses associated with the silicone foam acquisition in the second quarter of this year. Excluding those charges, the resultant decline of $4 million was driven by the cost savings from staff reductions and efficiency measures implemented during the year. We expect to realize continued benefit from those measures and believe our estimated run rate will continue to be in the range of $15 million to $16 million for the fourth quarter.

Research and development expenses were $3.8 million, or 4.7% of sales in the third quarter of 2009 as compared to $5.7 million, or 5.9% of sales in the third quarter of 2008. The third-quarter 2009 spend level was slightly lower than a typical quarter, reflecting an offset to what was a slightly higher than targeted spend rate through the June year-to-date figures, as well as lower legal costs associated with our intellectual property rights during the quarter.

Year-to-date through September, research and development expenses are 6.3% of sales versus 5.9% during the first nine months 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.

Rogers' 50% owned joint ventures had third-quarter sales totaling $30.4 million, down 7.3% from $32.8 million in the third quarter of 2008, but up 31% from the $23.2 million booked in the second quarter of 2009, continuing the recovery and demand at our two polyurethane joint ventures that have started rebounding in the second quarter.

Overall equity income in our unconsolidated joint ventures in the third quarter of 2009 as compared to the third quarter of 2008 decreased by $0.2 million primarily as a result of the year-over-year decline in sales. Other income expenses, which includes income from royalties, commissions and other fees, less other expenses, amounted to a net gain of $0.2 million in the third quarter of 2009 compared to a net gain of $0.6 million in last year's third quarter. The net decline is primarily related to an unfavorable net foreign exchange impact due to the decline in the US dollar.

Our third-quarter effective tax rate was 6.7% due primarily to a favorable mix of global income between our taxable jurisdictions, as well as a one-time gain related to a tax statute expiration. We believe our tax rate will be in the range of 6% to 9% for the fourth quarter of 2009.

Rogers ended the third quarter with a cash and short-term investment position of $43.3 million as compared to $38.4 million at the end of the second quarter of 2009. The increase related primarily to improved cash from operations, lower inventories and auction rate securities redemptions. During the third quarter, approximately $3.1 million of our investments in those securities were redeemed at par, leaving $39.6 million still outstanding, $1 million classified as short term and $38.6 million classified as long term.

Capital expenditures were approximately $2.7 million in the quarter and we expect total 2009 capital expenditures to be approximately $14 million.

Our balance sheet improved during the quarter with a net reduction in working capital of approximately $5 million, resulting from an improvement in our accounts receivable days sales outstanding to 54.5 days from 60.2 days at the end of the previous quarter. And inventory declining about 8%, or $2.9 million during the quarter to a level of $34.7 million. Overall, our current assets ended the quarter at 3.3 times current liabilities.

We continue to have no outstanding long-term debt and have no current needs to borrow. However, as we mentioned during the conference call at the end of the second quarter, we entered the third quarter with the potential that our capacity to borrow money under our existing credit facilities could be negatively impacted by a cumulative impact of recent financial results.

As that turned out to be the case and with our borrowing capacity significantly reduced under the existing borrowing formulas, we are happy to report that, during the quarter, we substantially completed negotiations with our bankers to amend our current credit facilities, which will provide us with improved borrowing capacity in the fourth quarter and going forward as our results strengthen. The agreement should be finalized between the parties within the next few weeks. This concludes my remarks and I will now turn the call back over to Bob Wachob.

Thank you, Dennis. And now we will be happy to entertain any questions.

(Operator Instructions). Fred Buonocore, CJS Securities.

Good morning, gentlemen. Very nice quarter. I wanted to start out asking about the MTI Global acquisition. Are you -- how is that progressing in terms of integration? And are you starting to see opportunities there to penetrate new markets and deliver new products to the market?

The integration is on schedule and within budget and we do expect to close the Richmond facility, Richmond, Virginia facility at the end of this year. And at that point, we will incur the final severance and state bonus expenses and we will also put it up for sale.

We see quite a few opportunities, some of the products that we have acquired from MTI. One example is the bun stock material, the very low density materials that are used for seat cushions. That has never been sold outside the United States. There is absolutely no reason that it shouldn't be. We see the whole rest of the world as an opportunity for these materials. And we are actively pursuing that.

Great. And then in terms of, Dennis and Bob, you both talked about cost-reduction actions and margin benefit there. Just in terms of looking forward and looking into 2010 for your overall operating margin outlook, with respect to the cost reductions that you have made, how much of this do we get to keep, how much of it reverts back as maybe you start increasing salaries again and doing things like that? So I'm just trying to understand what we should be looking at in terms of margin trajectory or are there kind of headwinds as you bring some costs back in?

There will be some headwinds. As you will recall, we have reduced expenses by $34 million and I expect, in 2008, a few things will happen. One is that we will give raises again, which we didn't in 2008 and that should be about $1.5 million. And in addition, we will plan for success; therefore, we will accrue for a bonus at the target level, which would add $4.5 million of expense. And then there is probably another $1 million worth of things associated with various insurances that are going to go up. That's the vast majority of what I see. There is a little bit in some materials, but we hope to balance that with some additional reductions in material costs. So that, in total, they almost zero out.

So in terms of materials, are you talking about raw material price increases and can you elaborate on that a little bit further?

Well, we expect, with the price of oil being up some, there will be some increases, but not that much. And we are effectively hedged on copper, at least for a rolling 12-month period and expect that to not be a significant issue with 2010.

Great. And then finally, you talked about -- you don't see any major inventory build going on. Can you just talk a little bit more about what you're seeing in terms of inventories in the supply chain and the kind of lead times you are seeing on orders at this point, particularly on the foams for cell phones and consumer electronics? Thank you.

Our customers are continuing to order with a request for extremely short lead times. That is a good indication they don't have any inventory. In fact, during the last week of September, we had probably $3 million to $4 million worth of what I believe were additional sales in that month as our customers in Asia were trying to get ready for the one-week holiday and therefore have materials in place so that they could begin production the day they return to work. And if you notice, we had a $3 million finished goods inventory reduction because this came as a surprise. It was pulled out of finished goods inventory because there is no way to make it in the US and ship it over there in that small period of time. So I would expect that we will not have a reduction in finished good inventories in the fourth quarter. I think we are as low as we can go without impacting our customers.

Very good. Thank you.

Avinash Kant, DA Davidson.

Good morning, Bob and Dennis. A few questions. When you talk about -- have you not talked much about the new product initiatives that you have been taking? And I was thinking, other than the overall improvement in the economy, what kind of contribution could we expect from some of the new product that you have been introducing this year in '10?

Not very much. The cycle time is 18 to 24 months after introduction. You are looking at maybe $1 million, $2 million tops from what we introduced in 2008. We actually don't begin the five-year clock until sales have passed $500,000. And the reason for that is sometimes it takes a year or a year and a half before we get to that level.

So maybe some of that will start to become meaningful in '11 but not in '10?

That's right. '11, we should see some significant impact. And in fact, that is why I mentioned SoftSeal and ThinStik because they become significant, yet they are several years old. And one of the reasons we don't talk about our new products by their names because it is, as most of my people that are important to me remind me, by the time I talk about it, they consider it old news because it is not really a new product, but it is new in regards to sales and impact on the business.

Right. And now in terms of the 3G business, have you seen things expand there? I think the majority of the orders have been from China lately, but have you seen other countries also start to order on the 3G side?

China is rolling out round three at a pretty measured pace. I actually believe that it is going to go through Q4 and Q1 as opposed to being the big burst it was in the first quarter. Although the size is about the same. In Europe, it is very slow. In the US, we have AT&T trying to build out their system as they are experiencing some serious problems, capacity problems very much associated with smartphones and their use of about eight times the bandwidth. In fact, for us this is a big deal. The more smartphones, the more people are going to have to expand the infrastructure. Now a big [advantage], as I mentioned, is when is India actually going to issue those 3G licenses?

They have been late.

Just like China was late. I stopped predicting because China was a lesson and it was about a year and a half late. So I stopped reading and stopped trying to say when it would be.

Right. And from Dennis, any idea in terms of what should we think of tax rate in the next year and also CapEx?

We are just going through our planned calculations. CapEx, we are going to maintain control on those. Next year, we do have a fairly large sum, about $4.5 million, to complete the high-frequency facility in China. Our maintenance capital we always say is $12 million to $13 million and so I would expect something under $20 million and above $15 million. More to come in the first quarter when we look at our first-quarter rate.

Tax rates, we have had a lot of impacts this year that have brought that rate down. We are going to be in a position next year where our European tax strategy will be in full bloom and so we will have very low effective tax rates on our European earnings. Our Chinese tax rates are going from 7.5% and 15% up to 15% and 20% and our US taxes, because of the write-off of the deferred tax, we have the unique position of, when our income turns profitable in US segments, which it is currently not in the third quarter, we will be able to revalue the reserve that we have taken on our deferred taxes and end up with very low or minimal US taxes and even zero in some cases.

So I expect something north of 10% and below 20% and I will have to get more firm numbers as we look at our rates for the first quarter after we get our geographic incomes projected more firmly.

And did you give the depreciation and the headcount for the current quarter?

Depreciation for the third quarter was $4.5 million. I don't know the headcount.

I believe we are in the neighborhood of 1600.

Now a final question, Bob. Of course, in terms of visibility, your business is a lot, a quick turnaround business and I believe, but for the $3 million to $4 million shift from Q4 to Q3, you would have seen kind of Q4 being flat from Q3, right?

Yes.

Now seasonally, how has Q1 been in your business and do you have any visibility qualitatively into Q1?

Well, let me first answer that Q4, seven out of the nine, last nine years has been lower than Q3. So that would indicate that it is going to be a little stronger this year. Q1 is about 50/50 as far as being higher than Q4 and it is really driven by special events. It depends on who has introduced what, but we see a gradual improvement here overall. At some point, we are going to benefit from an inventory build on our customers' part and also on our part because our finished goods are almost at an unsustainable low level.

Okay, perfect. Thank you so much.

Jiwon Lee, Sidoti & Co.

Good morning. It's Brian Murphy in for Jiwon. Thanks for taking my questions. I think most have been answered, but could you give us your thoughts on sort of what kind of growth you expect from high-performance foam?

I expect that high-performance foam in the fourth quarter will be less than the third quarter. Third quarter is typically by far the highest quarter with September being the biggest month of the year and it was as it was the year before and the year before that. In fact, it was the second-highest month for high-performance foam in our history. I expect it will grow in 2010, but not in the fourth quarter.

Great. Thank you. And could you just give us some rough sales numbers for RTI during the quarter?

You mean MTI?

Right, sure.

Yes, well, that is a part of high-performance foams and we don't break out that detail.

Okay, thanks very much.

Tom Lewis, High Road Value Research.

My questions were already answered. Thank you.

Dana Walker, Kalmar Investments.

I have a few questions. Gentlemen, good morning and Deb, how are you?

Good morning, Dana. I had no doubt that you would have some questions.

I have a whole string of questions. We will see how many I get through. How did you feel about your flow-through comparing Q3 gross profitability to Q2 gross profitability on the increase in revenue?

We felt pretty good about that. It was a very good increase because we have our expenses pretty tightly controlled. So we didn't have to add a lot of labor and so close to margin after material.

I compute 55%, which sounds like a pretty good number. How does that compare to how you would expect to perform over the next year or so?

It might be hard to keep it at 55%, but I really would like to see a number of around 35% to 40% is a number that is sustainable for 12 months anyway.

You said earlier that when China -- when your customers in China wanted product earlier that that was not baked in your original guidance. Did I hear that correctly?

That's correct.

Okay. What type of placement do you have on some of the newer smartphones that will be introduced here momentarily, including a couple from Motorola?

We have PORON in the vast majority of all the smartphones.

Would you describe your placement as being at a maximal level on these products?

I might be able to say that, in the smartphone area, we have 20% to 40% more material than we do in the what we would call the featured phones, which is not the very low end. And our marketshare is very good, at least as good as it is in total, which we believe is in the 60% range.

Would your involvement with products like SoftSeal and ThinStik be higher with smartphones than it would be with a normal phone?

No, I would say that it is being used everywhere and those products are 30% to 70% higher priced because there is significantly more value in those products than in some of the older because ThinStik includes a pressure-sensitive adhesive.

When a fellow like Tim Tebow suffers a concussion and you have recently introduced your XRD PORON, does that encourage the type of adoption that you would like to see even if it comes at Tim's expense?

I would hope so, but can't tell. I do know that we have an 18-month exclusive with the largest hockey helmet manufacturer and also with a baseball glove, Rawlings baseball gloves. I am not sure about football helmets yet. This certainly could encourage that.

You mentioned Solicore at the front end of your conversation. Could you update us on what has happened there with you since you have announced your investment?

Our joint development is progressing very well, maybe better than we expected. We have -- we have already made a battery that is functional, which to me was pretty early in the game to have been able to do that using the technologies that we are pursuing. So I am very encouraged about that.

What does that mean? And I presume that means that proof of concept is established at least at an early level.

Yes, yes. The biggest hurdle -- the biggest single hurdle -- what we thought required an intervention, we have actually proved that we can do it. And that was just last week.

How will that affect the timeline of what takes place next?

Probably doesn't affect the timeline, but raises our confidence significantly that we will be successful. And that we will be able to enter into high-volume manufacturing.

Would you expect Solicore-related revenue to be a 2010 phenomenon or later?

Of course, we won't be counting any of the revenues. We do have a minority position and so I wouldn't expect any -- of course, we won't count the sales and I really wouldn't expect any significant income.

Okay, that's enough from me for the moment. Thank you. Good luck.

(Operator Instructions). [Ralph Ray], Private Investor.

Good morning. Would you discuss your competition and the pricing? And secondly how much dollar goes into a smartphone on average?

In a smartphone, we have anywhere from $0.04 to $0.20. It varies by phone. There is no -- I really don't have an average, but I do know the range. Competition-wise, in the high-performance foam area, we have all the same competitors, no one new. Everyone continues to pursue their long-term strategy, which has been Rogers minus 20%. We are just as good. And we don't see anyone making any huge inroads here.

In the power distribution system business, nothing has changed competition-wise. Although there are a couple of new Chinese manufacturers, but they don't seem to be very capable. So we don't see them as a current threat.

In the high-frequency materials, nothing has changed, same players, same strategies. So we don't see any significant pressure. If anything, our alliance with Hitachi and the new data materials may put us in a position of being threatening to some other people as we have not historically played in the digital world. And we intend to become a significant force there over the next few years.

Thank you.

Fred Buonocore, CJS Securities.

-- to see if you could talk about what you think the opportunity looks like in alternative energy for wind and solar projects, which you've referred to in the past? Thank you.

All right, Fred. I still expect that, in the wind area, that our sales into that area will be 80% to 100% greater than they were last year. At the moment, I think it is a little slow, but starting to see big projects being funded. Now that is really the key here, the funding of the big farms, whether it be a solar farm or a wind farm. The vast majority of our business is in the wind turbine area. We have a couple of applications in the solar area.

However, an area that will be in alternative energy that will be, I believe, very large for us, but this is at least 2012, is in hybrid electric vehicles and in electric vehicles. We have over 20 projects that we are working on with a large variety of manufacturers for polyurethane foams, PORON, for silicone foam, for thermal management systems, being a aluminum silicon carbide for power distribution systems.

There is four different materials being utilized in these various vehicles as they have lots of issues associated with separating the batteries, with sealing the cases, with distributing some very large amounts of power and also in disseminating heat as the electric vehicles and the hybrids generate a lot of heat from their insulated gate bipolar transistors. You have probably heard me talk about that. Those things are used a lot in trades. Well, they are also used in electric cars and hybrid electric cars.

That's really interesting. Thanks very much.

There are no further questions at this time. Please proceed with any further comments or closing remarks.

To conclude, we have laid the foundation for faster growth and increased profitability as the world economy revives. We have done that by continuing to invest in new product development and diversifying into new markets. On the other hand, we continue to keep tight control on our expenses and are maintaining a strong balance sheet. I thank you for joining us this morning. Goodbye, everyone.

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