Rogers Corp (ROG) 2014 Q2 法說會逐字稿

Good morning. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation second-quarter 2014 earnings conference call. (Operator Instructions)

Thank you. Director of Investor and Public Relations, Bill Tryon, you may begin your conference.

Thank you, Steve. Good morning, everyone. Thank you for joining us. The slides for today's call can be found on the investors section of our website along with the news release that was issued yesterday.

Turning to slide 2, on the call today will be Bruce Hoechner, President and CEO; David Mathieson, Vice President, Finance, and CFO; and Bob Daigle, Senior Vice President and CTO.

Turning to slide 3, before we begin 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 statement.

Also, the discussions during this conference call may 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 slide deck for today's call which can be found on our website's investors section.

I will now turn the call over to Bruce Hoechner.

Thank you, Bill. Good morning, everyone. First, I would like to welcome David Mathieson to his first quarterly earnings call with Rogers.

David's extensive experience includes a role as Senior Vice President and Chief Financial Officer with our customer, Brady Corporation, where he completed 26 acquisitions. David's perspective on our business from a customer's point of view, in addition to his 27 years of financial and business experience, has already started to benefit Rogers.

Before we review the slides, I would like to offer some insights regarding Rogers' 2014 second-quarter results. The momentum we have gained over the past several quarters continues. We achieved strong top-line performance and continued to improve our gross margins and operating profit.

In addition, we continue to see the benefits of the decisive actions taken over the past two years, which has helped us improve operational efficiencies, pricing capabilities, and capacity utilization. Given our strong top-line growth, we believe the time is right to accelerate our investments in our business systems and processes, which we call the Rogers work smart initiative, and enhance investments in our M&A evaluation activities.

While these investments will affect our near-term S&A expenses, we are confident they will enable us to scale the Company more efficiently and effectively to support our growth and profit objectives. Our very strong first-half performance in revenue growth also drove a significant increase to bonus accruals in Q2. We have adjusted these bonus accruals based upon our current belief in strength of our businesses.

David will offer more specific commentary around second-quarter expenses later in the call.

In Q2, we saw robust demand in our megatrend categories of Internet connectivity and clean energy, as well as substantial sales increases in safety and protection applications, such as automotive safety sensors, consumer impact protection. In particular, we experienced strong demand for applications in telecom infrastructure, x-by-wire, energy-efficient motor drives, and automotive safety sensors. Thanks to strong market demand, dedicated employees, and operational improvements we achieved our sixth consecutive quarter of year-over-year quarterly sales growth in Q2.

Turning to slide 4, you will see that Rogers' overall and printed circuit materials individually achieved all-time record quarterly sales. I'm pleased to note that all three of our business segments contributed to year-over-year sales growth in Q2. Rogers sales grew by 15.9% in Q2 to an all-time quarterly record of $153.5 million.

In addition, we improved gross margins to 37.2% from 33.9% and operating margins to 10.6% from 10.1% on a non-GAAP basis. As I mentioned, the printed circuit materials business segment achieved an all-time quarterly sales record with sales up 34.9% over Q2 2013. This was driven primarily by the global growth of 4G LTE wireless infrastructure in base station power amps as well as wireless antenna, automotive safety sensor applications, and Internet connectivity applications for handheld devices.

Overall, this performance was the result of robust market demand and continued dedication and hard work from our printed circuit materials team. The power electronics solutions business segment achieved sales growth of 5.2% over the second quarter of 2013. Strong demand in energy-efficient motor drives, rail traction, and x-by-wire was tempered by lower demand in the laser diode market as well as specific EV/HEV applications due to customer internal supply-chain constraints.

High performance foams sales grew 7.2% versus Q2 2013. Increased demand for consumer impact protection, HEV battery applications, and mass transit vibration management was partially offset by relatively flat demand in general industrial and mobile Internet devices.

Moving on to slide 5, you will see an overview of second-quarter net sales performance by market. For the second quarter, 63% of Rogers sales were in our strategic megatrend categories as we continued to provide our customers with engineered materials solutions to support their robust growth in these areas of increasing global demand.

In the clean energy category, sales were up 11.2% over Q2 2013, with increased demand for power modules used in energy-efficient motor drives and automotive x-by-wire systems. The ongoing global buildout of the wireless telecom infrastructure contributed to an impressive 51.3% growth in year-over-year revenues in support of Internet connectivity. We continue to benefit from the increase in 4G LTE base station deployment around the world, especially in China.

We also experienced an increase in orders from one major mobile Internet device OEM for high-frequency circuit materials in applications that improve wireless connectivity. Overall, demand for these applications continues to remain very robust.

Rogers sales in the mass transit category grew 9.2% over Q2 2013 with increased demand across all major segments. Beyond our strategic megatrend categories, demand for radar-based automotive safety systems drove growth for Rogers printed circuit materials business. We believe we will benefit from further adoptions around the world as governments increase their mandate for automotive safety measures and as consumers become increasingly aware of the safety advantages of such systems.

Higher sales of impact protection materials into the consumer markets also drove growth in safety and protection applications. Overall, safety and protection applications were a significant contributor with growth of 38% over Q2 2013.

Turning to slide 6, I want to highlight our growth enablers. Our team in the Rogers Innovation Center is taking shape and a number of new R&D projects are now underway, which we believe offer exciting opportunities for our customers. The unique partnership Rogers has with Northeastern University is enabling us to apply emerging technologies to commercial opportunities in a timely and cost-effective way.

At the end of the second quarter in our targeted megatrend categories of clean energy, Internet connectivity, and mass transit we were tracking a cumulative total of 834 major design opportunities, which is an increase of more than 11% from Q2 2013. Also in Q2, there were 475 opportunities in the design-in phase of the selling process, up from 425 in Q2 of 2013. During the quarter we moved 31 megatrend opportunities from design into production. Keeping our pipeline of opportunities growing is a helpful indicator of our future business growth.

Our R&D marketing and new business development teams are collaborating with customers to develop engineered solutions to address real global market needs, enabling a new generation of technologies. We are balancing a long-term and short-term approach to building a robust sales pipeline that we will continuously refill as we convert projects into sales.

Our collaboration with customers is not limited to our R&D efforts. We are in the midst of a cultural transition to ingrain market-driven or outside-in behavior across the Company. Globally we are conducting workshops and challenging all employees to find and adopt the best practices of global organizations to improve processes and serve our customers better. This includes more outreach to our customers to learn what they need so we can be a partner of choice to them.

As we have discussed, Rogers is actively pursuing an acquisition strategy that is aligned with our current businesses. Our business processes and systems optimization projects, the Rogers Work Smart Initiative, are preparing us for integrating potential acquisitions through standardized systems and processes. We remain committed to our investments in operational improvements across the organization.

Here, too, we are taking an outside-in view, ensuring these improvements reflect industry best practices across all departments. I will now turn it over to David to report our financial highlights.

Thanks, Bruce, and good morning, everyone. Turning to slide 8, as Bruce mentioned, we had record quarterly sales in Q2 of $153.5 million with growth of 15.9% driven by printed circuit materials growing 34.9% with strong demand in wireless infrastructure. In power electronics we had growth of 5.2% and high performance foams showed a welcome return to growth of 7.2%.

Gross margins were strong at 37.2%, up 330 basis points from prior year non-GAAP gross margin of 33.9%, 220 basis points from incremental volume, and 110 basis points from efficiency.

On slide 9, our S&A increased this quarter from 19.1% to 22.5% of sales. That increase was driven by incentive and equity compensation accruals of $4.1 million, which was higher this quarter due to strong second-quarter and first half-year performance.

Spending on Rogers Work Smart business systems of $1.4 million, the CFO transition and other severance of $1 million, investment in sales and marketing of $0.9 million, professional services expenditures of $0.9 million, M&A opportunity evaluations of $0.5 million, and a range of other costs of $2.5 million in legal fees, business taxes, merit increases, and other cost increases offset by a $2.1 million pension benefit comprised of $1 million of income in the second quarter of 2014 compared to expense of $1.1 million in the second quarter of 2013.

Research and development expenses were 4.2% in the second quarter of 2014, slightly lower than the 4.7% experienced in the second quarter of 2013. The lower rate is primarily related to the impact of quarter over quarter sales growth. Total gross spending did increase in the second quarter of 2014 by approximately $0.2 million due to the investments in the Rogers Innovation Center and strategic investments.

On slide 10, operating profit margins improved by 50 basis points compared to the non-GAAP operating profit percent for the second quarter of 2013. This increase is due to the strength of gross margin increases offset by an increase in commercial expenses of 280 basis points.

Our diluted earnings per share rose 9.4% from a non-GAAP $0.53 in 2013 to $0.58 in 2014, with operating income adding $0.14 offset by a higher tax charge of $0.05 due to geographic mix and share count dilution of $0.04. On slide 11, all-time record sales for the quarter were up 34.9% to $61.5 million, driven by wireless infrastructure growth and antenna applications and operating income up 157.7%.

On slide 12, growth in variable frequency motor drives, rail traction, and vehicle electrification in the power electronics solutions business was offset by lower demand in HEV, laser diode, and solar markets. Sales were up 5.2% and the operating loss reduced by $0.7 million in the quarter.

On slide 13, high-performance foams grew 7.2% in the quarter, driven by strong demand in HEV, mass transit, and consumer impact protection, offset by more modest increases in general industrial and is now demonstrating growth in the face of the headwinds caused by the product design changes in a mobile Internet device market. Operating income at $4.6 million was up 29.6% in the quarter.

On slide 14, we continued to generate cash and to pay down our debt. Cash flow from operations in the quarter was $11.9 million with capital expenditures of $8.1 million and we repaid debt of $3.8 million. We ended with a cash balance of $218.7 million and a debt balance of $70 million.

On slide 15, guidance for the third quarter is for our revenues to be in the range of $153 million to $159 million and for EPS in the range of $0.65 to $0.75. This guidance takes account of estimated P&L spending on Rogers Work Smart business systems of approximately $2 million in the quarter. The total expected cost of this project is approximately $15 million over the next two years.

Now this completes my commentary and I will now turn the call back over to Bruce.

So this concludes our prepared remarks and we will now open up the call for questions.

(Operator Instructions) Daniel Moore, CJS Securities.

Good morning. Perhaps give us a little bit more color, Bruce and David, on the Work Smart initiatives. As you just closed you said you would be spending about $15 million over the next one to two years. What will that entail and how specifically will that enable you to be better prepared to integrate potential acquisitions in the future?

Dan, our approach here is very consistent, I think, with the strategies that we have talked about. Over the last couple of years we have focused very much on getting the top line organized and in line, and I think we have seen that very well. Certainly this year first half up 16% year-on-year on revenue and even last year we were up close to 8% over the previous year in revenue.

What we are looking at now, though, is, as we have probably said, we are looking for acquisitions. And part of that to grow the Company and to achieve the next level of performance, our belief is that we need to improve our business processes, our systems, and so on. And so that is really the bottom line here on the Rogers Work Smart initiative.

We think that what we will accomplish out of this is more standardized processes, the ability to scale the Company to the size that we believe we should and can be as we go through both the organic growth, which is targeted to be 10% a year, and inorganic growth, which will range basically 5% or so if we average that out -- at least that's what our plans are -- over a number of years.

So with that sort of background, let me turn it over to David to give a little bit more color maybe on the spend.

Yes, we very much need this business system. I have seen the benefits over the years of filling in Oracle, for example, and Honeywell and SAP for example in Brady. And I am on a board in tenant where I've seen great progress being made in the business.

This project is a very high return project. It's above 25% so as soon as we can do it the better as far as I'm concerned. It can reduce our inventories, for example, with smart planning, so I'm looking forward to the next couple of years in getting this project done.

Sure. Just one more thing I would like to add. This also has a component of planning involved, so when we look at ability to get more out of our manufacturing plants, work our capital a little bit better, both CapEx as well as working capital and inventories and so forth across the board. So we see this as really the next step in our transformation of the Company.

That's helpful. Want to focus for just a moment on the tax rate. It was up about 600 bps in Q2. What tax rate is embedded in the fiscal Q3 guidance and do you still expect about 29% for the full year? I am just trying to understand the delta there.

Yes, we still expect around 29% for the year, Dan. The third quarter we expect just a little bit under 31%.

31%, okay. And then perhaps one more and I'll jump back in queue. You have seen a significant surge in revenue over the past few quarters driven by 4G base station build out, among other factors. You will start to cycle against some pretty stuff comps.

Maybe just talk about your outlook for 4G in particular over the next four to six quarters. Do you expect dollars of revenue to continue to grow in that area? And then your confidence around sustaining double-digit growth as you cycle against those comps in 2015.

Sure, so as you know, we give only next-quarter guidance, but let me take a step back and give you my perspective on the PCM business but also some of the other businesses at Rogers.

In PCM certainly the 4G LTE buildout in China, particularly with China Mobile, is really pushing this quarter, next quarter, and through the end of the year. What we are hearing and what we are seeing, and we were just in China and heard this directly from a number of the OEMs, is that China Unicom and China Telecom are now starting to roll forward on 4G. So that will take us through -- we will see very strong demand coming in from them probably Q4 and certainly into 2015. So my confidence in year-on-year is still very strong.

The other thing that we have seen is the Indian opportunity. There's been a lot of work over the last six months or so in getting their frequencies and their systems organized and their carriers organized. We hear now that 4G will be started -- 3G and some 4G will be started there in India as well, so we are looking at 2015 to see India coming into play.

As we all know, or those of us who travel in Europe at least, 3G is in Europe and 4G is yet to come, so we see Europe certainly in 2015 and beyond as a great opportunity for us. So just in the PCM business alone we see this as a continuation over the next certainly four to six to eight quarters of very, very strong growth on the 4G LTE side.

The other thing that I would like to talk about for PCM is the blind spot detection systems for automobiles. We are in our infancy there in growth and we had huge growth this quarter.

We were up 33% year-on-year in that business in Q2 and we see that just starting to ramp even more than what we've seen already. So that has legs that go out at least two, three, four years in our view. So that is the PCM business.

On the power business, power electronics business, we are seeing again some good recovery in the second half of this year in rail. We will see a nice build up in EV, specifically with one manufacturer who has straightened out some of their internal supply chain issues, so we will see that come back pretty well. And the variable frequency motor drives, the power modules for those, as industrial activity continues to expand, we are seeing very good demand there.

On HPF, I am very pleased to see us return to a growth mode there. The team is working hard to grow our business beyond where we had very nice business in MID; recovery and growth in safety and protection areas, particularly in the consumer area. We have got a great application now in soccer or football shin guards. First non-hard surface shin guards that are using our PORON material, plus all the safety helmet equipment in hockey and even now in soccer some headgear. So we are seeing some very nice growth there.

We are seeing mass transit also, particularly with our silicon foams business, starting to take off and we see that continuing. And MID, we've introduced some new products in the MID area, particularly the back cushion and we've already got one application. We are waiting for that to come through and actually get some volume for us. So overall we are very, very bullish moving forward on comps.

Very good, I appreciate it. I will jump back in queue.

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

Good morning, everyone. Just a few clarifications in the beginning. First, I was just trying to understand; in your prepared remarks you talked about $4.1 million of increased quarterly accruals. This was in Q1 and Q2 combined, right, so could you give me the Q2 number?

That was the Q2 number, actually.

Just the Q2 number. Because when you clearly (multiple speakers).

If you'd like to clarify, we probably -- the catch up in our Q2 was probably around $1.5 million. So had we planned this or forecast this with what actually happened we would have put $1.5 million more in Q1 and $1.5 million less in Q2, if that helps.

I reconciled this number with is that when you did the pre-release you talked about $6 million to $7 million of additional expenses in Q2. If I add all this up, this one comes out to roughly $9 million or so. Am I doing the math right or is there some mistake here?

Like if I take all the negatives and add that with the offset of $2.1 million in pension benefits, I get to somewhere around $11 million kind of number. $9 million kind of number, $9 million kind of number.

No, I think we -- this is offset by a $2.1 million pension benefit, Avinash.

Still, even after offsetting that I get more than $9 million.

No, well, I get $8 million and that includes the offset of $2.1 million so -- (multiple speakers).

So the $4.1 million was in the quarter? So $4.1 million and then $1.4 million, the CFO transition -- I would just like to get some clarity on that one. Maybe I am doing something wrong here.

Sure. We will do that offline, Avinash.

Okay, okay, perfect. Then, in the meantime, the other question I was asking about. It looks like SG&A you are talking about additional $2 million in the business smart initiatives, but could you give us the level of SG&A, the absolute level of SG&A that you are modeling at the midpoint of the guidance in Q3?

We can kind of look at the number but it should be close to $32.5 million or something, $32.3 million or so at the midpoint. Is that in the ballpark?

No, it's more like $30 million.

$30 million?

$30 million, yes.

$30 million. So are we expecting an improvement in gross margins here or --?

No, roughly flat.

And R&D also pretty flattish?

Up about $1 million I would say.

And that increase in R&D, is that kind of where you want to be or it's going to be something one-time there on a percentage basis?

Well, it jumps up and down a little bit. That is up about $1 million for the quarter in the Innovation Center.

Because over time you have talked about getting to kind of 6% R&D. I was thinking whether this move will be in that direction, so what kind of timeframe should we be thinking of when we talk about getting to kind of 6% of revenues that are being R&D expenses? You will get very close to 5% at this number may be.

Yes, Avinash, it's Bob Daigle; maybe I can help you with that. So one of the -- so part of the increase you are seeing in Q3 is really the scaling up the innovation center as we had talked about earlier in the year, ramping up of some funded projects, and having full staff. The way we are approaching this is our roadmap to go from, as you point out, maybe 4.5% to 5% in terms of R&D investment that incremental investment is primarily going to be made up of discrete opportunities that we identify in the Innovation Center that we choose to fund.

So we are thinking that's over probably a couple year period. I don't see that spiking up dramatically, but as we add discrete projects where we see some nice opportunities to add revenue and growth to our businesses, we will be investing incrementally in those.

Then, of course, on the revenue side as you see some -- in terms of the electronic side of the business where you are talking about the cell phone and the tablets and all that it looks like there has been some redesigning going on. But that business seasonally should it be stronger in Q3 given the high units or Q3 and Q4 or not?

Seasonally we see -- traditionally we see the increase in HPF in Q3. Q4 tends to be a little bit variable. It depends on the demands for Christmas and so forth and new product introductions. But what we are looking for is relatively flat with last year and Q3 for MID HPF.

Okay, perfect. Thank you so much.

Let me just add also, and you've probably seen this in the press with Microsoft and Nokia, the changes that they have undertaken in their business model going to basically from multiple, many multiple products to more like the other OEMs with a few products. So there will be some transition there. That is -- since we are across the board in mostly everyone's MID or cell phones or smartphone systems, we are covered, but there could be some variability there that we haven't quite understood yet because that announcement just came out.

Thanks, Bruce. Thanks for the clarity.

Daniel Moore, CJS Securities.

Thank you. I just wanted to clarify, not to beat a dead horse, but you said about $30 million in SG&A for Q3? Is that correct, David?

That's correct, Dan.

And that includes the $2 million sort of beginning incremental spend on the projects that we talked about?

Absolutely. Yes, it does.

Okay. So what's the total year-over-year increase in incentive compensation and equity comp that you now expect for 2014?

Year-over-year?

Correct.

Approximately double.

I have to go back and check that, but is that in the $10 million to $12 million range?

Yes.

Okay. And I had one other follow-up. You talked about the investment business systems. So as we go about, by my math gross profit will be up about $38 million or so give or take for 2014 year-over-year. It looks like maybe a quarter of that is going toward incentive comp.

Just want to get a sense for as we move forward is that type of percentage a reasonable way to think about the percentage of improvement that we will see that would flow through towards incentive compensation?

Hold on a minute, Dan. It's year-over-year, right? We're talking about year-over-year performance and (multiple speakers).

Correct, correct. As we move forward beyond 2014.

Well, next year will be higher, obviously. We are planning continuous growth and improved profitability so it will get higher as we grow the business.

But certainly we have new targets, right? You have reset -- we had a strong growth this year. Next year, of course, we are hoping to show very good growth as well, as I outlined earlier, but we know the new baseline so we start over and we have to earn it.

So, Dan, one other thing that might be helpful for you guys is -- this is Bob Daigle -- when you think about this year's performance, it's really -- we are hitting it out of the park, so if you look at our variable comp, it is much higher than it was last year because of, as Bruce mentioned, running through the first half 16% year-over-year growth, very strong operating improvement.

So you kind of -- although you get little bit of increase because you in some cases add staff, more participants in the bonus plan, this tends to be kind of we're approaching peak kind of levels of incentive comp based on the current staffing levels.

Very good. Lastly, on kind of the same topic but SG&A; $30 million as we grow a little bit in terms of the investment on that project. Is that a good base level to think of with some moderate growth from there going forward into Q4 and to 2015?

Yes, it is, Dan.

Okay. Thank you again.

Thank you. There are no further questions at this time. Mr. Hoechner, I turn the call back over to you.

Great, thanks, Steve. So in closing, I would like to summarize a few highlights of our call.

First, we had a very strong second quarter, carrying through the momentum that began back in 2013 and making Q2 our sixth consecutive quarter of year-over-year quarterly sales growth. We achieved all-time quarterly sales records driven primarily by the global demand for Internet connectivity, automotive safety sensors, and clean energy. We believe that market indicators point to continued growth in these areas.

Secondly, we continue to improve our margins through our operational excellence initiatives. We are seeing early returns from our process and system improvements within our Work Smart initiative, which are enabling us to better serve our customers through more robust business intelligence and process efficiency.

Lastly, our focus on innovation leadership for both the near and long term will help us create more value for our customers and shareholders. We expect to expand our market share by taking an outside-in approach to understanding and converting customers and market opportunities into sustainable, profitable growth for the Company.

We believe our recent sales growth performance is indicative of the health of our markets and the unique material engineered solutions we provide. Together with strong market indicators, we feel we have a sustainable advantage in the marketplace and that we are well-positioned for profitable growth throughout 2014 and beyond.

Thank you for joining us on today's call.

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