Rogers Corp (ROG) 2012 Q3 法說會逐字稿

Good morning, my name is Alicia and I will be your conference operator today. At this time I would like to welcome everyone to the Rogers Corporation third-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). Thank you. Mr. Bruce Hoechner, President and CEO of Rogers Corporation, you may begin your conference.

Thank you, Alicia. Good morning, ladies and gentlemen, thank you for joining us and for being flexible in the wake of Hurricane Sandy that caused us to delay our earnings announcement and call previously scheduled for last week. Our thoughts are with the many people of the eastern United States and who were impacted by the storm.

With me today are Dennis Loughran, Vice President Finance and Chief Financial Officer, and Bob Daigle, Senior Vice President, Power Electronics Solutions and Chief Technology Officer. Slides for today's call can be found on our website's investor section along with the news release that was issued earlier today. 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 of 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 statement.

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 of 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 November 5, which is also available on Rogers' website in the Investor section. I will now turn it back over to Bruce.

Thanks, Dennis. On slide 4 you will find an overview of our performance by market and megatrend. As the pie chart demonstrates, we continue to be well diversified by market. We expect our commitment to the megatrend focus areas of clean technology, Internet and mass transit to help accelerate the Company's growth over the next few years. However, economic and market dynamics have impacted results in the third quarter.

Megatrends accounted for 53% of net sales in the quarter, down from 60% in Q3 of 2011. Hardest hit was our clean technology megatrend category where the ongoing slowdown in capital and infrastructure spending continues to impact demand for our Power Electronics Solutions for industrial motor drive and wind energy applications.

On the positive side, we have seen a significant increase in demand for our Power Distribution Systems into several projects in the automotive market. In mass transit we have not yet seen the rebound in rail investment in Europe and China that we expect will drive demand for our Power Distribution Systems products.

As for the Internet megatrend, in mobile Internet devices our High Performance Foams business continues to be a market leader in cushioning and sealing for tablet computer applications. But the drawdown of inventory in the supply-chain due to the timing of tablet model changes affected our third-quarter sales and prevented it from being a stronger quarter.

Sales were strong for our PORON XRD cushioning materials for mobile device cases also used in sports impact apparel. In Internet infrastructure our Printed Circuit Materials business showed strong growth in products that enable the latest smart antenna technologies. Sales for base station power amplifier applications were up versus last quarter, a sign we believe indicates that the highly anticipated wireless infrastructure build is beginning to ramp.

On the wired network side our recent launched Theta high-speed digital product has won several qualifications, but development of demand has been slower than previously anticipated. We have put our capacity expansion for that product on hold for now as we work to align capacity with our latest view of market timing.

Strong sales growth has continued for Printed Circuit Materials used in automotive blind spot detection applications. These products continue to build momentum as more automotive platforms continue to adopt this new safety feature.

Moving to slide 5, we continue to build a robust pipeline of design opportunities as we partner closely with customers to develop solutions to their materials technology challenges. At the end of the third quarter we were working on 793 design opportunities, up from 765 opportunities in Q2.

In addition, we had a significant number of opportunities go into production during the quarter. We believe that our growing design pipeline is a key positive indicator of future revenue growth.

Turning to slide 6, let's look at the business segment performance results. For the third quarter of 2012 our businesses generated net sales of $130.2 million, a decrease of 11.6% from last year's third quarter. The majority of the decline was in our power electronics segment reporting a 35% decline.

This segment was hard hit due to markets it serves such as industrial motor controls driven by capital investment and renewable energy markets that rely on governmental infrastructure investment. We believe these markets have bottomed out and we will begin to see improvements in demand by the second half of 2013.

In comparison with the results for Q3 2011, High Performance Foams was down 3.5% while Printed Circuit Materials achieved a 1% increase for the quarter. Sequentially, however, we achieved an overall 3% net sales improvement versus the second quarter of 2012 with both High Performance Foams and Printed Circuit Materials reporting strong growth at 10.9% and 7.2% respectively.

Power Electronics Solutions declined 11.4% versus last quarter. Despite the difficulties we face in the global economy we exit the third quarter with strong growth quarter on quarter in two of our largest businesses and we believe that all of our businesses have strong growth prospects as we look towards the future. I will now turn it over to Dennis to report our financial highlights.

Thank you, Bruce, and good morning again to everyone. Following on with the new slide presentation format we have prepared several summary financial indicator slides corresponding to the segments of my presentation. I will mention that the slide number in advance of the respective comments.

As reported in the press release, we reported a large third-quarter GAAP earning result of $3.46 per diluted share with the majority of that result related to benefits from net one time discrete tax items that will be explained more fully later in my comments. Our underlying non-GAAP result of $0.69 per diluted share is what I would like to discuss as it represents a strong improvement in profitability in excess of what our original expectations would have been at the mid-range sales level of our guidance.

Turning to slide 8, you will see that our streamlining activities contributed substantially to the results with $4.5 million in quarterly cost benefit compared to the $3.0 million we had built into our guidance projection. Of that total $2.5 million benefited manufacturing margin and $2.0 million represented lower SG&A expenses.

That increase in the benefit is related to excellent results in labor, product yield, procurement savings and efficiency projects implemented during the year. We expect these benefits to increase slightly to $5.0 million in the fourth quarter of 2012 and then provide that continued quarterly benefit in 2013 and beyond.

Our gross margins are depicted on slide number 9 with the third quarter 2012 at 33% as compared to the 34.4% recorded in the third quarter of 2011. Approximately 30 basis points of the decline was due to one-time charges booked in this year's third quarter related primarily to the Bremen closure.

The remainder of the decline was attributable to several factors -- loss contribution on our year-over-year reduction in sales contributed approximately 150 basis points of the decline; and negative absorption on lower production levels due to inventory reduction efforts accounted for approximately 160 basis points in reduced margin.

Those factors were partially offset by a 190 basis point improvement related to the $2.5 million in streamlining benefits to our manufacturing margin for the quarter.

Turning to expenses on slide number 10, selling and administrative expenses for the third quarter of 2012 and 2011 were $26.3 million and $27.5 million respectively. Third-quarter 2012 includes $2 million of one-time expenses related to pension settlement accounting.

The net improvement of $3.2 million quarter over quarter reflects streamlining improvements of $2.0 million in the 2012 third quarter and $1.2 million net in lower compensation and other overhead costs primarily related to reduced performance assumptions for annual and long-term incentive programs.

With the benefit of our streamlining efforts we expect our SG&A to be approximately $23 million during the fourth quarter of 2012. However, as reported previously and in our current press release, we do anticipate severance and restructuring expenses during the fourth quarter of 2012 related to the relocation to Hungary of inspection operations of our Curamik electronic solutions business.

Anticipated charges cannot be reasonably estimated at this time and as such no anticipated costs have been accrued to date in our guidance for the fourth quarter does not include any cost related to the project. Research and development expenses were $4.8 million or 3.7% of sales in the third quarter of 2012 as compared to $5.4 million or 3.6% of sales in the third quarter of 2011. In the near term we expect our R&D spending rate to be in the range of 3.5% to 4.0% of sales.

Tax impact -- there is no slide; however, the third-quarter rate is worthy of some additional explanatory comments. During the quarter we had net discrete favorable tax adjustments totaling $50 million related primarily to the reversal of a reserve originally taken in 2009 against our US deferred tax assets.

That reserve resulted from the assessment at that time that our ability to utilize the deferred tax assets was questionable, largely due to historical losses in our US operating results. The reserve was reversed in Q3 due to the improvement in our US operating income during the past three years and projections for future sustained operating income. We project that our effective tax rate for the fourth quarter of 2012 will be approximately 25%.

Turning to slide number 11 -- Rogers ended the third quarter with a cash and cash equivalents position of $91.1 million as compared to $95.8 million at June 30, 2012. As represented in the slide, we have continued to manage cash in a manner to maintain sufficient liquidity reserves for our current and future needs despite the overall depressed economic conditions in our markets.

For the third quarter of 2012 the net decline in cash was primarily attributable to capital expenditures of $5.7 million, a one-time pension settlement payment of $6 million and long-term debt repayments totaling $14 million of which $11.5 million represented a discretionary repayment against our credit revolver and $2.5 million with scheduled repayment against our term loan facility. These uses of cash were partially offset by strong cash flow generated from our operations.

Our combined debt payments of $14 million resulted in a quarter end balance of $106 million on our outstanding long-term debt. That balance offset by our cash balance of $91.1 million resulted in a value of net debt in excess of cash equal to $14.9 million, a value that has improved $43.5 million in the past four quarters.

During the quarter we also achieved a significant inventory reduction of $4.6 million, improving our tracking metric to 10.4 weeks of supply from last quarter's level of 10.8 weeks. Year to date we have lowered inventories by $8.3 million or 10.5% from the end of 2011 and as quarterly sales have increased improving our metric from a peak of 12.5 weeks. Other metrics remained comparable to our prior quarter. This concludes my remarks and I will now turn it back over to Bruce.

Thanks, Dennis. This concludes our prepared remarks and we will now open up the call for questions. Alicia?

(Operator Instructions). Daniel Moore, CJS Securities.

First just a clarification that you are up to $5 million quarterly benefit from the cost savings and restructuring and all the strong moves that you have taken over the last several quarters. Does that number include the benefit of moving the Curamik operations to Hungary?

No, it does not. It actually doesn't include two benefits. The Bremen closure is being enacted and we finalized early in the first quarter, so the quarterly benefit from the Bremen closure, would be one quarter of that $1.4 million offering estimate that we have given out would start probably in the second quarter. And then the Curamik move of finishing operations would be starting late in the fourth quarter of next year once we have had that whole operation moved and completely closed down in Eschenbach.

You obviously don't have an estimate for the costs for Curamik; I assume you don't have an estimate for the cost savings yet either?

Correct. And that mainly relates to the union negotiations and actual determination of the number of people and the final operation size in Hungary.

Understood. Perhaps you could elaborate a little bit more around Theta around the issues that are sort of hamstringing the development of the opportunities there and whether or not the delayed CapEx is sort of a quarter to quarter or more of the will reevaluate in six- to 12-month time frame?

Okay. So first we are still seeing some good wins in the smaller applications, the smaller programs with our Theta. But what we found was that the qualification cycle, particularly for the larger opportunities, was taking 12 to 18 months. And so we hadn't hit our sales targets and our sales goals that we had anticipated and so we took the opportunity to decide to delay the installation of the press in Arizona.

Now what this does for us, it gives us some flexibility because we are also considering utilizing that press to cover some other demand that we see growing, particularly in the RO4000 world. As we look into 2013 and 2014 for demand capacity balance there is an opportunity to redirect that press for those products.

So what we are doing is looking at that capacity situation and saying, okay, let's make sure that we have got enough to cover demand that we know is coming, or we are very sure that is coming, and then also looking at how we are progressing in our market as we do the development work with the Theta products.

Very helpful. And lastly just switching gears, R&D -- you've obviously been able to manage extremely well down to the -- 2.5% to 3% plus range. Do you expect as we look out to 2013 to start to tick back toward the more normalized 4% to 5% of revenue?

Absolutely. I think we are at a stage now where we are doing a lot of work in the market doing our technology and market road mapping to understand specific needs and longer-term needs that require that R&D and development activity. As we look forward into 2013 we are looking at bolstering our core R&D organization to start to work through the identified targets and opportunities as we have gone through this road mapping exercise.

So this is -- I would say a low point right now for our R&D and frankly not a place I want to stay. I think our Company is a technology company, I know it is and we need to make sure that we are making the right investments. And I think as I said previously, we will only make the right investments when we fully understand the customer market needs and that we have got clear projects and that is what we are working on defining right now.

Understood, appreciate it. And I will jump back in queue.

Avinash Kant, Davidson & Co.

So first question on the Theta product, in the past you have kind of predicted not huge revenues from this one in this year at least, maybe roughly $2 million to $5 million or so and you had kind of anticipated maybe roughly $10 million or so could come in in 2013.

Now with the moderation in -- or basically the extension of the time line that you have seen what's your expectation of revenues from the Theta product this year and next year?

Well, we have never really stated specifically what our revenues would be in the shorter term. We had always said that we are looking for about a 15% market share in 2017. And so, we are still looking at that as the target.

As I pointed out earlier, the cycle time for approvals and spec ins is longer than we anticipated. So longer-term we believe the market is still a great opportunity for us, it is a question of timing right now that is really put us on hold on the capital.

But you would not expect the revenues to be double digits in 2013?

At this point, no. Again, because of the cycle time extensions that we have discovered here.

Okay. And then on charges, in the last quarter when you talked about the charges, and I am not talking about the one that you have for taxes, but ex those tax numbers you were kind of talking about roughly $0.15 or so in charges. It looks like you had $0.17 or so in the charges. So could you just give us the slight differentiator that you saw $0.15 to $0.17, where did that come from?

It was -- there weren't any new activities, it was really just the level of severance and shutdown costs related to Bremen and the settlement accounting. So the two activities that we had mentioned were the same just slightly different levels of expense, probably some equipment obsolescence as a part of that estimate were probably the two biggest things that might have changed a little bit, Avinash.

Okay. And then on that front, of course, going forward for 2013, how should we think of the tax rate going forward? And also if you could give us some idea about what is the expectation of gross margins and operating margins in the Q4 guidance that you have given us?

In the go-forward Q4 guidance we are looking at a slightly improved -- at the mid range of our guidance we'd be at about 34% gross margin, and when you look going forward, as we have always said, and we mentioned in our comments, we believe our go-forward contribution on increasing sales can be in that 40% to 60% range depending on business.

So contribution level of 50% will improve our gross margins next year on whatever we end up coming out with growth in sales, I haven't calculated that yet but we are expecting that kind of incremental benefit and that would improve our gross margins going forward.

Tax rates, we have always maintained that the thing of probably between 25% and 30% depending on the mix of where our earnings are and these certain discrete tax items that seem to impact us going forward, we certainly -- the kind of numbers at 25% is sort of the low end of that range just because of the way things are hitting this year. But for your model, the models or whatever, in the mid 27% to 28% is probably the best way to go right now.

And just any operating margin assumptions for Q4 and what was the depreciation and amortization for the current quarter?

In the current quarter we had 6.0% of depreciation and 1.1% of amortization.

Million, right? So total $7.1 million?

$7.1 million, yes.

And in Q4 you talked a little bit about the gross margin assumptions at the midpoint of 34%. What should we think of operating margin roughly in (inaudible)?

Well, we are looking at SG&A of $23 million is our guidance and R&D probably in the -- pretty close to what it was last -- about 3.8%.

Okay, perfect. Thanks so much.

(Operator Instructions) Jiwon Lee, Sidoti & Company.

Just wanted to circle back on the fourth-quarter guidance. If you could talk a little bit about the revenue assumptions for the key operating segments first, please.

Jiwon, when we look at our projections, Bruce had mentioned that we believe the power electronics, which is power distribution and Curamik holding fairly steady. And with the other businesses -- and Bruce had mentioned sequentially growing fairly strong in the third quarter over the second. I believe we are looking about a 3% average growth between Printed Circuit Materials and in our High Performance Foams.

So overall the whole Curamik side, you are expecting that business to be sequentially rather flat?

Yes --.

In other words the business (multiple speakers).

On a combined --.

Yes, it has kind of bottomed out here. And that is kind of what you were seeing from European side as well as your export market right now?

I'll let Bob comment.

Yes, so do one, I think you've got to think of that market on a global basis. So a lot of it is in terms of the slowdown is Europe, but a lot of it frankly is China as well. So as the economy in China has softened that has been a headwind frankly for the -- in the power electronics business because of a lot of it is tied to CapEx and infrastructure.

So the question is going to be as the new government steps in China and they start to ramp up, hopefully they start to ramp up investment, how that flows through to the industrial drive market.

That is very helpful, thank you. And then just the inventory comment, I may have missed it, is that sort of kind of where you want to be or were there some specific product lines or areas that you wanted to drive a little bit further down.

We were -- when you looked at what we have been doing this year trying to get to 9.5 to 10 weeks of supply in overall metrics. So we think as we grow we will probably try to hold the line on dollar value of inventory and let that metric improve with growth.

Certainly as we started this year our Printed Circuit Materials' inventories were the highest in terms of our metric because this was the year that we were -- had dual supplies and we were ramping up our laminate facility in China, so we had to make sure we had enough backdrop materials around the world in case the qualifications were longer term, which they ended up being.

So that is the one that I believe we have brought down most significantly this year from probably in the mid-teens weeks of supply down to closer to our average.

Terrific. And lastly for me. You mentioned some model changes in the tablets and the smartphones, the inventory pool was not enough. So in the fourth quarter you are expecting that market at least to be I guess up a little bit, correct?

Yes. Actually it was some of the model changeovers in the tablet computers sides about dipped down our demand in Q3 and that is fully moved through the system now and we are anticipating a very nice rebound in Q4.

Very good. That is all for me. Thank you very much.

Shawn Severson, JMP.

Bruce, I was wondering if you could give a little more color on how you think China plays out. I mean obviously you have had a lot of experience over there and they have a government change coming, but what is your estimate as far as what is going to happen and how that will flow through and impact Rogers throughout 2013?

Well, I think first of all we will be looking at first and second quarter of 2013 for some of the stimulus programs to roll through. I believe the difference this time versus the 2008/2009 stimulus is it is going to be very, very well directed. I don't believe that the government wants to have a broad approach.

And I think if you look at their five year plan, those industries that they have targeted in therefore growth will continue to get the funding. So how that reduces to practice for Rogers is in a couple of areas.

I would say the rail infrastructure we have seen investments starting to go; most of that right now is in the rails itself -- the infrastructure of the rail and track and so forth. What we anticipate is in the first half of next year we will start seeing that demand grow for locomotives and so on. So we will see some of that flow-through from that part.

We also continue to see the build out in 3G and the beginnings of 4G infrastructure in China. And so, we have seen the ramping of that and while that is not necessarily directly part of some of the stimulus, it certainly is related to the growth of the economy that the government wants to pursue. So that is another very positive sign for us at Rogers.

And if I recall correctly, I believe you are about 30% kind of off of your peak China revenue, is that correct? Is that still the case, I guess?

About 35%.

In power electronics?

Just in general. If you look at your business in China and the impact the slowdown has had over there versus kind of the ramp we had a couple years ago, are you seeing 35% across the business units? Or is that representative just in power electronics?

Yes, Shawn, it's Bob Daigle. That would be specific to Power Electronics that were off. If you look at the rest of our business we are actually up in circuit materials and up in the foams area. So most -- this decline has been specific to our electronics because so much of it is tied to infrastructure spend which was being driven by a large degree by investment in China.

Yes, yes. And just on the 4G in China, the 90% design in metric still holds, right? I mean you're still having the same leverage to roll out in China for 4G we have had in other parts of the world?

Right. So the 4G in China -- first of all, yes, we're about 90% marketshare in those base stations. And that is still a small scale test program in about 10 or 15 cities, I believe, that they are putting in the 4G. So they will continue to build out the 3G, switch over to the 4G and we think that will happen maybe and then an accelerated basis towards the second half of next year that the 4G will start ramping.

Okay and then just last question for me. Going back to the US and LTE spend, it looks like it takes them up a touch, but what is your I guess the lead times that you would see and what are you hearing through the channel as far as any chatter that might be indicating that really is picking up? And when it does is it like a four-week, six-week, an eight-week type lead time for you? Just trying to figure out how far in front of an actual bill that you will be?

You talking about for infrastructure in 3G and 4G, Shawn?

4G specifically in the US with LTE spend. The one thing everybody has been waiting for for a year, now kind of the carriers have just -- obviously have needed CapEx (inaudible).

Yes, we are starting to see some increase in demand there. Certainly in the fourth quarter we anticipate some. We believe that the inventory has been run down quite a bit through the supply chain. So we are starting to look at making sure that we are producing in anticipation of the demand coming forward in Q4 and into Q1.

Okay, so there is anticipation, in other words, there is some signal throughout the channel that there are going to be some stations installed over the next six months then -- that will require you to obviously start producing [more]?

Yes, that is -- we've seen a broad base for a number of our customers demand forecasts moving up.

Okay, great. Thank you.

(Operator Instructions). Stefan Mykytiuk, Pike Place Capital.

Shawn just asked my questions on the LTE ramp here in North America. So, thank you very much.

Daniel Moore, CJS Securities.

Saw a nice improvement in the High Performance Foams in the JV. You alluded to that being a bit of a seasonal uplift. Or are you seeing a little bit more sustained strength in those businesses?

Our view is that it is seasonal, the build for Christmas, the holiday season. We have seen I would say an uptick in general but certainly the bounce that we saw in Q3 was in anticipation of that -- of a bigger holiday season for those products. But our belief, we had seen over the last year or so a real sort of bottoming out of that market. And we are seeing it start to climb back even beyond this bump that we are anticipating for the holidays.

Appreciate it, and look forward to seeing you at our conference in January.

Great, thanks.

And we have no further questions in queue at this time. I now turn to call back over to Mr. Bruce Hoechner, for closing remarks.

Thanks, Alicia. For the fourth quarter of 2012 we forecast net sales between $129 million to $135 million. And earnings from continuing operations on a non-GAAP basis, excluding any special charges, between $0.69 a share to $0.79 per diluted share. Rogers remains focused on improving our execution, identifying new growth opportunities and managing the areas that are within our control.

As technology leaders in our key markets we are seeing positive indicators of continued growth in our High Performance Foams and Printed Circuit Materials businesses. In power electronics solutions we are not seeing a rebound yet, but we are aligning our cost structure so that Rogers will be in a strong position to deliver even greater value to our customers and shareholders in the years to come. Thank you for joining us today on the call. Have a good day.

And with that, ladies and gentlemen, this concludes today's conference call. You may now disconnect.