Rogers Corp (ROG) 2011 Q2 法說會逐字稿

Good morning. My name is Sarah an I will be your conference operator today. At this time I would like to welcome everyone to Rogers Corporation second quarter 2011conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to Mr. Bob Wachob, President and CEO. Mr Wachob, you may begin your conference.

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

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

Thanks, Dennis. Second quarter 2011 was marked by record sales in all of our core businesses. As we have mentioned in the past, we are focused on markets that are benefiting from three significant economic and social megatrends. They are the growth of the Internet, the expansion of mass transit, and the investment in clean technology. We are having considerable success in these areas, as 63% of our sales in the first half were into these megatrends, up from 41% last year. Activity in these megatrends continues at a brisk pace, with 31 programs entering production in the second quarter of this year, 61 in the first half.

And to keep the momentum going, we are adding salespeople in China, Europe, India, and the United States. The proliferation of smartphones and tablet computers are causing wireless data to grow at about 100% a year. To keep up with this growth, the infrastructure for wireless communications is having to expand at a rapid rate. Rogers is benefiting greatly from these trends. During the quarter, a number of strategic events occurred that will help to grow our business over the next several years.

The first event is that a major bay station OEM committed to a new design concept, which will utilize five times as much of our printed circuit material as they use today. To meet this demand, we will need to add capacity. Therefore, they have agreed to sign a four-year supply contract for a minimum of 80% of their needs. A second OEM is now in production on the design, which utilizes three times as much of our printed circuit material and they will enter into a three-year supply contract for a minimum of 70% of their needs and make a substantial payment for nonrecurring engineering charges, so we may meet their increased demands.

These two contracts alone could add $30 million to our sales in 2013. Additionally, we introduced a new printed circuit laminate material named RO4725. It's aimed at the $80 million bay station antenna market. It has already been released to the design community at a major antenna OEM. This is a record rate of adoption for any new product at Rogers. In the wired Internet segment, our Theta high-speed digital printed circuit material was fully qualified by a third fabricator.

This resulted in a major manufacturer of enterprise routers, servers and switches releasing Theta to the design groups. By 2013, this could add about $15 million to our sales. In the clean technology megatrends, we are continuing to see significant growth and are finding many new opportunities. Curamik is benefiting from the tremendous growth in clean technology from hybrid vehicles to wind and solar to fuel cells and energy efficient motor drives. In addition, we are seeing growth in applications such as automotive electric power steering, electric water pumps, and electric air conditioning.

All of which save energy as they are activated only when needed, versus being continuously on with hydraulic or belt-driven systems. We have a significant new application for Curamik products in photovoltaic cells, or CPVs. These systems concentrate the equivalent of 500 suns on high efficiency triple-junction solar cells, similar to those used for satellites. Our ceramic substrates are used to make electric connections to the solar cells and remove the heat. The efficiency of these utility scale systems can approach 30% and reduce the land needed per megawatt of electricity by 50%.

We are currently sole sourced at nine manufactures and are working with ten more. Sales for CPV demonstration projects have already exceeded $2 million. We could realize $15 to $25 million of sales for this application in 2013. During the quarter, we entered into a relationship with Himag, a privately owned designer and manufacturer of planar transformers. Planar transformers are one third the size and weight of traditional wire-wound transformers and are 99% efficient versus 90% for wire wound.

In an electric car, this would allow the very expensive battery to be 10% smaller or the car could go 10% farther. In electric car charging systems, they allow faster charging and less heat generation, thus a significantly smaller size. It is our intention to make planar transformers an integral part of the busbars used in these same applications. This is another step toward providing more solutions to the issues faced in the clean technology space. We expect continued rapid growth in our three megatrends, and the significant strategic events just mentioned that occurred in Q2. We could add significantly to our sales in 2013.

I believe the Company is well positioned for the next couple years, as the markets we are focused on are showing positive trends and results. I'm very optimistic about our prospects. In the meantime, we will focus quarter-to-quarter on excellent execution, while continuing to make strategic investments in our future. And one last note. We've received multiple questions about Thompson's consensus estimate of $0.83 for the third quarter. Reality is that is an old number and the current consensus is $0.79 and we've asked Thompson to hurry up and get it right. I'll now turn it back over to Dennis with the details of Q2.

Thank you, Bob. And good morning again to everyone. As you can all tell from Bob's comments, Rogers is having great success in 2011 and prospects for significant growth in our megatrend markets have improved substantially. From the financial perspective, this is evident even in the near term, with improved top and bottom-line results. However, it also requires that we be prepared for the long-term to support that growth with adequate operational and financial resources. I believe we are succeeding in both of those areas.

Most importantly our businesses are aggressively addressing key sales in marketing, operational and infrastructure needs to make sure we are prepared to take full advantage of the market opportunities that Bob outlined in his comments. We are all optimistic for a vibrant future for Rogers. Now onto our second quarter results. For the second quarter 2011, our businesses generated sales of $143.7 million, an increase of $47.1 million above last year's second quarter, for an almost 50% improvement.

With $34.6 million of that increase attributable to Curamik sales, our legacy businesses grew quarter-over-quarter by $12.5 million or 13%. All of our core business segments show significant improvement. Averaging 22% as a group. Printed circuit materials and power distribution systems led the way with growth rates of 29% and 39% respectively. Curamik grew at 19%, and high performance foams contributed 13%.

Rogers reported a profit of $0.73 per diluted share for the second quarter of 2011, compared to a profit of $0.52 per share for the same period in 2010. For the quarter, Curamik was accretive to our business, contributing approximately 13% per diluted share. Gross margin for the second quarter 2011 was 33.5%, as compared to the record 38.6% reported in the second quarter of 2010.

As reported last quarter, a major factor affecting the margin comparison to the previous year's result, is a 250 basis point impact, related to the inclusion of Curamik's business, which has a lower average gross margin than Rogers other businesses. As has been discussed previously, Curamik's lower gross margin is offset by its lower commercial expenses, resulting in operating margins comparable to Rogers. Also approximately 150 basis points relates to lower inventory absorption this quarter, due to a 50% lower inventory build, compared to Q2 of 2010.

Finally, the start-up costs for the new circuit laminate facility in China and busbar facility in Arizona continue to impact overall margins by approximately 100 basis points, as compared to last year. With impacts on Curamik and our strategic growth initiatives in printed circuit materials and power distribution systems, we expect our near-term average gross margin percentage to be in the 33% range. Selling and administrative expenses for the second quarter of 2011 and 2010 were $26.8 million, and $23.7 million respectively.

The increase of $3.1 million in SG&A expense was attributable primarily to the inclusion of Curamik, which is comprised of $3.3 million in normal operating SG&A costs, as well as approximately $1 million of acquisition-related non-cash amortization expense. Those increases were partially offset by a $0.8 million decrease in incentive compensation expense. The remaining net decline of $0.4 million related to merit pay and other inflationary impacts being more than offset by cost control measures and normal quarterly swings in spending.

As a percentage of sales, including the Curamik contributions, SG&A expense actually decreased from almost 25% of sales in Q2 2010 to approximately 19% of sales in 2011, as we are able to support our increased sales volumes with our existing infrastructure. We expect our SG&A to be in the range of $26 million to $27 million in the third quarter and fourth quarters of 2011. Research and development expenses were $6.2 million or 4.3% of sales in the second quarter of 2011, as compared to $5.9 million or 6.1% of sales in the second quarter of 2010.

In the near term, we expect our R&D spending rate will be around 4.5% of sales. Rogers 50% owned High Performance Foam joint ventures with INOAC Corporation had second quarter 2011 sales totaling $16.8 million, with equity income of $1.3 million, compared to $16.4 million of sales, and equity income of $1.4 million in the second quarter of 2010. 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 second quarter of 2011, compared to income of $1.1 million in last year's second quarter. The net decrease is primarily related to less favorable exchange rate activity during the second quarter of 2011, as compared to last year's second quarter.

The effective tax rate for the second quarter of 2011 was 22%. The Company believes that the tax rate for the full-year 2011 will be approximately 24%. Rogers ended the second quarter with a cash and cash equivalence position of $75.4 million, as compared to $66.1 million at March 31, 2011. Our improved cash position can be attributed in part to the redemption of $3.7 million of auction rate securities at par during the quarter, leaving a par value of $33.6 million of such securities outstanding. And a positive cash flow generation from our operations, partially offset by $10 million of payments, against our long-term debt obligations.

Capital expenditures were $3.9 million for the second quarter 2011. As outlined in the press release, Rogers now expects capital expenditures of approximately $35 million for the full year 2011, up from our previously announced estimate of $25 million. The increase is based on projected spending needed to support the strong sales forecast we are currently seeing, as well as very positive recent confirmations of accelerated demand for printed circuit material products in the wired and wireless infrastructure markets, as well as the increased demand for certain products in our other businesses.

With regard to our balance sheet, during the second quarter 2011, our net working capital position increased by $8.9 million, primarily related to increases in accounts receivable and inventory, due to the improved sales levels. In accounts receivable, days sales outstanding decreased to 56.0 days compared to 57.1 days at the end of the previous quarter, continuing our excellent performance in global accounts receivable collections.

Inventories increased by $6.6 million during the quarter, to $71.5 million, due primarily to normal business growth. Our inventory tracking metric increased to approximately 9.6 weeks of supply, versus last quarter's 9.0 weeks. Overall, our current assets ended the quarter at slightly more than 3.6 times current liabilities, relatively unchanged from last quarter.

At the end of the second quarter 2011, Rogers reported outstanding long-term debt of $135 million, which represents borrowing against our credit facility in January 2011 to help fund our acquisition of Curamik, less repayments of $10 million made during the second quarter. We incurred approximately $1.1 million of interest expense on the debt during the quarter at a rate of approximately 3%.

As mentioned in the press release, on July 13, 2011, the Company amended its credit agreements to increase its total borrowing capacity from $165 million to $265 million through the addition of a $100 million term loan, providing greater flexibility to fund any future strategic endeavors the Company may undertake. The amended credit facility now matures on July 13, 2016 instead of November 23, 2014. This concludes my remarks. And I will now turn the call back over to Bob Wachob.

Thanks, Dennis. At this time we'll be pleased to answer any questions you may have.

And your first question comes from the line of Avinash Kant from D.A. Davidson & Co. Your line is open.

Hey, guys. This is Eric Ramos in for Avinash.

Good morning.

Good morning. A few questions. You had originally estimated that Curamik could contribute between $115 million and $125 million in 2011. Based on the results for the first six months, to you think that $130 million in CY 2011 is reasonable?

Yes.

Do you think it could be upwards of that number?

Could be.

Okay. What is the timeline for the data program? Do you expect it to contribute meaningful revenues this year?

No. I imagine that the design activity will begin. They need to complete a design, in which case then they'll have to order printed circuits, at which time we'll get an order. That then will go through multiple reiterations of redesign as they try to get the design correct. This is a long-term kind of thing. Then they'll go to production. And that's why I said $15 million kind of number in 2013. That's when we begin to move the needle, 2012 I don't believe anyone can get to production in that period of time. Fortunately it gives us time to add the needed two press systems that we're going to need to meet this demand as it's going to go up extremely rapidly, beginning in 2013.

Okay. And then the two long-term contracts. Do you expect any revenues from those in 2011 or 2012?

Yes. The second one, where they are using triple E amount of material, we are already supplying, but we need to supply significantly more. Therefore, there will be growth in, a fair amount of growth in 2012. The other one, they've committed to the design and they have either three or four design centers, using this design concept now. I expect prototypes probably in 2012, maybe some production toward the end. But then 2013 will be a really big deal, which we will have added the capacity by then. Which is probably just one more press system.

Okay. That's all I have. Thank you.

Thanks.

Your next question comes from the line of Fred Buonocore from CJS Securities. Your line is open.

Yes. Good morning. Nice quarter.

Thank you, Fred.

Dennis, you gave us a good kind of breakout on the gross margin. I just wanted to circle back on that to make sure that I'm clear. So you said the impact from various, I guess ramp up like in Arizona and in China. That was around 100 basis points compared to last year?

Correct. It's about, you know, $1.4 million between the two. It's extra labor, unabsorbed costs, depreciation, those kind of things as the thing ramps up, and material scrap as they test products.

Sure. And do you think that, I mean, how long do we see that? In other words, what amount would be embedded in your Q3 guidance?

I think a similar number for Q3. Because we're projecting at about 33%. I think both those operations are hoping to be up and fully complemented and running by the end of the fourth quarter. Maybe a little bit less in the fourth quarter than what we're thinking in the third quarter. We don't have estimates yet.

Okay. And what you said is for the full year, an average gross margin somewhere in the 33% range?

Correct.

Okay. And looking out beyond completion of these ramp-up initiatives and, with the idea that maybe Curamik you do have some room to bring up the gross margins on that side, what do you think your longer term gross margin could be, maybe in 2012 and beyond?

As we look at the add backs, we always think the 35% average and above in peak periods of utilization is possible. As you saw last year at 38%.

Sure.

We'll absolutely see quarters like that. But that 35% number, with the percentage of new products we have and the markets we're in, seems to be the projection rate as we look out at our operations. So it can get a little bit better. We think averaging 35% at this point in our history is about right.

Okay. Great. And then just switching gears to some of your new initiatives. Can you give us a little bit more color on Himag? I'm not totally clear on that business and what that opportunity could represent.

Sure. What we believe is the first significant opportunity is associated with electric cars and the charging systems also. You need, within an electric car you need two transformers. And your choice is a planar one, which can save you one third the size and one third the weight and is 10% more efficient. It's 99% versus 90%. That's a big deal. Think about how much those batteries cost. If you can reduce the size of that battery by 10%, it reduces cost by 10%. That makes these things actually a cost savings. Because they do cost more than the wire wound.

Same thing with the charging systems. You can charge the car faster, whether the charging system is external or internal. So that's where we see the opportunity. It ties right with the busbars and these planar transformers will become an integral part of the busbar. So we'll manufacture that as part of the manufacturing process of the busbars. So we add more functionality to what we can supply to the electric car guys.

Got it. And then on the automotive note, but shifting to what we call more conventional cars. Last quarter you talked about the automotive radar safety application. And that seemed like a pretty sizable opportunity. Can you give us an update on where that is and where you think that's headed.

Well, I think we mentioned that the Mercedes 350 and the Ford Focus were the 2012 model year we'll offer those things as an option. And, of course, they began production toward the end of the third quarter of those. And we see continued adoption and we see that our share continues to be very, very high. So we think that's a really good opportunity that's going to build over time. And could be very, very significant if you, someone projected, this is the highest number I've seen, that in four or five years there will be 25% of the cars would have that. At that point I think that equates to something like 18 million cars, and at $4 apiece, for example, that would be $70 some million dollars for us. That's a lot.

That $4 apiece is your content?

Yes. Remember you have to have at least, you have two of these. You're going to have two sides of the car.

Yes.

For roughly $2.

Okay. Got it. Interesting. And then just following up on Eric's question, with respect to the two long-term contracts with these wireless infrastructure companies. So this is something that is new, that you started talking about. I guess with this announcement, but clearly it's something that you've been working on for a little while. You realize you don't give long-term guidance. Is this incremental to kind of the growth that you've been talking about, say in your presentations? Is this something kind of on top of a lot of the other growth expectations that you've had?

The first one absolutely is because we had no idea that they were considering a concept using five times as much material. And the second one, its using three times as much. We've been in production for about nine months with that. But their requirements have increased dramatically. And this whole industry is going to characterize by two technology leaders and then a handful of fast followers.

Right.

So we'll see what happens with the fast followers. This kind of stuff doesn't stay a secret for very long.

Got it. And then finally on the Theta high-speed digital laminate opportunity, when you talk about in your release, design groups for those major enterprise router servers, can you give us a little bit better sense for the lay of the land. In other words, who are the players in this space? What we should be watching for to understand the speed of development in this area.

Right. Keep in mind this is the high end of the market. And Dell'Oro Market Research Group, they think that it's about a $24 billion market. That would be for the people who make the switches, routers and servers. And they also say that they believe Sysco has about a 75% market share in, in Juniper, 10% or 12%, Alcatel somewhere around 10% and HP and a bunch of people have the rest. So it's pretty concentrated.

Can we assume that the major enterprise router server and switch manufacturer that you mention in your release is, one of those players?

I can't say who it is. But I can tell you that any smart person would try to go for the biggest one I think.

Yes.

First.

Fair enough. Okay. Thanks very much, guys.

You're welcome.

Your next question comes from the line of Shawn Severson from ThinkEquity. Your line is open.

Alright, thank you. Good morning, gentlemen.

Good morning, Shawn.

About the Theta product, what's that market today? I mean obviously I know they're in production at a certain level. And what's the theme for the materials today? And I know you're just launching and it will probably be (inaudible) market share. But what's the materials market today as it stands.

Right. Today it's $200 million and it's projected by, in five years in 2016 to grow to $600 million. And so at 15% we're really very small at that point and just the beginning of a really rapid growth cycle.

Because even at 15%, I would assume that your market share, the development that went into this, obviously (inaudible) two forces on this but, it would seem to me that 15% market share would be a pretty conservative number.

I think so.

Okay. Okay. Because I assume that, do you see this market boiling down to just a couple two players or do you think it will stay like a four, three, four player market? (Multiple speakers) in material supply.

I think at the high end it probably comes down to only two players. Unless someone else can come up with the materials that have significantly improved temperature resistance, so that they can pass the lead-freed solder and some of the long-term testing at high temperatures, which we passed. That is one of the claim to fame here. We are the best high temperature material.

But still only assuming 15% market share at this point, just because it's hard to tell.

Right.

Certainly there will be upside opportunity if you have the technological experience on it?

Yes.

Okay. And as we look at the new bay station market opportunities, you know the design, can you talk a little bit more about why the material content is so much higher. What design principal is there? And I know obviously you talked about (inaudible) coming up. But is there any reason this wouldn't become the de facto standard for next round launches? And to that point, would this be, is this going to be the next generation 4G type bay station or is this going to be something that isn't going to be like the what the AT&T rolling stuff out next year. Are we talking about something beyond the stuff that was kind of being planned right now for rollouts in 2012?

Right. For this manufacturer, this will be their platform for 4G. And, therefore, they will sell it to everyone. And the reason they're using so much more material is that they can reduce their costs significantly by combining multiple functions into one printed circuit board that incorporates all of our materials. And, yes, it easily could be the standard for others. But only time will tell. Hopefully in coming quarters, I'll have something to say.

All right. And in terms of incremental capacity, does it work the same way that like the other 4G designs would, that as traffic increases, you'd be using, obviously you start out with one board, but then as traffic increases on each bay station, you would add incremental boards using your material to that bay station?

That's correct. That's exactly how it works.

Okay. So pretty much the same thing?

Right. You get spurts and then you get a nice steady increase as the traffic increases.

Okay. Great. And lastly on foams. Obviously your biggest exposure is certainly to the biggest market share leader is today in terms of tablets, market share leader, I should say, in terms of tablets and smartphones. But what's going on behind the scenes with other product launches? Is it fair to assume that you are involved with the other people that might be out there trying to compete actively later this year and in the 2012 with tablets and Smartphones?

I believe we're currently designed into eight to 12 different tablets. So, yes, we're working with lots of people. Try to work with everyone.

Okay. And in terms of margins, the impact on gross margins, anything, obviously you're spending some more money, when you've added capacity in the past, it has been a drag on gross margins. Is there anything with this incremental CapEx and what you're planning there that we should think about in terms of the negative margin impact or is the demand there today, such that as soon as this thing is up and running, you're going to be putting material through?

Right. On the digital side, I would imagine that next year that could be $1 million to, maybe $1 million kind of drag, maybe $1.5 million. On the wireless side, I don't think that will be the case. You won't see it. Because the three presses will be ramping and so the one additional one will kind of get lost in the shuffle there as the other ones are ramping up in the gross margin is improving. Because the utilization is improving. You just won't see this. Because we already have seven presses. So this will be the eighth. As we get bigger, these expansions become less of an event.

Right. Right. And just the last question. I know you talked about the numbers in the past, whether if you were to sell everything you have available to an ED. It would be a certain dollar content. Can you give an update on that and if you add Himag to that mix, what that comes out to be today. Obviously you're not going to get 100% of all of your products and (inaudible). But just theoretically.

Theoretically, if we got everything we could get inside an electric car we would be in excess of $400 per vehicle. Including the foam, the Curamik products, the busbars, the Himag and the thermal management solutions, aluminum silicon carbide parts.

Okay. And then I guess with Himag, is there any development process there? Or is this a product that's really available today?

It's available today. These are custom designed transformers, much like busbars are custom designed for each individual application. The good news is once you get these things, it's hard for people to come after you. The bad news is this takes a while.

Okay.

You know that we're looking at three years out starting today, at least.

Right. Exactly. Exactly. All right. Great. Thank you.

Okay.

Your next question comes from the line of Sims Lansing from Trafelet & Company. Your line is open.

Good morning.

Good morning.

In your 2010 fourth quarter earnings call, you noted that the three megatrends should grow well into the double digits and that the non-megatrend businesses should grow around 6% to 7%. Assuming that the revenue breakout for Rogers going forward is the same as it was in the first half of this year, with 63% of revenues coming from megatrends and 37% coming from other areas, this gets you to an annual growth rate above 11.5%. How is this change going forward?

I would say the growth rate will go up. At least 13%.

At least 13%. Okay.

That's my guess at the moment.

And what would you say the incremental margins are on your businesses that serve these three megatrends?

If we're utilizing existing capacity, then every additional dollar gets us in the 40% kind of gross margin, some cases a little better.

Okay. And can you provide any more color on the megatrend growth? Is it higher than, well into the double digits or what?

Oh, absolutely. It is well into the double digits. It's exceeding that 15% that we talk about previously.

Okay. What about the non-megatrends?

That's staying in the 6% to 7%. Maybe a little less.

Okay. And what would need to happen in order for gross margins to go north of 35%?

We'd need to get to almost full capacity.

Okay. How close are you to that right now?

We're probably, well, if everything was perfect, we're probably $50 million away.

Okay. All right. Thanks.

Everything is not perfect. You know how that works.

Sure. All right. Thanks.

Okay.

Your next question comes from the line of Dana Walker from Kalmar Investments. Your line is open.

Good morning.

Good morning, Dana.

The bay station contracts that you described, these are power amplifier relationships?

Yes. And now it will be more than just power amplifiers. Let's put it that way. Adding other things.

Is this something you can explore out loud or is that?

Not now. When they introduce the product then I can explain all about it. But this is pretty much a secret as to exactly what they're doing.

So you're, therefore, not in a position to describe what material you'd be displacing?

Oh, no. It's, they're using just more of our material. Same material. These guys are 100%, their usage is 100% Rogers. It's the 4000 family. Only difference here is they're going to use a thinner material than they did before. Five times as much of it.

Okay. Dennis, you said something when you were talking about Curamik, which I didn't quite follow. You used the phrase 13%. Were you talking about Curamik's operating margin in the quarter or were you talking about $0.13?

$0.13 of accretion to Rogers. So in our $0.73 is $0.13 of Curamik. We had $0.01 in the first quarter with the extra inventory amortization that was there. And $0.13 in the second quarter.

That is after interest expense. That's a net number?

Correct.

Okay. Where do you stand on the Curamik capacity expansion?

That's progressing as expected. In fact, we have made the final decision on the design of the imaging and the back-end processing equipment. And we have decided to buy equipment that's double the capacity that we originally planned. And we still expect all that stuff to show up and be operational by the end of the year. Although lead times seem to be extending for this kind of equipment. But we're in good shape.

Right now, though, would it be fair to say that this level of revenue of around $35 million a quarter is, your close to capacity?

Reasonably close. We are operating seven days, but if we add more people, we can add more capacity for a while. We can certainly go past this $35 million.

The expansion that you have underway will allow you to make how much?

Oh, it could get into the $40 million, $45 million a quarter. We have to add more ovens in also. But these things are steps. Ovens are pretty quick.

Back to the bay station for a moment. Were you surprised by this development? Or is this something that you've been working on and it just happened quick.

Well, we've been working on it, in some ways surprised. This kind of developed over two to three-month period, in which we were asked to make certain commitments concerning volume. And we said we would if they would. And so that's how we got into this. And so when we came to an agreement, then they released the concept to the design groups. So it was relatively quick. As these things go, it was very quick actually.

How cyclical and/or at risk would the higher levels of volume be in your judgments? You talked --

With what I perceive in 4G and the continued increase in the data rates of the smartphones and the tablets and those kinds of things, I think we've got a multiple year run here. At least four. And I think our customer thinks four at least because that's what he would sign up to.

Have you signed these types of contracts before?

No. But I like this because if I have to spend money because the customer says he's going to need this stuff, then I want him to guarantee he will take it. And he won't show up one day saying well, I have someone who is a nickel cheaper. I'm going to give him half the business unless you reduce your price.

So you view these contracts as being more binding than the debt ceiling spending reduction accord that will try to bind a future Congress to something they won't abide by?

That's not hard to be more binding than that.

Let's see here. The credit agreement, which you've expanded, given the amount of liquidity that you have. Can you talk about the thought process behind why that makes sense?

The thought process is that we were, had very little incremental borrowing capacity. We have a very active new business development acquisition targeting process ongoing. And we, in the megatrends we're in, we're certainly looking for bolt-on opportunities that would supplement what we have in our current businesses and also in the megatrend areas, looking at markets and product opportunities that we currently don't participate in. So it was mainly to take advantage of our good financial situation. It also improves some of the covenants in our ability to spend and acquire against those targets. So the amendment just wasn't another $100 million. But it did improve the overall underlying terms of the credit agreement. So it really was just to give our Company the flexibility to do things that could be accretive down the road if we choose to.

If one wanted to be picky, and I guess the one part of the business is that is a little under pressure right now, would be the joint venture side, where --

Yes, that's true.

If you were to opine looking forward over the next couple of years, are we at a nadir in your judgment or is there some diminishment of the value of those businesses and their ability to grow, compared to where they were before.

The effects of the Tsunami in Japan will pass. And all that business associated with that will return to normal. It's a question mark in my mind about the game consoles. If they reach their peak, maybe. And LCD TVs, well, they're bound to come back. I think they reached a peak and now they have dropped off significantly at the moment. But I expect them to make some rebound. Maybe they don't get as high as they did. And then we're always looking for new applications.

Dan, just from my commentary, in terms of the growth of our PORON demand worldwide, those joint ventures and the capacities they have could certainly be utilized for any global product needs for PORON foams if there is a , if the game consoles go down. So it would certainly delay or move out the need for a major expansion of another line, by filling up all the capacities, including our joint venture. So it can be

Are you being designed out of LCD TVs or are you suggesting that the units sold worldwide of LCD TVs is down compared to where it has been?

Units sold is down.

You're not being designed out?

No.

And the role that you play in consoles and in LCD TVs would be?

Gasket around the display.

Okay. So the same as it would be for smartphones.

Right. Exactly.

That seems, maybe last question for me. Could you, you talked about CPVs. Can you talk about whether this is a unique thrust for you, whether you expect to have competition and talk a little bit more about your longer term views of where that goes for you.

We may end up with some competition. But the majority of these players are US-based players. And so that's an advantage for us. And they're all in the demonstration phase, so that they build big demonstration projects. When this does take off, I expect that we get all of the initial orders, because we're what they're used to and they know our stuff works and they don't dare take a chance on things that are supposed to last 40 years. This really is one of those places where the first guy wins.

Very well. Thank you.

Your welcome.

Your next question comes from the line of Stefan Mykytiuk from Pike Place Capital. Your line is open.

Yes. Good morning. Most of my questions were asked. But I just wanted to go back to the Theta opportunity. Bob, I think you quoted a huge number, what $600 million market opportunity in 2016, according to some outside estimates. Where's the ramp? Is it really 2014 and 2015, where this becomes a really big product?

Yes. Yes. The ramp really begins in 2013. And then goes from there.

Okay. So when you said potentially $15 million for you in 2013, that's, 2014 could be multiples of that it sounds like?

Yes. Yes. Each of these designs could generate anywhere from $4 million to $8 million worth of sales for us.

Okay. Terrific. And lastly, on the bay station, those two bay station agreements. Those two OEMs, what percent market share do you have? You talked about a handful of others. But the two big ones, how much market share do they have of the market?

They have more than half.

Okay.

Terribly more than half actually.

Terrific. Great. Thanks very much.

Your welcome.

(Operator Instructions). Your next question comes from the line of Ralph Freeze, who is a private investor. Your line is open. Ralph Freeze, your line is open.

We lost him.

Your next question comes from the line of Shawn Severson from ThinkEquity. Your line is open.

Thanks, Bob. Just a quick follow-up actually on the IGBT side. And I listened to a number of calls there. There's still long lead times, shortages, capacity constrictions there. These would be at like the, I assume Infineon, Fugi and others. I just want to get your sense of where they are in terms of capacity additions, relative to yours. Even you know even if you add that capacity at Curamik , can the market out there sell more IGBT? What are you seeing on that front as we look out into

There seems to be, and probably will remain, a little bit of a shortage. I have a feeling that that's what the makers want the market to be. Because there's certainly a lot less price pressure if you are really asking, couldn't I have more. But I believe that Infineon has noted that they expect to grow 20% this year. They've raised that from 15%. There clearly is capacity being put on. It's just that they're not putting it on quite as fast as people say they need it.

Right. Right. And have you seen, now with six months in Curamik, have you seen (inaudible) come much out of Japan, or do we continue to think of that as more of a Japanese only type competitor.

Japanese only. We just don't see them.

But do you see more opportunity to actually take market share from them in Japan or do you think that's just kind of going to be the same share that it is today?

Well, we're doing the things to begin, we have already begun the process of getting new adoptions there beyond the one major player. And we have assigned different sales resources, so that we can penetrate some of the other users. This is a long process, though. This industry doesn't move quickly. Because it goes into things that are high reliability and last a really long time. So they're cautious. But in the long-term, we're going to get a lot more business in Japan than we already have.

Okay. And then in terms of the things that you cited for 2013, I know you mentioned a little bit about a contribution margin, roughly at 40% or so. But as we look at all those different markets and applications opportunities, how should I think about gross margins for those businesses? Everything is going to be floating around the corporate average approaching that 35%? Are there a couple in there that could, if they get big, improve the mix and therefore improve the margin?

Yes, there are. Because everything is not the same. Every product does not have the same gross margin. Indeed, there are some that, and for good reason, you can imagine why I'm not going to you which ones those are. Because I'll get phone calls about reducing the price. Yes, there's some real big ones in there. And of course, our job is always to get rid of the ones that are low.

Right. All right. Great. Thank you.

Your welcome.

And with no further questions in queue, I turn the call back to Mr. Wachob for any closing remarks.

Thank you. In closing, I've said for a while now, that we had laid the foundation for faster growth and as you can see, we are experiencing that growth. We'll continue to invest in new product development and focus on the three megatrends to keep driving our growth. Thank you for joining us today. And goodbye, everyone.

And this concludes today's conference call. You may now disconnect.