Rogers Corp (ROG) 2010 Q1 法說會逐字稿

Good morning. My name is Brook and I will be your conference operator today. At this time I would like to welcome everyone to the Rogers Corporation 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)

I will now turn the conference over to Bob Wachob, President and CEO of Rogers Corporation. 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 of Corporate Compliance and Controls; Robert Soffer, Vice President and Secretary; Ron Pelletier, Corporate Controller; and Bill Tryon, Manager of Investor Public Relations.

First, Dennis will dispense with the formalities and then we will get right down to business.

Thank you, Bob. I would like to point out to all our listeners that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in 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 statement.

I will now turn it back over to Bob.

Thanks, Dennis. Q1, certainly much better than our plan and significantly better than we expected at the start of the quarter. It sure feels much better being where we are today versus this time last year.

During the quarter we benefited from a strong rebound in most of our markets and from the China 3G roll out which compressed a couple quarters of business into one. Also, some of our new products introduced in the last three years are starting to grow nicely like our high frequency laminate with low profile -- think very smooth copper -- especially in antenna applications for communication towers.

As we look forward we expect most of our growth will come from three long-lasting market megatrends. They are the continued growth of the Internet, the expansion of mass transit, and the global drive to sustainable energy.

Within each of these three megatrends there are several exciting application spaces that we project will have growth rates varying from 10% to 30% compounded annually over the next five years. We already have solid positions in most of these application areas and they are the key focus for our additional product and market development work.

In these three market areas we are currently involved in over 450 customer projects; that is up from 200 when we reported in early February. And we have 29 programs that have already gone into production this year. In addition, we have more than 30 design wins which we expect will go into production sometime in the future.

One notable design win was achieved by our start-up business, Thermal Management Solutions. We received an order for an aluminum silicon carbide component for heat removal in hybrid electric and electric cars. A Tier 1 automotive customer has provided a forecast that totals $25 million in sales between 2011 and 2015. Now who knows what the real sales will be, but the win validates the premise behind this startup business.

In total across all markets our salespeople are involved in more than 1,000 customer projects, up from 700 this time last year. Customer project activity is always a positive sign for the future and this is one of the highest levels of activity that we have seen in many years.

In summary, we had a strong beginning to the year and are cautiously optimistic going forward. I will now turn it over to Dennis to go over the details.

Thank you, Bob, and good morning again to everyone. As evidenced in our press release and Bob's comments, our strong sales and operating performance have allowed us to report results that exceeded even our recent guidance update. We are in a strong position moving forward in 2010.

We have ample market opportunities upon which we are diligently focusing our strategic efforts. Our balance sheet and improved earnings provide us with the resources to quickly take advantage of those efforts as we did with the acquisition of SK Utis this quarter and will do with both organic and acquisitive opportunities moving forward.

With first-quarter 2010 sales of $83.9 million rising over $18 million above last year's recession-driven levels all of our businesses performed at or above our previous guidance levels. As you have read both high-performance phones and printed circuit materials outperformed all others as they combined operational readiness with strong customer demand.

That sales performance combined with excellent operating efficiency helped generate a reported GAAP profit of $0.43 per diluted share for the first quarter of 2010 compared to a GAAP loss of $0.56 per diluted share for the same period in 2009. As reported in the press release included in the net profit for the quarter are net charges of $0.01 per diluted share primarily related to SK Utis acquisition costs offset by one-time tax benefits.

First-quarter 2010 gross margin was 36.1%, an all-time record for our company, versus 21.3% for the first quarter of 2009 with the improvement attributable primarily to the positive impact of our significant operating leverage and higher production levels and a favorable sales mix as most of our increases came from two of our three core strategic businesses, high-performance phones and printed circuit materials.

Selling and administrative expenses for the first quarter of 2010 and 2009 were $21 million and $16.7 million, respectively. The 2010 figure includes $0.9 million of one-time acquisition costs associated with the SK Utis acquisition as well as $1.8 million of incremental equity compensation costs due to the timing of the issuance of our 2010 grant in the first quarter as opposed to the second quarter in 2009. And $2.2 million for incentive compensation which was not incurred in 2009.

Excluding those charges, the resulting decline of $0.6 million was attributable to ongoing cost constraints in administrative areas. We expect to realize continued benefit from those measures and believe our S&A run rate will continue to be in the range of $19 million on a quarterly basis in 2010.

Research and development expenses were $3.5 million or 4.2% of sales in the first quarter of 2010 as compared to $5.5 million or 8.4% of sales in the first quarter of 2009. The first-quarter 2010 spend level was lower than our average spend expectation of 6% of sales or approximately $4.8 million, reflecting lower level of spending for legal matters related to intellectual property protection as well as a periodic fluctuation in laboratory and project costs that should even out through the rest of 2010.

For 2010 we continue to expect spending equal to our long-term target R&D spending level of 6% of sales.

Rogers' 50%-owned joint ventures had first-quarter sales totaling $30.5 million, an almost tripling of the recession impacted $10.6 million reported in the first quarter of 2009. Overall equity income in our unconsolidated joint ventures in the first quarter of 2010 was $2.2 million as compared to the loss of $0.4 million for the first quarter of 2009, primarily as a result of the year-over-year improvement in sales.

Other income and expense, which includes income from royalties, commissions, and other fees less other expenses, amounted to a net gain of $0.8 million in the first quarter of 2010 compared to a net loss of $0.1 million in last year's first quarter. The net improvement is primarily related to improve commissions from our PLS joint venture of $0.6 million and favorable net foreign exchange impact of $0.2 million.

An additional note related to our joint ventures. On March 31, 2010, we reached an agreement with our partner to dissolve our PLS joint venture and have all of the related distribution activity flow through Rogers beginning in the second quarter. This will have no impact to our overall bottom line as income will shift from commissions we formerly received and recorded in other income.

However, it will cause a gross up affect on both sales and expenses and profits to be shown in our operating results. In the second quarter we expect this change to incrementally impact our sales by approximately $5 million.

Taxes for the first quarter were impacted by one-time events described in the press release resulting in an effective tax rate of 22.3%. We believe our tax rate will be in the range of 27% for 2010, higher than our previous estimates due to improved earnings projected in regions with higher tax rates.

Rogers ended the first quarter with cash and short-term investment position of $42.9 million as compared to $58.1 million at the end of the fourth quarter of 2009. Although a significant decline at first glance, this decrease relates primarily to the expenditure of $26 million paid to acquire SK Utis which we were able to fund entirely through internally generated cash.

Also impacting our cash in the quarter were a net increase in working capital of $8.8 million to support higher operating levels and capital spending of $1.3 million offset by cash from operations of approximately $12.6 million and dividends of $8.1 million from joint ventures. During the first quarter approximately $0.6 million of our auction rates were redeemed at par leaving a par value of $42.8 million outstanding at the end of the quarter.

Capital expenditures were approximately $1.3 million in the quarter. For 2010 we expect capital expenditures to be approximately $20 million with the principal change from our previous estimate of $17 million being the recent positive acceleration of opportunities in high-speed digital and power distribution markets.

Our balance sheet responded to increased operating levels during the quarter with a net increase in working capital of approximately $8.8 million related primarily to higher accounts receivable and inventory of $7.8 million and $2.5 million, respectively, offset by increases in accounts payable and other current liabilities totaling approximately $4.7 million. Despite the increase in working capital, which was expected due to the higher production levels and sales levels in the quarter, our efficiency metrics for receivables, collections, and inventory levels remained in excellent condition.

In accounts receivable days sales outstanding improved to 56.7 days from 61.8 days at the end of the previous quarter. Inventories increased by about 16.4% or $5.6 million during the quarter to a level of $39.4 million. However, $3.6 million of that increase represented the SK Utis and the PLS inventory values added to our balance sheet at the end of the quarter.

We maintained our DOS at approximately 8.6 weeks of supply, well within our targeted range. 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.

This concludes my remarks and I will now turn the call back over to Bob Wachob.

Thank you, Dennis. We will now entertain any questions.

(Operator Instructions) Fred Buonocore, CJS Securities.

Good morning, gentlemen; very nice quarter. I am sorry; I jumped on a bit late so I am sorry if I am making you repeat yourself. Obviously very strong, stronger than expected quarter, looking for Q2 to be stronger than what I had been originally expecting.

How do you look at the full year now in relation to your previously provided guidance? If you could elaborate on that given the trends that you are seeing.

Fred, I tell you, I struggle with what this quarter, second quarter is actually going to be because our visibility is not very good. Most all of our lead times are at less than two weeks so we have generally less than two weeks of backlog.

But in general, for the year, I would have to say that it's pretty clear we are going to do better than what we thought in our plan and therefore better than the guidance. But the hard number just -- it eludes me because I really just don't have any idea. I have to wait and see.

No, that is fair enough. That makes sense. Just in terms of -- one of the things that I have been seeing with other companies that have operations in China and fairly labor-intensive businesses in China are constraints on labor. And I know we have discussed this in the past, but is labor or higher labor costs impacting you at all? Or do you expect maybe as your demand continues to improve to run into a little bit of a headwind there?

Well, our operations in China are not necessarily particularly labor-intensive.

Right.

But we also follow a policy of treating our employees in China pretty much the way we treat the people in the US and Europe, which is not the normal practice. And because of that we have significantly less turnover. We provide a lot of training for our people which causes them to stick around. The negative of all of this is for salaried people we are the place everyone goes to look for the best people.

But in general we are not having a labor problem. We are able to attract people. I just looked; we have 29 people in China who have passed their five-year anniversary. That may be a record for someone who has only 700 people in total. So in general we don't have the issue.

Increasing labor costs, absolutely. Increasing salary costs, that is certainly going on. But then that is the history of China, when you start so low it keeps going up.

Very good. I will jump back in queue. Thanks.

Avinash Kant, D.A. Davidson & Co.

Good morning, Bob and Dennis. A few quick questions first. Clearly you saw a very strong Q1, better than expected, and the guidance for Q2 is better than expected. Could you maybe highlight where did you get the upside from?

One of the biggest places was the 3G rollout in China. All of it got compressed into this quarter whereas we talked about the fourth quarter, it didn't happen like we thought. We thought it would be spread out over several but it got real busy.

And it was actually quite a little challenge for us to ramp up manufacturing fast enough to keep the lead times in a good place. Actually we were able to build a little inventory to satisfy those customer requirements.

Besides the high frequency, well, in addition at high frequency all the custom stuff, the US military applications and the automobile applications, which we have a fair number, all came back in a really strong way. Automobile in particular much stronger than we thought.

And then of course in the high-performance foams area just everything got better. In fact, what was really amazing to me was that our sales grew the most in the US versus what you might normally expect to be Asia.

Right, right. Looking into the guidance for the next quarter excluding the impact from the JV you are kind of looking maybe -- the midpoint kind of is flattish from where you had in March. Is it typical seasonally?

Yes, yes. If you exclude the acquisition and the joint venture then we are predicting $75 million to $79 million which is pretty similar to the way we viewed the first quarter. And absolutely historically, I believe seven out of the last 10 years the second quarter has been our weakest quarter and we expect that to be the case again.

Okay. Also tax rates, I think Dennis talked about it a little bit. So we should expect tax rates close to 29% or so going forward in the rest of the three quarters for the year?

That is how it will work out. Yes, Avinash.

But how about 2011, should 2011 be modeled at 27% like 2010 or 29% like the ongoing rate?

We have -- I would say the only prediction we can give you is what we have analyzed for this year. We have such divergent tax rates among our regions it is very specific to the mix of our sales and volumes going forward. And I don't have a look at 2011 and so I apologize for not being able to give you any guidance on that. Obviously it has changed.

As our performance has improved we are selling more in Asia, which is where currently our highest effective tax rate is because of our excellent international tax planning, as well as our US situation we have got a net operating loss. If we keep performing very strongly in Asia that rate that we are looking at this year could be a predictor of the next year.

And what was the depreciation for the quarter, depreciation and amortization for the quarter?

$3.8 million.

$3.8 million, okay. So one final question for Bob though. As a lot of these 3G sales in China seems to have come in this quarter should that be a negative impact going forward for the year or you would see other regions like India or other regions starting to pick up on the 3G side?

Certainly it's a negative impact on Q2 and most likely Q3. Then we would expect it potentially in Q4. We have the possibility of China Mobile extending out into the secondary and rural cities and therefore some additional Chinese business.

At the moment India is, I believe, into week three of their auction. It seemed to be as long as somebody keeps raising the bid they seem to continue the auction and give no date as to when they will stop. But the good news is they have started the auction.

It could have some impact in the fourth quarter. I think it's most likely the impact will be next year and it should be pretty significant. We have heard that there could be as many as 250,000 base stations installed by the three licensees whoever they might be in the 22 circles.

Perfect. Thank you so much.

(Operator Instructions) Jiwon Lee, Sidoti & Company.

Good morning, thanks. Just going back to the second-quarter guidance, I was hoping to get a little more color on the kind of assumptions that you gave for the project mix as well as the gross margin given your record high gross margin in the first quarter.

Jiwon, when we looked at that the significant improvement over last year was obviously production levels as well as favorable product mix. When we looked at the second quarter versus the first quarter of this year our guidance has probably a mid range of about 33% or so. And that mix change -- that change is really related to bringing in PLS and Utis which do operate at lower than our average gross margin levels in the 20% to 25% range.

So that weighted averaging of bringing them in grossing us up brings that gross margin down to about 33% based on what we are going to do for the second quarter. But basically no real significant shift in what the business units are contributing.

Except a little bit from lower sales.

Exactly.

That we expect, especially in the printed circuit materials segment.

That is very helpful, thanks. Then SK Utis, given your guidance you are blending in about $3 million in sales for the second quarter?

Yes.

Yes.

Okay. That was like -- what was the 2009 sales? That was about $12 million, is that correct?

Yes, that is correct.

So -- as you obviously aggressively pursue the handset and other consumer markets how should we be thinking about that gross attraction throughout the year, especially on the SK side?

Utis at this instant in time is constrained by capacity and we have authorized a 50% increase in that capacity, which I expect to be in place in September or October.

That is terrific. And your new products to energy and transit side, Bob, that is very project driven isn't it? So how should we be thinking about that attraction throughout the year at the pace of things that you have [been] so far?

Well, I would say that it will pick up as the year goes along. Since some of the numbers I gave were from the first the year, as the year goes on we will bring more of those things into production and that will have a bigger impact. At least at the moment those -- within those three megatrends if I were to annualize the first quarter we would show a 30% increase from last year, but I would expect that it should be better than that as we gain some traction.

Some of this, however, like we talked about the thermal management solutions, that business -- we have a contract, however, it's less than $1 million in 2011 but grows to over $7.5 million out in 2013. Some of this stuff is not near-term and I have said this before, we win then we wait. The key here is how many wins do we get, how many spec-ins which is actually in the long run more important than how many projects go to production because it tells us about the future.

That is helpful, thanks. Any sort of update on the order side and what would you already discussed in your remarks that we could be expecting this year?

Well, one of the things that is going on right now is there has been some questions about inventory out there. We don't think there is any building inventory. In fact, what we see is a very large increase in the number of orders but they are smaller. To me that indicates that our customers are really watching their inventories and are ordering more often to keep them under control.

It also would indicate that visibility is not quite what everyone would like. I really like the old days when deliveries were 12 weeks because you could forecast the quarter pretty easily. That no longer is the case.

Okay. And speaking of inventory, are you comfortable with the level of inventory that you have given the anticipated sales level? Is that a little lower than you would like, just in time, or how should we be thinking about that?

We have built $2 million worth of finished goods during the quarter to help us maintain our level of service to our customers and we expect, based on the forecast, that we are in good shape for the second quarter. Should be no increase in inventory and I doubt that we will have any significant decrease. So we are pretty comfortable right now.

Good news is during the quarter we got surprised but the manufacturing guys came through and we kept our service levels at the right spot and we did put in some finished good inventory to help maintain those delivery times.

Jiwon, from a medium-term perspective we are moving ahead on our capital project to complete our laminating facility in China. As we reported to everybody in the past, the building had been done the previous year, we bought all the equipment. We now have got our first press installed.

The team and the rest of the equipment will be implemented and installed during the rest of this year for availability in the first quarter of next year as this growth consumes our open capacity in Arizona and Ghent for high frequency materials.

Okay. So that part of the incremental $3 million CapEx for this year wouldn't be spent, what about the power distribution products? Where would that expansion take place?

The base -- our original $17 million estimate had the completion of the laminate facility in it and what I spoke to were two new opportunities for our high-speed digital product line. The high frequency laminate projections for that require us to get some equipment in place in the United States to produce prototyping and be available for production next year, which was not in our original forecast for that.

And our power distribution business is looking at expanding with the wind and solar opportunities as well as their base locomotive power distribution equipment in the US market. So they will be putting equipment in place to start taking advantage of a US market that we would be cut out of if we don't have capacity for these folks in the United States.

Perfect. I will hop back in the queue. Thank you.

(Operator Instructions) Dana Walker, Kalmar Investments.

Good morning. Could you comment on the longer-term view for SK Utis? What types of opportunities you believe you have now that you have production on the ground in Korea?

Right, SK Utis has focused on the telecom handsets but we see tremendous opportunities in the automotive area, especially with some of the hybrid and electric vehicles, and also in LCD TVs along with a lot of other consumer electronic products. We think this business has quite a few opportunities here.

It grew 40% last year. That took them out of capacity and the previous owner was capital constraining it as it was not strategic for them. As I mentioned, we are adding the capital. It's rather minor, less than $1 million, but adds a significant amount of capacity. I see this business growing quite nicely and becoming even more profitable than it is today.

Is there anything about their product line that is different than your present phone product line?

Yes, actually the chemistry -- although they are able to achieve similar results, the chemistry is totally different and opens up what we believe are multiple product development opportunities for us, both with their technology and in combination with the technology we already had. We think this has surprisingly turned out technology wise to be a really good thing.

Therefore you would hope to do a reasonable amount of business outside of Korea with their chemistry?

Yes, that is correct.

If you were to scope the size of your present phone business, which is running $120-plus million, how do you view the addressable market with what you have just acquired outside of Korea?

I think we have significant growth opportunities here for the business in total, especially in -- which we haven't talked about today -- in the mass transit area both in trains and in planes. We have had a major adoption for sound deadening material in a commercial aircraft that will be introduced, if they stay on schedule, in 2011 which should generate multimillion dollars worth of product sales.

We are seeing lots of other opportunities in the rail area as you have noticed with some of our press releases that we are getting major orders that exceed $1 million.

Is the aircraft [order] though is that part of your existing business or was that a Utis win?

That is part of our existing business. It's a silicone product used for sounded deadening in composite aircraft.

Okay.

Actually, someone just reminded me that the product came from our acquisition last year of MTI.

The only composite aircraft, and maybe I need to read more aerospace magazines, that is about to be launched would be the Dreamliner.

I believe the Dreamliner and A350.

Okay, I need to read more magazines.

I just read what the salesman writes. It's more useful.

Your gross margin or your profit rose more than your revenue sequentially.

Yes, that is because we cut the costs so much last year.

Do you view anything anomalous going on in comparing Q1 to Q4, other than the fact that you built revenue, you lowered your structural costs, and you had a nice -- I guess those would be the two primary things?

Right. That is really it. And we had a little extra cost associated with competition and the accrual for a bonus. In the second quarter we gave people raises so we will experience that cost increase in Q2, but you can't go forever without giving someone a raise.

Would you elaborate on the design that you describe with aluminum silicon carbide which is auto based? What exactly will that product do?

It's a molded part that has fins on it. In some applications it will be exposed to the air, in other applications the coolant will actually be flowed over it so as you get to higher powers you can't use air to dissipate all the heat, you will use the coolant.

It has fins and it is in the neighborhood of four inches by four inches, and it is applied -- with this particular customer they currently have three customers, two of which are German-based and one is French-based. So there is opportunity for many more customers; you shouldn't really trust the beginning here.

When you say two German and one French you are talking about the actual car builder?

Yes, yes, because our customer that is their customer.

And this part will be fitted where?

Two places. One is the inverter that is where they convert the DC power into AC power and you use insulated gate bipolar transistors, I seem to use that phrase a lot. That is what generates the heat and that is the heat you have to take out. In the converter where you go from the 12 volts or 18, I forget which it is, in the battery to 650 volts. The reason for the inverter is these cars are run on alternating current motors, not on DC current motors.

When one looks at the way you describe the revenue flow from the way that design might play out what does that suggest about near-term activity levels for hybrid and electric vehicles?

At the moment in the hybrid and electric vehicles we have 46 customer opportunities that we are working on which spans not only the thermal management things but also power distribution and our high-performance phone businesses. So far this year we have been spec'd in to seven different applications.

And of course we are in production in one but that wasn't to a 2010 event. It was a 2009 event but that same customer we have supplied prototypes for their next vehicle.

Would you view most of the opportunity from this category to be post-2011?

Oh, yes. Yes, absolutely.

With some activity in 2011?

Yes, and some in 2010. In the hundreds of thousands in 2010, I would expect exceeding $1 million in 2011, and then you get into four or five. 2012 is a long ways away and at this point we are just relying on people's forecasts for vehicle sales.

Let me ask one broad question and then I will step back. As you look at all the things that you are doing and consider what might be incremental in the 2011 timeframe to what you are likely to see in 2010, what things stand out most for you?

I would say activities associated with trains. I believe that is an area that will give us quite a bit of opportunity in 2011. We will begin to see some effects from 4G. As more operators begin to start to deploy systems those really big sales come in 2012 and 2013. We will see some added effect in 2011.

As far -- it's really just Verizon in the US and a few cities in Sweden and I think too in Norway, about all the activity at the moment. I do believe that India in 2011 will be, on the 3G side will be a pretty big deal. And that along with the return of satellite TV to higher levels in China will stimulate 2011.

Thank you very much.

At this time there are no further questions. Mr. Wachob, do you have any closing remarks?

Thank you. I would just like to leave you with one last thought and that is that we have laid the foundation for faster growth and increased profitability as the world economy revives. We will continue to invest in new product development and look for opportunities to diversify into new markets.

Thank you. Goodbye, everyone.

Thank you. This concludes the conference. You may now disconnect.