Rogers Corporation Q1 2008 Earnings Call Transcript

May.14.08 | About: Rogers Corporation (ROG)

Rogers Corporation (NYSE:ROG)

Q1 2008 Earnings Call Transcript

May 1, 2008 9:00 am ET

Executives

Bob Wachob – President and CEO

Dennis Loughran – VP, Finance and CFO

Analysts

Avinash Kant – Broadpoint Capital

James Chen – BB&T Capital Markets

Tom Lewis – Century Management

Jiwon Lee – Sidoti & Co.

Mark Keeler – Walthausen & Co.

Operator

Good morning. My name is Carey and I will be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation first quarter 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)

Mr. Wachob, you may begin your conference.

Bob Wachob

Thank you. Good morning, ladies and gentlemen. With me are Dennis Loughran, Chief Financial Officer; Deb Granger, Vice President, Corporate Compliance and Controls; Paul Middleton, Treasurer; Robert Soffer, Vice President and Secretary; and Bill Tryon, Manager of Investor and Public Relations.

First, Dennis will dispense with the formalities and then we will get right down to business.

Dennis Loughran

Thank you, Bob. 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.

I will now turn it back over to Bob.

Bob Wachob

Thanks, Dennis. The quarter turned out better than we expected. The higher than expected sales were driven by High Performance Foams and Power Distribution Systems, each of which had record first quarter sales. Compared to Q1 2007, total sales declined by about $13 million, with Durel and Flex materials declining $18 million as expected.

High Performance Foams is benefiting from sales growth in new products introduced a couple of years ago and from strength in the commercial aircraft marketplace. Connecticut polyurethane foam facility is operating seven days, three shifts. In China, we are adding a second shift on the new machine to alleviate some of the overtime in the U.S. In Carol Stream, we have added a third shift to the silicone foam line to reduce lead time and overtime.

In regards to Printed Circuit Materials, all the commodity Flex materials are now manufactured by our joint venture in Taiwan and those sales, which are much smaller than last year, will now be reported in our Polymer Products business segment. In 2008 compared to Q1 in 2007 all of the sales decline in the Printed Circuit Materials segment was related to Flex materials.

On the high-frequency side, we had good growth in the automotive lane change sensor application and we had revenues from a new application in Voice-over-Internet protocol. The high definition satellite TV applications remained strong while the cell phone infrastructure business is soft. The high reliability applications, including military, were also very strong.

We made our first shipment from the Thermal Management Solutions business and expect that business to ramp throughout the course of the year.

Looking ahead, we see scattered signs of significant inventories at some of our customers as a few of them have been slow to adjust for lower sales rates. It is not widespread, but it is there. All across Rogers, we remain restrained in our hiring and spending. We believe we are well positioned to manage our future growth and our strategic initiatives are still being fully funded.

And I will turn it over to Dennis for the detailed results.

Dennis Loughran

Thank you, Bob, and good morning again to everyone. Rogers finished the first quarter of 2008 in strong fashion with both sales and EPS exceeding guidance, operating margins showing the strength we expected and favorable results in the balance sheet management and cash generation from continued focus in that area. We believe we have set a solid foundation for 2008 with the restructurings for 2007 behind us and businesses focused on growth and profitability as they should be.

In sales, our first quarter achieved a level just over $3 million above the midpoint of our guidance range with the strength across all reporting segments. Earnings per share of $0.48 reflect a strong manufacturing margin at 31.6% based on well balanced but not yet fully optimized sales and production levels. The quarter continued a trend of balance sheet improvement with inventory levels reduced by over $3 million, a reduction of 6%. Overall, working capital contributed approximately $5 million in cash during the quarter.

Overall for the first quarter of 2008, Rodgers reported earnings of $0.48 per diluted share from continuing operations. This compares to earnings from continuing operations of $0.55 per diluted share in the first quarter of 2007. The year-over-year change is attributed primarily to lower sales and resultant loss contribution related to the Durel business decline. That impact was mitigated by lower commercial expenses in the first quarter of 2008, resulting primarily from cost reduction programs initiated in the second quarter of 2007.

Going forward in 2008, we expect our quarterly average SG&A costs to be approximately $17 million as compared to the first quarter of 2008, which came in as expected at $18.4 million due to the inclusion of approximately $1.5 million in planned higher equity compensation expense during the period.

The first quarter of 2008 sales totaled $102.3 million, representing a $12.8 million or 11% decrease from the same period in 2007 with the decline being driven primarily by lower revenues in restructured businesses, Durel and Flex, totaling $22.4 million, which offset growth in our Advanced Circuit Materials, High Performance Foams and Power Distribution Systems business units.

First quarter 2008 gross margin was 31.6% versus 30.5% for the first quarter of 2007. The 2008 results stand out as very positive in light of the higher margin percentage in the face of lower sales and a $3.3 million reduction in inventory versus a $1.4 million inventory build in last year's first quarter and the result of less favorable fixed cost absorption in the current quarter.

Selling and administrative expenses for the first quarter of 2008 and 2007 were $18.4 million and $19.3 million respectively. This decrease was driven primarily by the favorable impact of cost reduction programs instituted during 2007, more than offsetting the impacts of general inflation, merit increases, increased incentive compensation and foreign exchange related impacts attributable to the RMB and euro currencies.

Research and development expenses were $5.3 million in the first quarter of 2008 as compared to $5.7 million in the first quarter of 2007. As a percentage of sales, research and development expenses were 5.2% in the first quarter of 2008 as compared to 4.9% in the first quarter of 2007. For the full year 2008, our long-standing commitment to target a reinvestment percentage of approximately 6% of sales into R&D is still in effect.

Other income and expense, which includes income from our joint ventures and royalties, less other expenses, amounted to $1.5 million in the first quarter 2008 compared to $1.9 million in last year's first quarter. The 2008's first quarter – excuse me, in 2008's first quarter, we experienced a $0.6 million net foreign exchange loss versus a $0.4 million gain last year and a favorable net of other items totaling $0.6 million.

Rogers' 50% owned joint ventures had a first quarter sales totaling $26.2 million, up 19% from $22.1 million in the first quarter of 2007, led by strength in our two polyurethane foam joint ventures. However, overall equity income in unconsolidated joint ventures decreased in the first quarter of 2008 as compared to the first quarter of 2007 from $1.3 million to $1.1 million. The decline was due to lost margin from RCCT, more than offsetting gains in polyurethane foam profits from RIC and RIS. The company's first quarter 2008 effective tax rate was 29.2%. The company believes the tax rate will continue to be in this range for the remainder of 2008.

Turning to our financial position, Rogers ended the first quarter with cash and short-term investment position of $22 million compared to $89.6 million at the end of 2007. That noticeable decline resulted primarily from a reclassification of $53.3 million of our investments in auction rate securities from short-term investments to other long-term assets. This reclassification occurred in the first quarter of 2008 as a result of failures of numerous auction events during the quarter resulting from recent events in the credit markets.

Excluding that reclassification, cash and cash equivalents declined $14.4 million, with the single largest impact being the expenditure of $30 million for share repurchases during the quarter, offset in part by strong operating cash flows. Capital expenditures were approximately $3 million for the year and Rogers anticipates capital expenditures in 2008 of approximately $30 million.

In accordance with the $30 million stock buyback authorization issued by the Board of Directors on February 15, 2008, the company purchased 906,834 shares of stock at a cost of $30 million in the first quarter of 2008 at an average cost of $33.08 per share.

From a balance sheet perspective, we continue to have no outstanding debt, although we are supported by available credit facilities totaling $100 million. Our current assets ratio was at 2.6 times current liability with the reclassification of auction rate securities impacting the ratio this quarter.

Inventory levels ended the quarter at $48 million compared to $51.2 million at the end of the fourth quarter of 2007. Accounts receivable ended with 67.4 days outstanding, staying flat to the 67.3 days reported at the end of the fourth quarter.

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

Bob Wachob

Thank you, Dennis. And now, we will entertain any questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Avinash Kant with Broadpoint Capital.

Bob Wachob

Good morning.

Avinash Kant -- Broadpoint Capital

Quick question. Regarding margins first, margins, you saw some improvements here at these levels in revenues. Should we expect these margins to kind of continue to grow through the rest of the year after June quarter?

Dennis Loughran

Yes, we expect -- although we don't have any firm forecast, we would expect that the Q3 would be higher in sales than Q2 and therefore, also higher gross margins.

Avinash Kant -- Broadpoint Capital

So, basically Q2 at this point you see as the bottom quarter for the full year, right?

Dennis Loughran

Yes, and that has been typically the case for the last few years once cell phones became a significant part of our sales. And as they are declining, of course this effect will become smaller. If you recall last year, there was about a $15 million decline in sales from Q1 to Q2, and this year, we are looking at $2 million to $5 million. By the same token, last year, Q3 was about $10 million greater than Q2. I wouldn't expect the effect to be that great this year.

Avinash Kant -- Broadpoint Capital

Okay. So, when you talk about Q2 being the bottom, is that just seasonality that you are talking about or you do have visibility for this year and you do see things improving?

Bob Wachob

We believe things will improve. However, we would expect Durel to every quarter be lower than the quarter before for the rest of this year.

Avinash Kant -- Broadpoint Capital

And Bob, if you could elaborate a little bit about one of your comments you made about the inventory at your customers.

Bob Wachob

Yes, one of the disk drive array manufacturers only forecast apparently once a quarter and then builds to the forecast. They are not going to take any product for about a month. And some of the cell phone people were pretty slow in recognizing that their inventories were rising and have therefore slowed down considerably.

Avinash Kant -- Broadpoint Capital

So this impact, is it coming from one segment of the market or you are talking about a broader segment, is it just disk drive guys or is it more --?

Bob Wachob

No, it is scattered. It is one person here, another person there. It is an individual company and not market oriented. The bigger the company, the more likely it is that they are slow in recognizing changes.

Avinash Kant -- Broadpoint Capital

So, it is no specific industry segment and maybe that is why you are expecting maybe a slower ramp in the third quarter?

Bob Wachob

Yes. I also think that the whole economic situation is a question mark. Currently, we haven't seen much effect from that. And normally, we would see that in our High Performance Foams segment first because that covers about every industry you can think of.

Avinash Kant -- Broadpoint Capital

One last question, could you give us the exposure -- what percentage of your sales were international in the current quarter?

Bob Wachob

73%.

Avinash Kant -- Broadpoint Capital

Thank you so much.

Bob Wachob

You are welcome.

Operator

Your next question comes from James Chen with BB&T Capital Markets.

James Chen -- BB&T Capital Markets

Questions on the share buyback, I would assume because of your reclassification of short-term investments that you probably will not initiate any new share buyback program anytime soon unless you change back from this long-term investment to short-term investment, is that (inaudible) correct?

Bob Wachob

At the moment, we don't have any plans to repurchase more shares.

James Chen -- BB&T Capital Markets

Okay. And on the polyurethane foam in the CMP pad application, I tried to understand a little bit more about this, is that a fairly new business and what kind of size or opportunity for this business?

Bob Wachob

It's not so new; it's like everything else we do. We introduce the product and two, three years later, there are significant sales and that's the case right now with a new entry into the business who is our main customer and they have grown very nicely. We are used as the backer pad. I believe the business may slow for a few months as our customer is increasing his yields and he is finding that the pads, because of our backer material, last longer than anticipated. So in some ways, that is good for the long term and it's not wonderful for the short term, and this could be a $5 million to $10 million application.

James Chen -- BB&T Capital Markets

And when you talk about $5 million to $10 million application, you (inaudible) specific customers and not counting the possibility of expanding to other customers?

Bob Wachob

That's correct.

James Chen -- BB&T Capital Markets

And there is two major players there and I would assume this application can be extended to the other major player, right? Or I should ask other question, is the design of the other player similar to the current customer so that they may use your polyurethane foam in their design or is it a totally different pad design there?

Bob Wachob

I don't think they are totally different pad designs. One of the players makes their own material.

James Chen -- BB&T Capital Markets

I see, okay. And can you please comment a little bit on the tax rate? I think you had some increase. In the last quarter, you did comment about tax rate increase because of tax holidays expiring. So can you please comment what is the change?

Dennis Loughran

I guess we originally projected around 28% for the year and we are at 29.2%. And based on information we have today, we would stand by that projection for the year. One piece of it was a small uptick in a rate for one of our Asian subsidiaries that had not been projected in our 28%. And in the U.S., our R&D tax credit is subject to legislation being signed every couple of years by Congress and the Senate and as it happened two years ago, that legislation expired and so you have to back out the projected benefit from that. And if they do as expected sign it later in this year, you get a cumulative favorable impact. We can't project our tax rate based on the assumption that they would sign it. So there may be some upside related to that later in the year, but that would have to be confirmed on signing.

James Chen -- BB&T Capital Markets

Okay. Last question is on the locomotive side of demand from Asia. How should we think about this growth? Is that major growth this quarter or is that some growth you think will continue because of major contract that you guys have?

Bob Wachob

Yes, we would expect that growth will continue as we receive contracts that are typically a duration of two to three years and each of which is a ramp-up in production. Of course, we are early in this cycle, so we would expect continued growth.

James Chen -- BB&T Capital Markets

Can you comment, is that mainly the customers outside of China or are you getting to penetrate into local Chinese locomotive manufacturers?

Bob Wachob

The major locomotive manufacturers in China are European, US and Japanese based. They all have joint ventures and that is how the Chinese participate. One of the effects we have had is that, after three years, we have finally made significant penetration into the Japanese OEMs and that will drive growth for some time. A highlight is that we have actually been designed in to the newest, fastest Shinkansen train in Japan.

James Chen -- BB&T Capital Markets

Okay. Great, thank you.

Operator

Your next question comes from Tom Lewis with Century Management.

Tom Lewis -- Century Management

Just a couple of questions. In looking at this margin performance that you put up this quarter, it is impressive that despite what the world is throwing at you, you are getting margin improvement and I am willing to attribute it primarily to all the hard work that you did last year. And also it looks to me -- my understanding is that you have got a basically better mix of business this year than last year as measured by margin. But should I be concerned that, in this quarter, you had a particularly rich mix of business to drive that that might go the other way that, shall we say, above normal?

Dennis Loughran

I wouldn't say particularly concerned should be in your vocabulary there. We think that there wasn't anything really overtly more favorable this quarter than we might experience on average for the remaining three quarters of the year.

Tom Lewis -- Century Management

Okay. So you really shouldn't look for a reversion to a mean on that particular factor affecting your margin over the course of the year?

Dennis Loughran

We do expect to try to improve our inventory levels somewhat more during the year, but over a three-quarter period, you probably wouldn't see that imbalance in inventory that we saw in the first quarter. So, it might be $1 million to $2 million in a couple of the quarters and a little bit of growth in inventory during one of them, but I think that will be an upside that was not experienced in the first quarter and we continue to constrain -- I think what you need to be positive, we continue to constrain costs, we continue to constrain headcount to manage costs in a period where we do see that everyone has to look forward to the economy to see where it is going to go. So, we are being as conservative as we can on adding and allowing costs to grow.

Tom Lewis -- Century Management

Yes, and that's apparent. I just wanted to make sure that there wasn't something else in there. The other thing being kind of in the same vein, we have talked some about areas of business that have been declining or kind of at the ebb part of their cycle. Are there any end markets that you are particularly watchful of that might be at a well above normal strength for that market at this time that you would be concerned that a year from now wouldn't be the case?

Dennis Loughran

No, I don't think so.

Tom Lewis -- Century Management

Okay, so as you go look across this vast array of markets that you serve, they are predominantly below normal or abnormal, would that be a fair characterization?

Bob Wachob

Yes.

Tom Lewis -- Century Management

In terms of their inherent product cyclicality and all that?

Bob Wachob

Exactly. Some of the things that are positive for us deal with new applications such as the one I mentioned about the lane change sensors. That should grow quite significantly in addition to the Voice-over-Internet protocol application. This is a good example. This was designed eight years ago and now it has significant business. It's a long wait.

Tom Lewis -- Century Management

Yes. No, I mean, it sounds like you are …

Bob Wachob

(inaudible) how long it's going to take for someone to try and displace us?

Tom Lewis -- Century Management

Yes, well, that is a part of what we like. All right, I will let somebody else in. Thanks.

Bob Wachob

Thank you.

Operator

(Operator instructions) Your next question comes from Jiwon Lee with Sidoti & Co.

Jiwon Lee -- Sidoti & Co.

The question is how should we look at your electrical component sales year-over-year in '08 given the likelihood that EL lamps sales will knock out I would imagine at least $40 million to $50 million sales off the segment, but that appears to be offset by your increase in the busbar sales?

Dennis Loughran

As the EL lamp business gets smaller and the power distribution business gets larger, we will see smaller and smaller effects. There was a pretty significant effect in the first quarter and I would expect that in the second quarter that segment's sales will still be down some.

Jiwon Lee -- Sidoti & Co.

Down year-over-year or sequentially?

Dennis Loughran

Sequentially and year-over-year.

Jiwon Lee -- Sidoti & Co.

Okay, fair enough. And I missed your comment on the lower other income contributions from the joint venture, why that was that is?

Bob Wachob

Primarily improvement in polyurethane's RIC and RIS offset by lower profitability, and I believe in the first quarter RCCT might have been just under break-even.

Dennis Loughran

That's the Flex Materials joint venture, Jiwon.

Bob Wachob

Flex Materials joint venture. So, it is experiencing the same market and capacity utilization issues as our own Flex business was prior to restructuring last year.

Jiwon Lee -- Sidoti & Co.

And did you comment on the operating cash flow for the quarter?

Dennis Loughran

We generated -- I didn't say the specific number, but we had probably $14 million or $15 million offsetting the $30 million we spent. $17 million of operating cash flow, they are whispering in my ear now, so that was a fairly decent number for the quarter.

Jiwon Lee -- Sidoti & Co.

All right. I am going to step off the queue for the time being. Thank you.

Operator

Your next question comes from Mark Keeler with Walthausen & Co.

Mark Keeler -- Walthausen & Co.

Good morning.

Dennis Loughran

Good morning, Mark.

Mark Keeler -- Walthausen & Co.

Could you just give us a little more clarity on the reclassification to the auction rate securities to long-term marketable securities? How comfortable -- auction rate securities clearly have gotten a bad name recently and how comfortable do you feel about any future impairments and what is -- I assume they don't go back into cash until they roll off and what is the time horizon that that takes place?

Dennis Loughran

Well, I'll tell you, the classification is based on the facts and circumstances at the time at the end of the quarter, so any valuations and classification issues will have to be evaluated each quarter as we go. The particular circumstances that allowed or that caused the reclassification this quarter is that the timeframe was fairly short. We did experience non-rollover for 2.5 months in the quarter, but that is fairly short term in relation to expectations that the market could start generating opportunities for rollovers and successful auctions during the year.

In relation to that decision as the year goes on, during the second quarter, if there are none, you might still have the same classification decision, but you might not, so we are really going to be up in the air on that. We believe, as it regards to our auction rate securities, we are in AAA rated student loans, municipal and federally government-backed in the 96% to 98% guaranteed range. The third parties that we hired to value that, or being hired by everybody else to value put a range and we had $54.4 million that were reserved on a $1.1 million basis, which was the low end of the valuation, between $1.1 million and $1.9 million of valuation reserve. So, we think -- when we got into the auction rate securities, we always remained as Rogers is fairly conservative in terms of interest rate expectations and security of the document. Now, on a long-term basis, we have good liquidity. We have the ability to indicate that we would leave those things until the market settled down and we had no intention to need to or have to sell those securities in the period that was appropriate for the classification during the first quarter.

Mark Keeler -- Walthausen & Co.

Okay, great.

Bob Wachob

I hope that's not too complicated, Mark. This is not a simple area. The public accountants weighed in very heavily here in this area.

Mark Keeler -- Walthausen & Co.

But, you'll still be recognizing some kind of interest income from those securities, right, is that correct?

Dennis Loughran

Yes, that's right. We have our base interest plus a default interest rate. As those things go, those with the least guaranteed type of securities are getting the highest premium, so we are on the low end of the insurance – I mean the interest rate premiums, probably in the 3% to 4% range and those things get evaluated as you go also. So, people who issued our securities are not the ones that are actually reclaiming and reissuing as some of them who are paying 14% to 20% interest premiums.

Mark Keeler -- Walthausen & Co.

Okay, thanks.

Dennis Loughran

Thank you.

Operator

At this time, there are no questions. I would now like to turn the call over to Mr. Wachob for any additional comments.

Bob Wachob

I would like to leave you with one last thought and that is that over the last few years, we have worked to improve the company's future prospects and we continue to invest in new business development efforts in R&D and in expanding our capacity through our key growing products. We are confident that, over the long term, we will see the anticipated benefits, both in terms of sales and earnings growth, and it remains our goal to continue delivering increasing sales and earnings for our shareholders. Thank you and good day.

Operator

That concludes today's Rogers Corporation first quarter conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!