Rogers Corp (ROG) 2010 Q4 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 fourth-quarter and year-end 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 hand the program over to Mr. Bob Wachob. You may begin your conference.

Thank you. Good morning ladies and gentlemen. With me are Dennis Loughran, our Chief Financial Officer; Deb Granger, Vice President Corporate Compliance and Controls; Robert Soffer, Vice President and Secretary; and Bill Tryon, Manager of Investor and 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 Rogers operation 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. By all measures, 2010 was very successful for Rogers. In Q4, business remained robust as wireless infrastructure remained strong and the traditional end of year lull in portable communication devices was less than normal.

We have mentioned to you in the past we are focused on markets that are benefiting from three significant economic and social megatrends. They are growth of the Internet, expansion of mass transit and investment in clean technology. We are having considerable success here as 41% of our sales in 2010 were into these megatrend markets with 2010 growth in excess of 35% year over year.

At the end of 2010, we had almost 600 active customer opportunities and for the year, we won 60% to 70% of the customer opportunities that have come to fruition. Importantly, one of the new application areas for us, base station antennas, now has 14 programs in production and these antenna programs are with customers located in China, Korea and the US. Additionally, two electric vehicle applications have gone to production with anticipated first-year sales in excess of $2 million.

Everywhere we look we see evidence of the continuing growth related to these megatrends. One example is smartphones. They are now expected to grow 50% in 2011. Tablet type devices are being introduced by a large number of suppliers and are expected to reach 60 million units, up from 18 million in 2010. Our content in foam gaskets, pads and seals in tablets can range from $0.10 to $0.50.

Currently we project that we are in more than 50% of the forecasted 60 million units for 2011. Almost everyone wants dual sources of supply so the math regarding content and per share device is not simple. However, it is large -- it is a large fast-growing market and one in which we expect to have a leading share.

Additionally, 3G wireless infrastructure spending is ramping up as our customers have increased forecasts for 2011 first quarter and are already forecasting a very strong Q2.

4G especially in the US, though still small is growing quickly. In order to prepare for this expected growth we have and are continuing to make a number of investments in capacity around Rogers. We are now in the final stages of starting up the Printed Circuit Materials facility in Suzhou, China and are about to enter the customer qualification stage. The full complement of hourly and salaried personnel are currently in place and have been trained and we have started recruiting supervisors for the second shift.

For the first quarter, we will again have additional wage, salary, utilities and material expenses associated with this startup but with little or no corresponding revenue. When fully qualified by our customers, we expect to be able to significantly increase capacity, improve responsiveness to customers and reduce excess costs in the US and Europe due to high overtime and weekend shift operations. We will then be in a great position to deal with the expected growth in 3G and 4G and other high frequency circuit applications around the world.

We also expect a significant reduction in our finished goods inventory for Printed Circuit Materials once our new Suzhou operation is in full production.

Much of the equipment has arrived at our new Power Distribution Systems North American operation which is located in one of our Chandler, Arizona buildings. We expect that startup and customer qualifications will take place in Q1 leading to first production shipments in Q2 2011. We see significant opportunities in North America for these products within hybrid electric and electric vehicles, variable frequency motor drives and mass transit that can only be addressed with local manufacture.

And finally, we are installing the equipment associated with our high-speed digital initiative as a very large printed circuit board fabricator and a very large OEM is now prequalified beta digital laminate. We continue to provide a considerable amount of sample material to the chosen printed circuit board shop so that they may test and fully qualify our material in their process. They have built a significant number of printed circuit boards and the OEM's testing is in progress.

In this case, no news is good news throughout the long testing cycle. And for Rogers, this is great news. The success through this phase of the process could put us six months ahead of our planned timeline.

We have own Curamik for about six weeks now and we have our integration manager on-site at the facility. The limited initial integration activities associated with finance, information technology and sales are going quite smoothly. And at this point we are even more enthusiastic about the business than when we first acquired the operations.

Throughout the Company, we are continuing to focus our resources on where we see the best opportunities. In 2010, we allocated 12 additional business development and marketing people to the megatrend effort. All this bodes well for the future growth of Rogers.

In the meantime, we continue to work to prepare ourselves to meet the growing needs of our customers while striving to take a -- strike a balance between short-term profits and long-term growth.

I will now turn the call over to Dennis for the details of the fourth quarter and full year.

Thank you, Bob, and good morning again to everyone. The fourth quarter of 2010 finished off a stunning year of turnaround performance and exciting progress in our strategic megatrend markets as well as significant accomplishments in acquisitions that we believe will transform the face of Rogers for years to come.

We continued 2010's excellent improvement over 2009 results with fourth-quarter gains in sales and gross margins compared to year ago levels being at or near our average improvements for the entire year 2010 illustrating that the year was characterized by sustainable vitality rather than temporary recovery gains. With a full year of significant gains, the fourth quarter did culminate in advanced circuit materials operating at or near maximum capacity levels. This issue will be addressed in the first quarter of 2011 as we bring our production facility in Suzhou online.

That situation caused costs to rise slightly in the fourth quarter compared to the third quarter of this year. However, our operating leverage continues to be the major positive story for Rogers as we operated on average during 2010 in a range of capacity where we generated gross margins well above the previous year and even above historical peak levels.

Fourth quarter 2010 sales of $97.3 million represented an increase of $19.3 million above last year's fourth quarter with all of our business segments showing improvement. High Performance Foams and Printed Circuit Materials continued their strong pace for 2010 contributing over 80% of the year-over-year growth and leading the way to Rogers' overall 24.7% increase in sales for the quarter.

Rogers reported a profit of $0.65 per diluted share for the fourth quarter of 2010. Excluding net nonrecurring items disclosed in the press release, the non-GAAP result of $0.44 per diluted share compared to a non-GAAP profit of $0.40 per share for the same period in 2009.

Contributing to that improvement was a higher fourth quarter 2010 gross margin of 33.2% as compared to 30.4% for the fourth quarter of 2009. Underlying that result is a 45% contribution margin on incremental sales driven primarily by the positive impact of higher production levels combined with a favorable sales mix as most of our increase came from two of our three core businesses, High Performance Foams and Printed Circuit Materials.

Selling and administrative expenses for the fourth quarter of 2010 and 2009 were $24.1 million and $16.6 million respectively. The increase of $7.5 million in SG&A expense was attributable primarily to the inclusion of performance-based compensation costs of approximately $5 million in the fourth quarter of 2010 that were not incurred in the fourth quarter of 2009; $2.3 million of costs related to Curamik acquisition, leaving only a small net remainder of approximately $0.2 million in other increased costs. We expect our SG&A to be in the range of $24 million per quarter in 2011 which includes the impact of our new Curamik acquisition.

Research and development expenses were $5.6 million, or 5.8% of sales in the fourth quarter of 2010 as compared to $3.9 million, or 5% of sales in the fourth quarter of 2009. Our R&D percent of sales for the full year of 2010 was 5.2%. This percentage is below our strategic target a 6% of sales mainly due to the impact of the high sales growth in 2010 as we did not increase our spending at the same rate.

We will continue our commitment to a long-term target R&D expenditure rate of 6%. However, the addition of Curamik forecasted to add over 25% to our consolidated sales base, we expect our average for 2011 to be more in line with the spending percentage achieved for 2010.

Rogers' continuing 50% owned High Performance Foam joint ventures with INOAC Corporation had fourth quarter sales totaling $21.2 million compared to $20.7 million in the fourth quarter of 2009. As mentioned in the press release, in October, the Company sold its position in its 50-50 joint venture with Chang Chun Plastics Company RCCT.

Overall equity income in our unconsolidated joint ventures in the fourth quarter of 2010 was $2.3 million as compared to $2.0 million for the fourth quarter of 2009.

Other income and expense which includes income from royalties, commissions and other fees less other expenses amounted to income of $0.3 million in the fourth quarter of 2010 compared to income of $1.2 million in last year's fourth quarter. The net decline is primarily related to the exclusion of PLS commission income of $0.7 million from these results as they were included in consolidated and operating profit in 2010, as previously mentioned, as well as net one-time gains in the fourth quarter of 2009 not repeating.

In addition, a gain of $3.2 million was booked and reported as a separate line item on the income statement as a result of the sale of our position in the 50-50 joint venture with Chang Chun Plastics RCCT as disclosed in our press release.

The effective tax rate for the fourth quarter of 2010 was a negative 30% having been impacted by a significant discrete item identified in the press release related to the release of a valuation allowance on certain of the Company's US deferred tax assets. Excluding that item, the rate for the fourth quarter would have been 8%.

For the full year of 2010, the Company's effective tax rate was 14%. The overall 2010 tax rate was also impacted by the previously mentioned partial reversal of a valuation allowance on the Company's US deferred tax assets as well as the favorable settlement of certain tax issues and other one-time discrete items. The Company believes the tax rate for 2011 will be in the range of 25%.

Rogers ended the fourth quarter in a cash and cash equivalents position of $80.1 million as compared to $53.2 million at the end of the third quarter of 2010.

For auction rate activity during the quarter, we redeemed only $150,000 at par. However for the full year of 2010, we redeemed $5.8 million of these securities at par leaving a par value of $37.6 million of such securities outstanding at year-end.

Capital expenditures were $12.6 million for the full year of 2010 compared to $12.1 million in 2009. Rogers expects capital expenditures of approximately $25 million in 2011 with the increase related to the addition of Curamik as well as planned capacity expansions and process improvements.

Our balance sheet responded to the declining operating levels during the fourth quarter of 2010 as compared to the third quarter of 2010 with a net decrease in working capital of approximately $9.1 million related primarily to lower accounts receivable and increased short-term liabilities.

In accounts receivable, days outstanding increased moderately to 61.8 days compared to 58.5 days at the end of the previous quarter primarily related to seasonal payment patterns. Inventories increased by $1 million during the quarter to $47.6 million resulting in an improved inventory tracking metric of approximately 9.5 weeks of supply versus last quarter's 9.7 weeks of supply. Overall, our current assets ended the quarter and 3.4 times current liabilities.

At the end of the fourth quarter of 2010, we had no outstanding long-term debt. However, as you know from subsequent press releases, Rogers did borrow $145 million against our credit facility in January 2011 to help fund our acquisition of Curamik. We will report the status of the debt as we proceed in 2011.

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

Thanks, Dennis. We will now entertain any questions you may have.

(Operator Instructions). Fred Buonocore, CJS Securities.

Good morning, gentlemen. Great quarter. Just wanted to drill into the guidance commentary from your press release a little bit and I am just trying to understand how much of a headwind from the various kind of nonrecurring expense items related to the ramp up of the different product lines you are baking into your guidance? And how much have you gotten or do you expect to get for the unutilized building?

In the guidance number, there is basically a net wash of impacts from negative one times and the sale of the building. So in that guidance number we are expecting just under a $2 million gain on the building if it closes as expected. And up in gross margin, there is approximately $2 million of headwind related to the one-timers ramping up the ACM laminate facility as well as we are going to incur additional inventory costs in the first quarter related to Curamik's amortization of their inventory write up. Those two things just about wash.

Okay. That's very helpful. And then as we look through the balance of 2011, how should we think about the way gross margin should track as the year progresses? It sounds like you are going to get a lot of stuff behind you in Q1 and it sounds like you're going to get some decent volume improvement based on commentary from the call as the year progresses. So how should we be thinking about gross margin as the year progresses?

We averaged about 36% for 2010 so two major things -- in the first quarter guidance -- I won't look beyond that. In the first quarter guidance, Curamik comes in, adds about 25% consolidated sales. We have indicated that Curamik's gross margins on average are lower than Rogers' average but their operating profit is about the same because they have much lower commercial expenses.

We believe in the first quarter that is worth about a 2 percentage point reduction from our Rogers average. And we already indicated we had two one-time items of about $2 million which is a little over $100 million a quarter would be about two percentage points. Curamik stays for the whole year and one-time items don't.

Okay, fair enough. And then how should we think about raw material costs and their impact on your business and profitability at this time?

Well, Fred, some places we have the ability to increase our prices and we have actually -- announced a price increase in our Printed Circuit Materials. They probably won't fully be in effect until well into the second quarter as everyone says no initially. In our High Performance Foam area, we intend to improve productivity to counterbalance any increase in raw materials. And of course, as we have mentioned in the past in our Power Distribution Systems, we have in place with our customers a quarterly price adjustment associated with the price of copper at the London Metal Exchange.

Okay, thank you. That's helpful. I will get back in line.

Avinash Kant, DA Davidson & Co.

Good morning, Bob and Dennis. Quick question, in the current quarter, it looks like you have seen a pretty strong traction in the [customer] electric component business. Could you give us a little bit about where is the growth coming from? I was talking sequential growth being very high.

It is mostly coming from China and some very large train programs. They were pulled forward into the fourth quarter by the customers from what had been originally the first quarter of this year.

So in the past you have talked about Europe being a big driver for this [trains] and the foams of business. Do you think -- and in the power distribution business now you think China, how big it is compared to the European business you have had?

China is now larger -- let's say Asia, because this includes Japan. Asia is now larger than Europe so our operations in China are producing more goods than our European operations. It's pretty amazing after only being there five years and being in Europe 40.

Right. And I remember of course you have done the acquisition of SK Utis, which has been contributing to your High Performance Foams business, now has been a few quarters now. Could you give us some idea of how is it tracking compared to the expectations you have had when you acquired this business?

It is pretty much right on our expectations and in fact the business has been growing nicely as we added 50% capacity to one of the machines by making it a little longer and wider so it could run faster and also make wider materials. And we are gradually filling that up. So we are quite pleased here with how that is going.

Also you have been talking a lot about clean technologies being a big driver and pretty much becoming the biggest growth driver into 2011. What percentage of revenue do you think this will contribute to 2011? Roughly?

Well, I can tell you if we owned Curamik for all of 2010, clean technologies would have been 27% of the total and the total would have been around $490 million. The Internet would have been about 20% and I think mass transit about 8%. So it would have been 55% would have been in the megatrends instead of 41%.

And you expect this percentage to move in which direction in '11?

Up. Slightly up.

More biased towards the -- which megatrend right now (multiple speakers)

I think all three of the megatrends are growing much more quickly than the base business. The other things such as defense and general industrial and consumer areas and even the traditional cell phones. All those are slower growth in the 6%, 7% kind of range whereas the megatrends are well into double digits, all of them.

And one final question maybe for Dennis. You gave us some good idea about the modeling in Q1. I just wanted to get a little more clarity on this one. So excluding all the expenses and of course the gains from the building which have kind of netted out itself, if the 125 -- taking the midpoint of your revenue guidance 125 million, how the model look on a steady state in a gross margin and operating margin percentage basis?

You are going to pick up two percentage points on both from where you are at.

In Q4?

(multiple speakers) Basically on a gross margin basis, you are going to pick up two percentage points from what is in the first quarter guidance. The operating would stay about the same because you are going to lose that one-time gain -- well in other operating income.

So the operating profit goes up but the net does not.

The pretax income does not.

But the operating profit percentage stays pretty much the same on a steady state (multiple speakers) after the (multiple speakers)

The operating profit percentage will go up because the other income line is below operating profit so that is where the gain on the building would be. Your pretax percentage would stay the same. Operating profit goes up 2%.

You are comparing it from Q1 but I'm thinking overall just Rogers and Rogers plus Curamik and let's forget about all the expenses and everything else. What is the impact on the model? Operating expenses staying the same pretty much, gross margins coming down a little bit?

Yes.

Okay and one more, sorry. The Curamik business that you have bought, which -- you have different divisions. Where would you put these businesses and what percentage of the business goes into which division, any idea?

We in all likelihood will have Power Distribution Systems, thermal management solutions and Curamik as part of power electronics. Now whether that becomes a reporting segment or not we have got to wait for public accountants to tell us whether or not that is possible. But that is how we will talk about it is power electronics, High Performance Foams and Printed Circuit Materials. Those would be our three business -- core businesses and Curamik would be completely within power electronics.

Got it. Thank you so much.

(Operator Instructions). Shawn Severson, ThinkEquity.

Thanks. Good morning, gentlemen. Question about the Curamik and IGBT market. Almost everybody I talk to says that they are in shortage. If they could find anything else in the supply chain, it is one of their targets where they want more capacity. And as you kind of look at the business model and the outlook for Curamik, I mean where is the bottleneck there? Are there a couple of things out there with the actual customers where they are adding capacity kind of to the tune where you could see significant jumps in the sales there simply by debottlenecking that market and actually getting the supply out there to match demand? Or is there something else going on out there in the market that we need to be aware of in the end market for IGBTs?

I believe that the IGBT makers themselves are adding a fair amount of capacity and therefore our customers have sequentially increasing forecasts. And because of that, we have in house two new ovens -- that is versus 12 before -- which we will be putting into service during this quarter and we have ordered about $3.5 million, $4 million worth of more equipment that will be in service by the beginning of the fourth quarter which will take our whole capacity up about 25% from where it is today.

And best I can tell the end market demand could absorb another 25% if you just look at the overall market easily. I mean if the IGBT makers could make it, they could sell another 25% more tomorrow. Is that fair to say?

I think that's fair to say. Of course, they are not bringing on that much capacity instantly but over the course of the year they will certainly be bringing on quite a bit more capacity.

Speaker: Okay. And what is the operating leverage in that business for you? I mean I know you talked about operating margin very similar overall Rogers but what happens over time? Is that a very -- can that be a big contribution margin business or shouldn't we think of it as quite as leverageable as some of the others?

On the contribution side, you could be looking into 40% to 50% range.

Okay, so it does have good leverage in the business as well?

Yes.

And I guess is there anything else out there in terms of competitive environment? I mean, you have got a great market share. Your next biggest competitor is pretty much selling inside Japan you know so is there anything else on the horizon I mean that you worry about from a competitive standpoint? Or do you think that this market is pretty well locked up for the next couple of years for you?

I am not nearly as worried about the competitors. I think we control our own destiny here. The business is not perfect. Their on-time delivery could be a lot better and we are working on making that happen and getting their systems a little more efficient and their planning a little better than it has been. Certainly the business is focused on the major customers making sure that the really big ones are all well taken care of and have not done quite as good a job on the let's say the second tier. We intend to improve that.

Also has been focused mostly as a European business. That is why about 70% of the business is in Europe. There were only two sales people in the United States, one on the East Coast, one on the West Coast. Little evidence of ever having visited Detroit. And in effect, one person in China and a couple in Japan.

So we see lots of opportunity there, Shawn, but we are going to have to add some additional sales resources here and of course, these things don't happen overnight, But looking ahead, we see lots of growth opportunities in Asia and in the US.

Okay. And is it easy for customers to switch? In other words, you don't have to wait through long design cycles and testing and all of that. So can they basically start using your material tomorrow on a similar product or do we have to wait for product cycles to go through the industry where you were on next-generation stuff and I assume even in that case they are fairly short cycles.

It will be next-generation stuff. No one ever goes back here and this is pretty -- things are pretty long-lived. Part numbers typically are in the three-year to 15-year life cycle.

Okay. So does that mean in order to capture market share and do things you want to do, do we have to wait three years in order for that to roll over or as you kind of develop the market and pursue opportunities in the US and outside of Europe, that it is very quick development for you?

We would work on new designs which (multiple speakers) a six-month timeframe from the day you start until it hits production.

Okay, all right, thank you.

Stefan Mykytiuk, Pike Place Capital.

Hey, good morning. A quick -- a couple of quick questions. Just in terms of looking out to 2011, the JVs -- the JV income has been a strong contributor to earnings. You think the growth rate can continue at similar rates as 2010 in terms of the underlying revenue growth within the JVs?

Yes.

Okay. Terrific.

It is very similar to the JVs are down to the two which are High Performance Foams so they should be able to grow at the same rate as our High Performance Foams business does.

Okay. And maintain margins or leverage them?

It depends on how fast sales grow. If sales grow fast, you'll leverage. If they grow relatively slowly, you don't.

Okay. All right. But right now it looks like foams has grown pretty nicely.

Yes.

Terrific. And then secondly, Dennis, what was the hit in the fourth quarter from the startup costs in China and Arizona?

About comparable. We ramped up people and started running material through and test. So about the same $1 million kind of number for the Printed Circuit Material laminate facility.

So $1 million in Q4 and you are saying $2 million in Q1?

No, Q1 was about $1 million and then we had an extra -- there was $2 million in the first quarter of 2011, $1 million from the circuit material.

I'm sorry, right. And the $1 million from the inventory write up, right?

Yes.

Okay, thanks. So it was $1 million total in Q4 and I think -- what was Q3 -- was there any or no?

They really started doing their stuff in the fourth quarter.

Terrific. Thanks very much.

(Operator Instructions). Avinash Kant, D.A. Davidson & Co.

Hi, Bob and Dennis. One follow up. When you did the acquisition of Curamik, you talked about $115 million to $125 million in revenues from this acquisition and roughly $0.20 to $0.30 in EPS. If I look into your comments and you are saying that operating margins at Curamik is very similar to what your model has been, it just -- it looks like there could be a lot more upside to the $0.20 to $0.30 that you have been talking about. Do you have a little bit more color on that one as you have been with the Company for a little bit more?

Well, we have only owned it six weeks and we still don't have the audited financial statements and we don't yet know how much the amortization or the intangibles is going to be as that is not resolved with public accountants. So it leaves us with several unknown things here but I would always prefer to let's say understate the potential versus overstate it.

So when Dennis talked about SG&A staying around $24 million for the rest of the year, 2011, at that level, right?

Yes.

And then amortization would be coming on top of that right, of course?

That is in the number. That is our planned SG&A including amortization. So you had $24 million in the fourth quarter but that had those major one-time items so you basically have to knock it down to the $17 million level and add back for amortization and add back for inflation and volume and those kind of things to get to that level.

So, but the amortization numbers that you are talk about $24 million, that includes your amortization from Rogers but does not include the amortization from Curamik?

Amortization from Curamik is Rogers and it is in there.

That means you know your amortization by now? (multiple speakers)

You have to put an estimate in, Avinash. What Bob is saying is that it is not certified so we have some preliminary estimates, the auditors will be going through it and we will know close to the end of the first quarter what their final valuation is certified. So it could go up or down from the number that we have in the guidance.

It could change by as much as $2 million or $3 million in either direction.

On a quarterly basis or on a full-year basis?

Full year.

Yes. But that is the whole idea. Even then I see upside to the $0.20 to $0.30 number.

Potentially.

Okay, I'll figure that out. Thanks.

Fred Buonocore, CJS Securities.

I just wanted to revisit what you were talking about before with the hybrid or the electric vehicle programs, the two that have gone into production. You say you anticipated first-year sales of $2 million, is that for the full year 2011 $2 million?

Yes.

And what do you think that could grow to as we move out beyond 2011 into 2012 and 2013, just in those two programs alone?

Well, it depends on how well they do. It could easily double. Maybe even triple. In some cases, the manufacturer of one of the vehicles intends to take the same platform to several other models. So I don't know if you want to call that the same or different but it will have a different badge on it and different sheet metal but it will be the same insides.

Sure. And Bob I know in the past you have talked about many more than two programs for electric vehicles and HEVs that you have been working on. And just wondering if there are any others that you think are reasonably close to going into production?

There are -- the ones I am aware of, there are three big ones that are 2012 model year programs. That means they will start sometime this year.

Similar kinds of content that you have on the two that are now in production?

Yes. Those although will be associated with thermal management solutions. And then question marks about foam and power distribution yet. That is still not finalized whether we win or they don't.

Got it. That's great. Thank you.

This concludes our question-and-answer session for today. I would like to hand the program back over to Mr. Bob Wachob for closing remarks.

In closing, I would like to remind all of you that we have laid the foundation for faster growth and increased profitability and we will continue to invest in new product development and look for opportunities to diversify into new markets while focusing on the three megatrends.

Thank you for joining us today and goodbye everyone.

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