Rogers Corp (ROG) 2012 Q2 法說會逐字稿

Good morning, everyone. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome you all to Rogers Corporation Second Quarter 2012 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to our host, Bruce Hoechner, President and CEO. You may begin your conference.

Thank you, Sarah. Good morning, ladies and gentlemen. With me today are Dennis Loughran, Vice President of Finance and CFO, and Bob Daigle, Senior Vice President, Power Electronics Solutions and CTO. First Dennis will dispense with the formalities and then we will get down to business.

Thank you, Bruce. 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. It should be considered as subject to the many uncertainties that exist at Rogers' operation an environment. These uncertainties include economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those of any forward-looking statements.

Also, the discussions during this conference call will include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the press release furnished with the current report on Form 8-K dated July 31st, which is also available on Rogers' website in the Investors section. I will now turn it back over to Bruce.

Thanks, Dennis. Despite challenging market conditions, our second quarter net sales and income were in line with our guidance. As expected the continued global slowdown in our key markets of wireless infrastructure and clean technology as well as global economic uncertainty took their toll on our business in the second quarter of 2012. However, across our businesses there were a number of positive results for Rogers during the quarter, particularly in our newer technology and application areas.

Our High Performance Foams business demonstrated continued leadership in cushioning and sealing for tablet computer applications. We are also seeing high growth in extreme protection applications utilizing our unique PORON XRD phone technology for sporting goods equipment and apparel as well as hand-held device protective covers. We believe both of these market areas will continue to be strong contributors to Rogers moving forward.

In our Printed Circuit Materials business we achieved significant market share gains with our Printed Circuit Materials developed specifically to enable the latest smart antenna technologies for wireless infrastructure. Strong sales growth continued in automotive blind spot detection applications with sales in this segment expected to double this year as deployment becomes more mainstream across automotive platforms worldwide. In addition, market response to our recently launched Theta high speed digital products for wired networks has been very positive from OEMs and fabricators, with qualifications continuing.

In our Power Electronics Solutions business we are seeing continued expansion and applications in automotive x-by-wire. This growth is driven by the replacement of traditionally mechanical systems, such us power steering and air conditioning, with electrically powered systems utilizing our Curamik direct bonded copper substrates. We are seeing continued opportunities in hybrid and electric vehicles, for both our Power Electronic Solutions and high performance phones. Although sales for HEVEV vehicles have not yet achieved the industry projected growth rates, we remain confident in the long-term potential of this segment. For Rogers, with the design wins we have already achieved, we expect to see sales increases in this segment towards the end of 2012.

Due to the overall weakness in the global economies, we have seen lower demand in some of our core applications during the second quarter of 2012. Demand for industrial motor drives utilizing our Curamik substrates has slumped due to reduced industrial equipment investment worldwide. We expect some rebound in demand in this segment as the economies recover. The 3G and 4G wireless infrastructure build-out has continued but at a slower rate than anticipated earlier in the year. Inline with the public comments of many base station OEMs, we believe infrastructure demand will remain flat for the rest of the year.

Our design and activity continues to grow as we partner closely with customers to solve their materials technology challenges. In our pipeline of opportunities, we have seen a steady increase this year in the quantity and value of major programs in the mega trend markets on which we are focused; clean technology, internet and mass transit. At the end of the second quarter, we were working on 765 opportunities, up from 682 opportunities in Q1. In addition, over the last year we have doubled our number of design wins and many should go into production over the next year.

We believe that our robust design pipeline is a key positive indicator of future revenue growth. Not only are we making good progress in driving future revenue growth, we have made significant progress in streamlining our operating cost structure to improve profitability. Adding to the $13 million in annualized cost savings from the streamlining initiatives previously announced, we have moved with speed and agility to make further structural changes during the quarter that will improve profitability and enable us to increase our focus on strategic growth markets.

Due to the economic uncertainties, we remain cautious in our short-term forecast. However, we are aggressively setting the stage for the future by strengthening our technology leadership, prudently managing costs and building a leaner operating cost structure. We believe that we will benefit from a leveraging effect in both top-line revenue and bottom-line profitability as a result of our recent decisive actions, and are well-positioned to know as the global economy recovers. I'll now turn it over to Dennis who will provide the details of the quarter.

Thank you, Bruce. Good morning again to everyone. Bruce provided an excellent overview of the quarter and the many changes going on at Rogers to improve our prospects for the future. So let's get down to the major financial factors that impacted our quarterly results. As we reported, GAAP results were a profit of $0.38 per diluted share. However, excluding one-time charges, we achieved $0.47 per diluted share on a non-GAAP basis, which is at the high end of our second quarter 2012 guidance of $0.37 to $0.47 per diluted share.

One-time net charges totaling $0.09 per share or $1.4 million, net of tax, resulted primarily from the ceasing of operations in our leased facility in Bremen, Germany. This action, along with the two other improvement actions I will discuss shortly, are inline with our comments in May that we will continue to streamline our operations and improve our costs on our way to achieving a targeted 15% operating profit margin by 2016. The Bremen closure and relocation of certain business activities to our Carol Stream, Illinois, silicon manufacturing facility are expected to provide an estimated $1.4 million improvement in operating profits in 2013. Related to this activity, in Q3 as we complete this action, we expect additional one-time net charges totaling $0.07 per share or $1.1 million net of tax.

In addition, the ceasing of production of our non-woven composite materials product will not have a material impact on our operations but will allow us to redeploy management and technical talents to other core growth businesses.

Lastly, we believe that the plan to move the final inspection stage of our Curamik business to Hungary will enable more cost-effective performance of the inspection operations beginning sometime in 2013. We expect the move itself to be substantially complete by the end of 2012 or early in 2013, and related expenses and charges will be incurred over that time period. We are not able to reasonably estimate those charges at this time. We do, however, believe the ongoing benefits will be material and will more than justify the cost of the relocation.

We have been making excellent progress on our streamlining activities initiated in the beginning of the year. In the second quarter, we achieved cost savings of approximately $2 million in commercial expenses bettering our previously announced expected benefit of $1.5 million in the quarter. In our third quarter results, we expect the total benefit of the streamlining effort to increase another $1 million to $3 million for the quarter with the incremental benefit primarily coming in the gross margin area.

For the second quarter 2012 our business has generated net sales of $126.7 million, a decrease of 11.7% from last year's second quarter. All segments declined year-over-year and the specific segment impacts were more fully described in our press release and Bruce's comments.

Gross margin for the second quarter of 2012 was 29.1% as compared to the 33.8% reported in the second quarter of 2011. Approximately 90 basis points of the decline was due to one-time charges booked in this year's second quarter related primarily to the Bremen closure. The remainder of the decline was attributable to lost contribution on our year-over-year decline in sales or approximately 200 basis points of the decline, and negative absorption on lower production levels due to inventory reduction efforts for approximately 200 basis points.

Selling and Administrative expenses for the second quarter of 2012 and 2011 were $22.5 million and $26.4 million, respectively. The improvement reflects the streamlining improvements of $1.5 million in the 2012 second quarter and $3.3 million in lower compensation costs, primarily related to reduced performance assumptions for annual and long-term incentive programs, offset by higher pension costs of approximately $1 million.

With the benefit of our streamlining efforts we expect our normal SG&A to be approximately $23 million on an average quarterly basis through the rest of 2012. However, as reported previously, in the third quarter of 2012 we expect to recognize approximately $2.1 million in pension costs related to the retirement of our former CEO. This amount will be classified as a one-timer and was not included in our third quarter non-GAAP guidance figures. The impact to our third quarter GAAP results is expected to be $0.09 per share or $1.5 million after tax.

Research and development expenses were $4.5 million or 3.6% of sales in the second quarter of 2012, as compared to $5.6 million or 3.9% of sales in the second quarter of 2011. We continue to enhance the productivity of our R&D spend through the use of technology road mapping and stage gate management. In the near term, we expect our R&D spending rate to be in the range of 3% to 5% of sales.

Rogers' 50% owned high performance joint ventures with Inoac Corporation had second quarter 2012 sales totaling $15.9 million with equity income of $1.3 million, compared to $16.8 million of sales and equity income of $1.3 million in the second quarter of 2011. As mentioned in the press release, joint venture sales this quarter were lower than last year's second quarter due to continued weakness in the Japanese domestic and export markets particularly LCD TVs, domestic mobile phones and general industrial applications.

The Company's 2012 second quarter effective tax rate was impacted primarily by the mix of earnings in different taxing jurisdictions that increased the effective tax rate to 32.5%. However, we believe our expected effective tax rate for the second half of 2012 will average 26% with some quarter-to-quarter volatility.

Rogers ended the second quarter with cash and cash equivalents position of $95.8 million as compared to $93.5 million at March 31, 2012. The net improvement in cash was primarily attributable to cash generated from operations, partially offset by planned pension contributions and capital expenditures. During the quarter we achieved a significant inventory reduction of $6.7, million improving our treking metric to 10.8 weeks of supply from last quarter's level of 12.5 weeks. Other metrics remain comparable to our prior quarter.

At the end of the second quarter 2012, Rogers reported outstanding borrowing on its credit facilities of $120 million. During the second quarter, we made payments of $1.25 million and incurred approximately $0.7 million of interest expense on that debt during the quarter, at an effective rate of approximately 2.5%.

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

Thanks, Dennis. We will now open up the phone lines for questions. Sarah, if you could organize that for us?

(Operator Instructions). Your first question comes from Daniel Moore of CJS Securities. Your line is now open.

Good morning.

Good morning.

The last quarter in Printed Circuit Materials, you talked about a draw down in inventories in defense related spending. Have you worked through that now? And what are your expectations for growth going forward in that vertical?

On the defense side, we still see what I would say a flat to down second half of the year as demand tended to subside. We believe the inventory management is in place, but again the demand is relatively flat.

Got you. And Bruce, you are now up to $15 million or perhaps more, with some of the additional initiatives in identified cost savings through restructuring. Do you see more opportunity going forward? Or at some point do you have to start to kind of reverse that and invest more dollars in marketing and R&D and start to invest a little bit more ahead of revenue?

I would say my view is that we have been front loaded here on our cost savings approach in streamlining. This is a somewhat different tactic than I think Rogers has taken in the past where we would do things over a longer period of time. Coming into Rogers and looking at the opportunities that we had, we did a lot of work here in the first half of the year to streamline. My view is there is always things that we will be looking at to improve but I -- my view right now is that we have done a lot of the work already.

And lastly, R&D was a little lower than we had expected. I know 3% to 5% is your guidance range. Is $4.5 million a number you are comfortable with going forward? Or do you start to have some concerns about sacrificing longer term opportunities for short-term performance?

Sure, yes -- very good question. My view is again that we will be ramping up R&D over the course of the next six to 12 months. We are working now to get very clear definitions of longer term programs and platforms that we will invest in. And as we do that analysis, we will then add the appropriate resources from a technology perspective to make sure that we have got it right.

The other thing that we are doing aggressively is our program management and project management. So the stage gate activities, the criteria that we are using and so on, that is being refined. While the number looks low historically perhaps for Rogers, the view that we have is our productivity and outcomes are improving our hit rates. So with that management and as we continue to look out and look for newer opportunities, we will staff to provide the support that we need.

That is very helpful. Congratulations on performance in a difficult environment and we look forward to seeing you at conference.

Thanks a lot. It is an interesting world out there.

Absolutely.

Your next question comes from Avinash Kant of D.A. Davidson and Company. Your line is open.

Good morning, Bruce and David.

Good morning.

Just some clarification. I think you were talking about the charges in the third quarter. I think you indicated two different charges. And combining those two roughly it looks like it is a $0.16 impact. Do I understand it right that the GAAP guidance is basically $0.44 to $0.54?

Yes.

Okay. In the past you talked about the retirement related charges being roughly $1.5 million. It is $2.1 million. Was there some change there?

There was a little bit of change in actuarial assumptions and we got the update right at the end of the quarter, so it increase -- probably do the present value being a little higher with interest rates down. That would be my basic assumption of the actuarial numbers.

And then also you talked about design wins improving. Could you give us the number -- in the past you have given us some numbers in terms of how many design wins. And do you have that number?

In terms of design wins we -- what we have looked at -- we are looking at opportunities. And then as those opportunities get specified, they move into a design win number. The number of specked projects that we have for this quarter is 437, and that versus June a year ago of 274. So again, we have got these -- we are doing extremely well working with our customers and getting the wins in place. The real challenge is when do they actually go into production.

As we have described in the release and so on what we are hearing from OEMs and from fabricators and so on is that the second half of the year is flat in most of the areas in most of our market areas, but we would anticipate some of these specs to move over into production during production during that time frame. Again, we have got a very strong pipeline of projects that have been specified. It's just a question of when they go into production.

And could you also give us some directionality about -- given the Q3 guidance that you have, what are you expecting from the various segments? Just up and down -- like do you expect Printed Circuit Materials, High Performance Foams, what do you expect of them sequentially?

In Foams we expect it to move slightly upward on Q3. And Q3 tends to be a strong quarter for that business on a normal year. So we expect that to hold this year as well. In the circuit business we are also seeing quarter on quarter increase there. That also tends to be a stronger quarter for us in that business. Again, not as much as maybe anticipated earlier in the year, but certainly a step up from where we are in the second quarter.

And in the Power Electronics slightly a bit up, but basically flat going forward. The question of whether we bottomed out there, our view is we believe that the market is pretty much bottomed at this point but we don't see any real drivers on the power electronic side that is going to really get into recovery until we start seeing more investment in equipment and construction going forward, which is really a major driver for us in that business.

Finally, some housekeeping questions for Dennis. Could you give us the CapEx depreciation? And what's the expectation for 2012? And the tax rate in 2013 maybe? What should we think about -- ?

Starting with the tax rate in 2013, I won't know until we get closer. For CapEx we did $6.6 million in the quarter. The estimate that was shown in the press release is down annually to $32 million. It again is sort of rationalization of timing of projects. The big decline last quarter had been the fact that we had been able to move out the anticipated expenditure of our PORON line into the latter half of 2013. And this latest decline also includes that project looking at land and building acquisitions also being pushed out a little bit on that project, where we preliminarily assumed it would be at the end of this year and now we have moved that into 2013.

Overall all of the strategic projects are on track and under budget -- and on budget, excuse me. And so the high speed digital, which is the Theta project, as well as the treater line in China are the two other big projects that are underway and on track.

And depreciation?

We had $7.1 million of depreciation and amortization, with $1.1 million of that being amortization for the quarter.

Thank you so much.

Your next question comes from Shawn Severson of JMP Securities. Your line is now open.

Thank you, good morning.

Hi, Shawn.

Bruce, I have a question for you kind of on the -- it is a big picture question. Obviously, you've had tremendous experience in China and very good knowledge of that market. Just wanted to get your thoughts on where it stands as it impacts your business, what you expect there over the next six months? And some of the actions that might be going on over there that can impact your business over the next six to 12 months?

Great question, Shawn. My view is fabricators is that given the situation that China faces on GDP growth, the government -- and it has been talked about over the last few months -- will be looking at some sort of stimulus approach. And historically for Rogers, when that happened back in 2009, we did pretty well coming out of that. Because a lot of that is infrastructure construction, that will drive -- for Rogers, it will continue to drive the buildout of 3G and 4G wireless infrastructure.

It will also help us we believe on the rail side. Our latest intelligence is saying as they reorganize the Ministry of Rail towards the end of the year, we will start seeing a pickup certainly in bidding and business in China. And so that should translate into an upside for us going forward into 2013 in that area. That, as you know, has been hit very, very hard over the last year or so.

And of course, with the consumer spending, if that remains relatively strong for things like mobile internet devices, we have such a good position in that globally and certainly China is part of that as the consumers is buy. That will help us as well. But I do think that some stimulus will be coming. The market there has been relatively slow and certainly the government is concerned. So that should help us.

Okay. Then now that you have had a chance to kind of look at the businesses and really dig in for the last six, seven months or so, what is the -- what is your take on the strategic vision? Do you feel that you kind of have all of the legs in piece that you want for growth? Or do you think that there is more opportunities for other acquisitions or other strategic directions?

Well, first of all, I think the core businesses and our focus on the mega trends, as we've outlined them, is a very strong driver as we move ahead. We continue to go out there and search for other opportunities in related areas. And our strategy is, let's see if we can build out where we are strong today in a more solutions approach. And that could drive some acquisitions closer in. From my perspective, that is a lower risk approach, in terms of acquisitions when you are buying them closer to home.

The longer term view is it would be great to have another major platform for the company. And we are endeavoring to identify specifically where that would be and how we would get there. But I think what we have got today is strong. We have, as we have identified some headwinds, but I think the core markets that we are in are very good markets. And as we continue to build out the vision of the company and we continue to grow, we will need most likely another leg of business and we are looking for it.

Great. Thank you.

Your next question comes from Colin Rusch of ThinkEquity. Your line is now open.

Good morning, gentlemen. It is Noah Kaye in for Colin. I was wondering if you could talk a little bit about how you see the impact of the sales mix on gross margin, both for this and the rest of the year?

This is Dennis. The bigger impact on gross margin is simply the contribution margin, as we improved during the year. In our guidance I believe we are predicting the mid point of the range would be about a 32% gross margin versus the almost 30% that was in the second quarter. And of that, I had indicated in my comments about $1 million of improvement in gross margin related to the streamlining effort coming in. And the rest was the contribution on the incremental business, which typically is above 50%. So that does move the average up.

As you look at our segments, the High Performance Foam segment is above our average. Circuit Materials is close to the average. And right now, the Power Electronics, at their level, is currently below our average. As Bruce mentioned, with the High Performance Foams being the bigger end of the upside and Circuit Materials rising but not as much, and Curamik, the Power Electronics being a little lower, we are getting a little bit of favorable mix from that trend as well.

Thanks for the color. Do you think you can pull additional cost out of supply chain for Curamik? And how could that be achieved?

The project that we are talking about is a fairly substantial effort underway and that is, part of that does move it partly closer to where its customer deliveries will be. But mainly it is a manufacturing cost play. As we look to leverage Curamik around the world, we have supply chain efficiencies going in, in terms of the US taking benefit of our supply chain there as well as in Asia. So overall that was one of the synergies that we thought when we bought Curamik, is as they grow in the rest of the world, they will get efficiencies than what they wouldn't have had as an independent company.

That is helpful. Then the follow-up would be, how does that relate to -- could you give us a geographic breakdown of Curamik sales?

They are heavy into Europe. I think the number is 70% in Europe?

About two-thirds of the revenue is coming out of Europe. And I think we have talked about this before, where one of the opportunities we saw when we acquired Curamik, which we are executing on, is really to be more -- leverage the Rogers presence in Asia to grow the business more aggressively in the region. And that is what we are focused on. Today it is heavily concentrated in Europe. Although if you look at where our customers' products go, these are really global businesses. The customers we sell to, a lot of the product ends up in places like China and North America as well.

Great. Thanks so much for the color.

Thank you.

Your next question comes from Jiwon Lee of Sidoti & Company. Your line is open.

Good morning.

Good morning.

Just wanted to ask quick questions about pricing side. Wondered whether there were areas where you have seen some decent pricing? Or whether you have seen some pressure?

On the pricing side, to me -- we break it down into two areas. One in our new products as we introduce them, we are continuing to push on what I would say value pricing from the standpoint of looking at the benefits that we provide to our customers and pricing accordingly. In existing areas we continue to look for opportunities on -- to increase our pricing inline with markets and inline again with the value that we create for our customer base. So I would say there is probably a bit of upside still on -- in some pricing activities for us over the next half of the year or so.

Okay. That's fair. And more a question for den Dennis. It looked like you have reduced the CapEx goal for 2012. And I wonder which area that relates to more?

I think the predominant -- from the original beginning year, which was in the mid $40 million to $45 million -- $45 million I believe was the starting number -- to the $32 million, Jiwon, is mainly moving the large project for the High Performance Foam's new line that will eventually be needed, moving it out between I think six and 12 months. Now the starting point for the entire project is moved into the first part of 2013, whereas it originally was intended to be starting in the second quarter. That extra capacity we've negotiated to utilize out of the joint venture has helped us tremendously in deferring that capital expenditure.

Perfect. And Dennis did you talk about the foreign exchange impact on the top and the bottom line?

I didn't specifically do it. In the press release we had a total of $3.6 million decline with two-thirds of that being the Power Electronics with Curamik and the other being our other businesses that operate in Europe. That is the top line impact. The bottom line impact is a fairly immaterial number because most of the costs of those operation are also in Euros. And at the operating level and the position that Curamik is in, it actually benefited by lowering the operating less -- less than a few hundred thousand dollars of net impact on the bottom line.

Great. And back to Bruce, if I may. We are sort of halfway into the year so if we think about these three mega trends, at the beginning of the year or at the end of last year and where we are now looking into the next six to 12 months, which area sort of surprised you the most on the downside? And how do you think about the outlook?

Without a question I would say clean technology was the one disappointment for us so far this year. And that is primarily driven in one case with the Curamik business, which over 50% of that business is things like industrial equipment, motor drives and so on, which as capital investment has been reduced in the first half of this year, we have seen significant decline there in demand. And also in wind, which is not a huge part of our overall business, but certainly was a very strong part of our business in 2011. That really just pretty much blew away in the first part of the year. Solar remain as relatively stable for us. But again overall green technology has been somewhat of a disappointment. Bob, you might want to add?

I would add on the whole hybrid electric vehicle and electrification of the automobile, as Bruce mentioned earlier, the x-by-wire applications are actually very positive. I think the alternative energy is really the very weak spot, in particular wind and to some degree solar. And the whole industrial drive area, the variable frequency drives, which are about energy efficiency -- the fundamentals remain very strong there in the medium and long-term. But clearly, with the downturn in the European economy and also the slowdown in China, that area has taken a hit.

That's well put. That is all for me. Thank you.

Thank you.

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

Good morning.

Good morning.

Just one thing on the PCM. Bruce, you talked about strength in the smart antennas but that you weren't seeing much ramp in the base stations. On AT&T's call they talked about their CapEx going up pretty substantially in the second half versus the first half. Is there some reason why you wouldn't be seeing that in your base station business? Or is it that they are spending the money on something else? Or any explanation there?

Absolutely we will see it because we have -- it is very strong share in 3G and 4G. We also have heard from Verizon that while they were down about 30% off of plan for their CapEx in the first half of the year, they are planning to recover in the second half. So that is going to be driving forward the demand in the US. Our tempering of our outlook is, we will believe it when we see it. We had seen and heard both Verizon and AT&T saying, we are going to have strong spending in the first half of the year towards the end of last year, and it never really arrived the way we thought. So our view is we hear what is being said, we are hopeful but we are realistic. And we will see how it turns out.

I will say also in China, we are seeing the 3G sixth roll-out. That will commence. But that will only commence towards the end of this year and into early next year. So we will start getting some boost from that. And that will take us through, at least in China, the 3G build-out through 2014. And 4G in China is still going relatively slow, with our latest information is about ten cities that are being tested. But again they are looking at 2013 to add about 200,000 base stations on 4G. So we look out there. My confidence when China Mobile says something is pretty good. And so we think certainly in 2013, we will see that Printed Circuit Material consumption going there.

Okay. So essentially you are saying for North America, you haven't built in a ramp in the base stations, but if it happens that is gravy.

Yes, and you heard my reasoning for it. So when we see it, we'll be happy.

I get it. The FX for -- I'm assuming the guidance for Q3 basically assumes kind of the Euro stays at these levels? And you have got a bit of a headwind year-over-year from that?

Yes.

Okay. All right. Oh, and one last thing, was there -- Dennis, there was -- the $1.3 million of the -- you broke out the $800,000 in restructuring costs and then, was there another $1.3 million in cost of sales that -- for Q2?

Are you talking costs or benefits? I'm sorry, I didn't get the question.

No, of cost of -- in the restructuring charge. In Q2, I'm sorry.

There was $1.1 million is in cost of sales.

$1.1 million.

That was the after tax impact.

I'm talking about pre-tax.

I think $1.4 million.

Okay. I'm just trying to get to kind of the adjusted gross margin for the quarter.

Yes.

So $1.4 million. Okay.

Right.

Okay. Thanks so much.

(Operator Instructions). Your next question comes from Daniel Moore of CJS Securities. Your line is now open.

Thanks for taking the follow-up. Bruce, just curious what insights or areas of opportunity have you gleaned from Helen Johnson since she has been onboard? Or just a little too early to tell?

We have had some very good interactions and discussions in a couple of areas. First, we are working very closely with other suppliers into the rail areas to set -- to help set national standards that will help both us and our customers provide high quality materials and performance. So she has got -- she is getting very involved with those ministries in China. And looking and understanding some of our local customers, certainly some of the bigger ones, who are aspiring to be global in nature, building those relationships very strongly on a local language level. So in the time that she has been here, aside from a lot of internal activity in getting our organization right, she has been externally focused as well.

Excellent. Thank you.

Your next question comes from Russ Piazza of Front Street Capital. Your line is now open.

Good morning.

Good morning.

I was wondering what kind of R&D opportunities might there be to enhance the Curamik product line going forward?

I will ask Bob to comment on that.

Thank you.

Good morning, Russ. There is a couple of major initiatives underway. One of which involves a new product line for us using a higher performance ceramic substrate that is being aimed for the hybrid electric vehicle market. We formed a partnership with a Japanese supplier, Hitachi Metals, where we are in the process of launching a silicon nitrate substrate that is aimed for this particular marketplace, that addresses the long-term reliability into this space. That is one particular area.

The other thing that we see is an opportunity where in the Power Distribution business, one of the big areas for us has been in the mass transit area. That is a space where Curamik historically hasn't played. There are some new products which we are in the process of developing, which are aimed at the power inverters that are used in that particular market space. So we see that as a potential growth opportunity.

Other focus areas which we've talked about really are about making sure that we are very well-positioned in the emerging areas in China, for example, as they grow in these power electronic area and new applications hike the hybrid vehicles and x-by-wire.

Excellent. Thank you.

Your next question comes from [Tim Schwartz] of Harvey Partners. Your line is now open.

Hey, guys.

Hi.

Quick question here. Just on -- Power Distribution Systems was a bit of a disappointment. Do you guys -- so the $11.6 million this quarter, does that come back next quarter? And also just on next quarter, what is sort of the implied gross margin with the guidance that you gave? Thanks.

In the guidance the PBS is relatively flat to slightly down in the guidance, so certainly not increasing from where it was. And I believe -- we don't talk about the gross margins but I think they would be below our average. We are at 32% and I think we are below that several hundred basis points. And Bob Daigle wants to comment.

I can comment on that. Bruce talked about it earlier, based on one of the questions. One of the big drivers or the biggest part of that business has been in the mass transit space. And that industry has been heavily driven by activity in China with the medium speed and high speed rail. And as Bruce mentioned, there is a -- there is a transition going on with the Transportation Ministry taking over for the Ministry of Rail in China. And the expectation, if you look at what was spent through the first half versus what China was indicating they were going to invest for the year, they are down. They spent about one-third of the total annual spend during the first half. So we are -- our belief is as they complete this transition from the Ministry of Rail to, basically their Ministry of Transportation, that they start to invest more heavily in the mass transit area.

Now, the upside area in the medium term for our Power Distribution Business has been our focus in the EVHEV space. And we are expecting to see some ramp in that particular application space towards the end of this year and into next year, which will give us a broader diversification for the business and give us a new growth platform.

Okay, great. So for Q3, like a 30% gross margin would be right or a little higher or -- ?

Probably a little lower than that. I really haven't look at that particular business segment's number but I'm suspecting it would be lower than that generally.

Thanks, guys.

I believe that is the last question. This is Dennis. I did want to correct the question that Stefan had asked about the one-time charges in the second quarter, I had overstated looking at a wrong number. It was $1.1 million of pre-tax impact in gross margin, Stefan.

Okay.

For the Bremen closure.

There are no further questions queued up at this time. I'll turn the call back to Bruce Hoechner for closing remarks.

Thanks, Sarah. With the ongoing uncertainty of the global economies, Rogers has focused on managing the areas within our control. As the technology leaders in our key businesses, we are strengthening our cost position, investing in innovation and improving our organizational effectiveness. As the global economies recover, Rogers should be in a strong position to leverage our improvements to deliver even greater value to our customers and shareholders in the years to come. Thanks for joining us today and have a good day.

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