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Rogers Corporation (NYSE:ROG)

F2Q08 Earnings Call

July 31, 2008 9:00 am ET

Executives

Robert D. Wachob – President & Chief Executive Officer

Dennis M. Loughran – Vice President – Finance & Chief Financial Officer

Debra J. Granger – Vice President – Corporate Compliance and Controls

Analysts

Jiwon Lee – Sidoti & Company, LLC

Tom Lewis – Century Management

Russ Piazza – Front Street Capital

Bob Fetch – Lord, Abbett & Co.

Dana Walker – Kalmar Investments

Operator

Good morning, my name is Caylee and I’ll be your conference operator today. At this time I would like to welcome everyone to the Rogers Corporation second 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.

Robert D. Wachob

Good morning, Ladies and Gentlemen. With me today are Dennis Loughran, Chief Financial Officer, Deb Granger, Vice President, Compliance and Controls, Paul Middleton, Treasurer, Robert Soffer, Vice President and Secretary, Bill Tryon, Manager of Investor Relations, and Ron Pelletier, Manager of Financial Reporting.

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

Dennis M. Loughran

I would like to point out to all our listeners that statements in this conference call that are not strictly historical are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exists 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 of any forward-looking statements.

I’ll now turn it back over to Bob.

Robert D. Wachob

Despite a very slow U.S. economy and a slowing in Europe, Rogers continues to perform as projected. Our new products introduced over the last few years as well as some new applications are making up for the declines at Durel and allowing us to perform reasonably well considering us the external environment. The quarter turned out as we expected. Once again, our performance foams and power distribution systems led the way with record sales. Our performance foams’ second shift in China is fully operational and we are now preparing a third shift. This has allowed a significant reduction in overtime in the U.S. The silicone foam business in Carol Stream, Illinois also significantly reduced overtime as a third shift there is now operating.

The new high performance foam products introduced over the last several years are continuing to fuel our growth. Our printed circuit materials segment, while new applications such as automotive lane change sensors and voice-over-internet protocol continue to grow, our satellite television application experienced a year-over-year decline. However, we expect a pickup in cell phone infrastructure sales in the second half of this year as the China 3G rollout finally begins.

We’re continuing to fully fund our strategic initiatives and have increased our new business development efforts. When others are pulling back, we see these unsettled times as an opportunity to extend our lead on our competitors. We are, however, remaining restrained in our hiring and spending. Our strong cash flow and [inaudible] puts us in a position to take full advantage of any opportunities which we uncover.

I’ll now turn it over to Dennis for the detailed results.

Dennis M. Loughran

Good morning again to everyone. Rogers turned in a solid performance against our goals for the quarter. As you look at and interpret our numbers, it represents one of the more challenging comparison periods because of the restructuring that took place during the second quarter of last year, requiring the elimination of the restructuring impacts and acknowledgment of the top line impacts from lower sales in the restructured flex and Durel businesses. Excluding those restructured businesses our top line for 2Q 2008 was up 8%. Eliminating the restructuring impact from last year, total operating profits including the restructured businesses improved more than 3.5 fold from $1.9 million to the reported $6.6 million in the financials accompanying our press release.

In sales, our second quarter achieved a level of $97.7 million just above the low end of our guidance range with strength across most reporting segments with the exception of printed circuit materials where sales into LNB applications were below year ago run rates. Earnings per share of $0.44 reflect an improved manufacturing margin at 32.1%. Our balance sheet continues to be a strength with cash and short term investments doubling during the quarter to over $43 million and inventories being maintained at levels comparable to those reported in 1Q of this year but over $20 million lower than the same period last year.

Over all the second quarter 2008, Rogers reported earnings of $0.44 per diluted share from continuing operations. This compares to a loss from continuing operations of $0.28 per diluted share in the second quarter of 2007 which included $12.9 million or $0.47 per diluted share of restructuring charges. The year-over-year change is attributable primarily to improved sales and operating profits across most business segments as well as improved results from the restructured businesses.

The second quarter 2008 sales total of $97.7 million represents a slight decrease from the sales of $97.9 million in the same period in 2007, with the decline primarily driven by lower revenues in our restructured businesses, Durel and flex, totaling $6.1 million which was offset by growth in our high performance foams and power distribution systems business units. Second quarter 2008 gross margin was 32.1% versus 16% or 25.2% excluding restructuring for the second quarter 2007. In the quarter, margins improved across our strategic business segments. These results stand out as very positive as we have managed to significantly increase margins on essentially flat sales levels through our continued efforts to manage inventories and achieve a more favorable, profitable product mix.

Selling and administrative expenses for the second quarter of 2008 and 2007 were $18.8 million and $17.6 million respectively. This increase was driven primarily by one time costs related to tax reduction programs initiated in 2Q of $0.7 million, litigation costs totaling approximately $0.4 million which we eventually expect to recover through insurance, and $0.6 million in additional expense due to annual incentive compensation accruals.

Research and development expenses were $5.9 million in the second quarter of 2008 as compared to $6.0 million in the second quarter of 2007. As a percentage of sales, research and development expenses were 6.1% in the second quarter of 2008 as compared to 6.2% in the second quarter of 2007. For the full year of 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 $2.6 million in the second quarter 2008 compared to $1.7 million in last year’s second quarter. The improvement is primarily related to increases in commission income of $0.4 million and a lowered net impact of all other expense items totally $0.5 million.

Rogers’ 50% owned joint ventures has second quarter sales totaling $29.2 million, up 11% from $26.2 million in the second quarter of 2007 led by strength in our two polyurethane foam joint ventures. However, overall equity income in unconsolidated joint ventures in the second quarter of 2008 as compared to the second quarter of 2007 remain flat at $1.5 million, as volume improvements were offset during the period by increases in depreciation and one time start up costs related to new production capacity coming online.

The company’s second quarter 2008 effective tax rate was 29.6%. The company believes that the tax rate will continue to be in this range for the remainder of 2008. As mentioned earlier in my presentation, the company currently is pursuing certain long term tax planning initiatives related to the realignment of our legal entity structure and to our transfer pricing strategies with the goal of favorably impacting the international tax component of our rate structure for 2009 and beyond. These potential impacts can not be quantified at this time. However, we will provide an update when the expected figures have been confirmed.

Turning to our financial position, Rogers ended the second quarter with a cash and short term investment position of $43.5 million compared to $89.6 million at the end of 2007. That decline continues to relate to the 1Q 2008 reclassification of $54.4 million of our investments in auction rate securities from short term investments to other long term assets as previously disclosed and described. There has been no significant change in the status of the auction rate securities during the quarter.

During the quarter, cash and cash equivalents increased by $21.5 million with strong cash flows supplemented by a decrease in accounts receivable of $11 million. Capital expenditures were approximately $6.1 million for the quarter and Rogers anticipates capital expenditures in 2008 of approximately $25 million. From a balance sheet perspective we continue to have no outstanding long term debt although we are supported by available credit facilities totaling $100 million. Our current assets were 2.9 times current liabilities and inventory levels ended the quarter at $48.3 million as compared to $51.2 million at the end of the fourth quarter of 2007. Accounts receivable ended with 62.5 days outstanding, an improvement from the 67.3 days reported at the end of the fourth quarter of 2007.

This concludes my remarks and I’ll now turn the call back over to Bob for some closing remarks.

Robert D. Wachob

Now we will entertain any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jiwon Lee from Sidoti Incorporated.

Jiwon Lee – Sidoti & Company, LLC

A few questions, please. First, could you give us a little more color on your third quarter guidance on as to how each of your key segments are expected to do?

Robert D. Wachob

Yes, we expect the high performance foams segment to continue to do well. We also expected the printed circuit materials to do better than the second quarter. However, custom electric components will be down, the Durel portion of it, down as much as $12 million while the power distribution systems we expect that also to be slightly although they do take several weeks off in Europe during the month of, in the third quarter. And not much change in the other category.

Jiwon Lee – Sidoti & Company, LLC

So the Durel is expected to be down more because of your legacy program or…?

Robert D. Wachob

Yes. Yes, within the life on multiple cell phone program.

Jiwon Lee – Sidoti & Company, LLC

And could you talk, Bob, a little bit more about your opportunities that you have on the polyurethane foam, especially with the portable electronics market? I mean, what type of growth from that particular market could we expect?

Robert D. Wachob

We continue to see significant growth there as we have several new products that, one is a 12 pound density, another a nine pound and then one we call Soft Seal and it is at six pound density. And those appear to have become the materials of choice for a very large number of cell phones. Those materials carry somewhat higher prices than the materials they’re replacing and, in addition, the number of cell phones is going up. Our market share is somewhere in the 60% range.

Jiwon Lee – Sidoti & Company, LLC

Oh, a product like Soft Seal, is that our meaningful competition out there?

Robert D. Wachob

No. Neither for the nine pound or the 12 pound.

Jiwon Lee – Sidoti & Company, LLC

Perfect. And on the China 3G front, could you, Bob, talk a little bit more about what you see out there right now, how and when some of these recent development and restructuring that they’re undertaking over there could affect you and the opportunities that you may see?

Robert D. Wachob

We see the restructuring as being almost complete and this is a very positive thing for us as it will initiate the beginning of the 3G introduction there. China Mobile will be first. They will be using TD-SCMDA technology, which is the homegrown Chinese and they will be purchasing from four Chinese vendors, at least that’s where our belief is at the moment and we expect to see orders in the first half. But this is just the beginning. This will take a little while. This isn’t going to be, doesn’t appear to be that it is going to be an explosion in one quarter. Instead, it’s going to be a controlled rollout.

Jiwon Lee – Sidoti & Company, LLC

You have a good positioning with any of these four Chinese vendors that may get some orders?

Robert D. Wachob

Yes, we have a very significant market share.

Jiwon Lee – Sidoti & Company, LLC

A couple of quick housekeeping questions. The percent of international sales for the quarter, Dennis.

Dennis M. Loughran

I’m not sure…

Robert D. Wachob

I don’t think we know. I doubt that it has changed much.

Jiwon Lee – Sidoti & Company, LLC

Is in the low 70%. Is that…?

Robert D. Wachob

Yes.

Dennis M. Loughran

Yes.

Robert D. Wachob

Yes. It’s probably actually shrinking a little as all the Durel sales that are going away were international.

Jiwon Lee – Sidoti & Company, LLC

Then, with your tax study that is hitting SG&A line, how shall we look at your SG&A line for the rest of the year?

Dennis M. Loughran

To me, this should be going down each quarter. The last quarter I projected an average spend rate of about $17 million to $17.5 million and without the unusual one time items we had this quarter, we would have been pretty much in that range so our committed funded activity levels is in that $17 million to $17.5 million range.

Jiwon Lee – Sidoti & Company, LLC

But there’s no…

Dennis M. Loughran

It may have a little, we still may have a little overhang on the tax study in the third quarter but that’s going to be a good project when we get done with it.

Operator

Your next question comes from Tom Lewis with Century Management.

Tom Lewis – Century Management

First off, the satellite TV business customer-to-customer group where it’s down some, could you give us a little perspective? Is that something that just comes and goes quarter-by-quarter, or are we getting over the mountain on a great big program that’s not going to repeat or how should we understand the ebb and flow of that particular end market?

Robert D. Wachob

That application was down 6% compared with last year. And we believe it is affected by the housing slump. Typically, when someone buys a new house you put in some kind of TV hookup either cable or, and generally when people move.

Tom Lewis – Century Management

Alright, so it’s more of a consumer thing than a program ramp?

Robert D. Wachob

This really is the LNB, the satellites up is all consumer driven so if the consumer’s feeling not so good, he’s probably not going to commit to that extra $60 or $70 a month.

Tom Lewis – Century Management

As you look at across your customer base, are there any places where it’s apparent to you that there’s either where customers, manufacturers taking down their inventories? What has been a factor or conversely, are there any areas that you’re concerned that they might be doing that over the balance of the quarter we’re in now?

Robert D. Wachob

We don’t see anything in the way of inventory reductions but then we didn’t see much in the way of a buildup either, previously, so it seems most of our customers have kept their inventories fairly under control. It could be that the satellite TV stuff, some of that may actually be inventory reductions. It’s typically what you do if your sales go down. You also cut your inventory. So we think that’s all in pretty good shape.

Tom Lewis – Century Management

As you look at, you’ve got talking in terms of getting, going to third shifts. What’s your sense of where, how startup related costs will add up in the second half as compared with the first half and just taking it a step further, do you anticipate much of that activity in the earlier part of next year?

Robert D. Wachob

The adding of the additional shifts during the second quarter was in silicone and of course that’s just adding a shift so that really didn’t, actually it was a net plus as we reduce the overtime enough that it wouldn’t cover the added expense of the people. And the second shift in China went very smooth. That helped us cut the overtime in the U.S. and also allowed us to expand our sales while we continue to run trial because trials are very important to us for the new products.

Where we had some significant expense is inside the joint venture where a new plant and a new machine in Japan were brought on stream and therefore they were running mostly trials and not shipping quite as much product. We expect they will ship more product and run fewer trials in the third quarter and also we have to keep in mind that in Japan, their depreciation mode is quite different than ours. It is a 25% per year binding balance so when you bring on new equipment, you don’t make any money either way.

Dennis M. Loughran

You make your cash though; your cash flow is good.

Robert D. Wachob

And of course, that’s how the Japanese look at things. Cash flow, they don’t really seem to look at profits as much as we do.

Tom Lewis – Century Management

Yes, yes, I’ve noticed that.

Dennis M. Loughran

Even with that startup, the change in profitability was de minimis in terms of a very marginal slight decline; it’ll go away as they ramp up their good production.

Tom Lewis – Century Management

Last question then, if you think, looking at your new products that we’ve talked about on calls in the past they, as compared, are there any new products, any products in that group that you would point to that are tracking significantly better or proved to be “Gee, that wasn’t such a great idea,” relative to what you were thinking at the first of the year?

Robert D. Wachob

As the Soft Seal continues to do much better than we expected where as the Dermabak material for medical applications is turned out be one of those that was a bad idea.

Operator

Your next question comes from Russ Piazza with Front Street Capital.

Russ Piazza – Front Street Capital

I was wondering if you could update us a little bit on what’s happening with the thermal management products? And I also saw that in the press release you mentioned something about chip packaging. I was wondering if that ties into it at all.

Robert D. Wachob

The chip packaging application we’re referring to is a single, very large customer that uses a high frequency material so it’s part of the printed circuit material. Their business is down by more than half. Some of their applications just have fun out and they don’t have that many new ones.

In the thermal management business, we continue to make progress. It’s slow. All new businesses take a long time. The progress that during the second quarter was that the thermal interface material did gel. We have developed a new product that has a much lower viscosity and therefore will have a much wider range of applications, and the manufacturing equipment for that is now in place and we’re in the process of starting it up and beginning to sample customers.

Russ Piazza – Front Street Capital

Are there things you still to develop on your end or is it the market you’re waiting to…?

Robert D. Wachob

Both. Both. On the aluminum silicon carbide side, we’re working on a less expensive way of making preforms but we’re also waiting for evaluations by customers. And some of these evaluations take three to six months before you can get approved as they go through all of their reliability testing. And that’s mostly what we’re doing is shipping samples for qualification. Then we would expect by the fourth quarter to start to get some orders here.

Operator

Your next question comes from Bob Fetch with Lord, Abbett.

Bob Fetch – Lord, Abbett & Co.

On the satellite business there a moment, how much to your knowledge is domestic versus international in terms of where the material goes?

Robert D. Wachob

I think it’s about 50/50 because the majority of the domestic is the high definition where they’re using about 50 square inches and the international is the KU and C bands where they use between 1.5 and 15 square inches.

Bob Fetch – Lord, Abbett & Co.

Meaning that you’re seeing, do you know in terms of where the material is going, which application and which geography it’s going into or is it largely the same, same customer?

Robert D. Wachob

They’re actually the same answer. We sell them to all the same people. They make all the systems so when we get the orders we don’t really know. Our knowledge comes from talking to them about what’s going on and certainly the C-band, which is a very low frequency stuff, always has significant pressure because it’s the kind of materials that go into places like India, where it’s cross first function later.

Bob Fetch – Lord, Abbett & Co.

So is your pricing for your product actually down?

Robert D. Wachob

Down every single year.

Bob Fetch – Lord, Abbett & Co.

But on a plan basis?

Robert D. Wachob

Yes. We know we have to lower it and we plan on that.

Bob Fetch – Lord, Abbett & Co.

So with whatever impacts been going on out there, what are the sales for that material? How much, what was the rate of change actually?

Robert D. Wachob

6%.

Bob Fetch – Lord, Abbett & Co.

So, again, mean it would suggest that even with “a few said it’s housing slump affected the half the businesses international” on a by definition not be affected by the same factor. But at the same time, the offset positive even domestic is if people are going to continue to keep their satellite TVs, they’re going to be upgrading to digital so it should offset some of that housing weakness as well.

Robert D. Wachob

Yes. That’s why I think probably the domestic was down roughly 12% so being 6% versus a number that you would think might be 25% or so.

Bob Fetch – Lord, Abbett & Co.

Getting back to some of the other product areas that we’ve developing any momentum in the auto safety area? Lane changing and cruise control rate radars is on?

Robert D. Wachob

Yes, that continues to grow very nicely, especially the lane change because that’s much less expensive than the, what, I forgot what they call it.

Debra J. Granger

Adaptive cruise control.

Robert D. Wachob

Adaptive cruise control. That’s the name. Still remains very expensive. We have to wait until someone comes up with a less expensive semiconductor. That’s what’s driving the cost of that.

Bob Fetch – Lord, Abbett & Co.

And you had previously talked about, PORON just seems to be a nice, steady product line and even more so as time goes by. A new nine pound material you mentioned last time and it was already running at a few million dollar rate? Are you finding more applications all the time?

Robert D. Wachob

All the time. More applications, absolutely. And not all parts of that business are strong. Their general industrial part is actually down year-over-year but since it is so diversified and very heavy on the international, it continues to do well.

Bob Fetch – Lord, Abbett & Co.

On your auction rate securities, what’s the maturity on some of that stuff?

Dennis M. Loughran

We actually have one small tranche of a little over $2 million in just one current but most of them, there’s probably 12 to 15 tranches are in the between 10, 20 and even after 30 years on some of them.

Bob Fetch – Lord, Abbett & Co.

So at least, for the time being, it could, the value could just be held up there for some time.

Dennis M. Loughran

Yes. Our position is that we have sufficient cash and other resources to allow us to treat those as long term investments right now and slight valuation decrease we’ve taken of about 3% year-to-date is basically based on the long term interest rates, compared to what we’re receiving on those as a premium. It still has been fairly marginal. We don’t expect much change. We do have to evaluate it quarter-to-quarter as the duration of this thing goes on. Some of the facts and circumstances may change and we haven’t taken a hit on our P&L in terms of that valuation but that’s always up for conjecture every quarter.

Bob Fetch – Lord, Abbett & Co.

What’s the average interest rate on those securities?

Dennis M. Loughran

About 4% to 5% pre tax.

Bob Fetch – Lord, Abbett & Co.

So obviously, if it became more liquid your balance sheet would reflect that pretty much overnight too.

Dennis M. Loughran

Yes, sir.

Bob Fetch – Lord, Abbett & Co.

Allows you a lot more flexibility not that you generally consume the cash that you generate anyway. Right, Bob?

Dennis M. Loughran

That’s right.

Robert D. Wachob

Yes.

Bob Fetch – Lord, Abbett & Co.

Last time, you also talked about an oversupply in Korea of flex materials. Has that largely taken care of itself?

Robert D. Wachob

No, the Korean manufacturers continue to lower their prices to fill their capacity. They seem to have a different view of the world than most other people. Our flex business associated with that has stabilized and was approximately the same this year as last year. We expect it to stay that way but, of course, the margins have become quite small and that’s why we’re having the joint venture make the material for us and we’re functioning as a reseller/distributor.

Bob Fetch – Lord, Abbett & Co.

China represented how much of your production in the first half and what do you expect in the second half? At what rate is that becoming a larger contributor?

Robert D. Wachob

Actually, the China production is going down. It’s going down because of the rapid shrinkage of Durel.

Bob Fetch – Lord, Abbett & Co.

Remember last time you had talked about it having going from 25% to 30% of your sales.

Robert D. Wachob

Now that’s based back down to 25%.

Bob Fetch – Lord, Abbett & Co.

And where is the inflection point, say, back up I guess?

Robert D. Wachob

No, I don’t expect Durel to go back up in the near term.

Dennis M. Loughran

When we install, when the high frequency materials facility gets online in the first quarter 2010 would probably be the inflection point up again.

Robert D. Wachob

The polyurethane foam production is, of course, is doubled as we went from one shift to two and that will go up again by 50% as we add the third shift. And the floats business is growing. [Inaudible] is that power distribution is growing very quickly.

Bob Fetch – Lord, Abbett & Co.

Can you elaborate on “China finally going 3G beginning in the second half,” what one ought to have as an expectation?

Robert D. Wachob

Oh, I believe in the second half it’s only a couple million dollars. Right now, it looks like it’s only China Mobile and they’re going to start pretty slow. But then that should grow significantly in 2009 as the other two players come on stream and as they, I believe they’re going slow on the TD-SCMDA because it may have some bugs that need to be worked out yet. So you’re better off not having a huge number of things that have to be fixed.

Bob Fetch – Lord, Abbett & Co.

So we’re looking out now and we even talking about stable of products and the progression they might typically have in their first couple years of introduction. What are we looking towards in terms of those products having the most impact in the next two years?

Robert D. Wachob

I would say the, we’re going to continue to see positive impacts from some of the new silicone products that go into trains. And also from the products of the polyurethanes, the 12, the nine and the pound densities in the Soft Seal, the six pound density. Then I expect that we’ll see some increase in the business for high frequency associated with cell phone antennas, base station, the antennas. And then hopefully within the next six months we’ll have a couple of very new special products to announce their introduction. I only mention it because they’re very close now but it will…

Bob Fetch – Lord, Abbett & Co.

You don’t normally announce them until you’re actually generating some sales, correct?

Robert D. Wachob

Yes. Yes.

Bob Fetch – Lord, Abbett & Co.

On the antenna business, any impact from [Commsco Pion Andrew]?

Robert D. Wachob

No.

Bob Fetch – Lord, Abbett & Co.

How large a customer is Motorola still?

Robert D. Wachob

Oh, they’re still a very significant customer. I don’t know exactly how much because we hardly sell anything to them.

Bob Fetch – Lord, Abbett & Co.

Not directly, I know.

Robert D. Wachob

Yes. We sell printed circuit materials into the board chops and the same material that Motorola uses for base stations, Ericsson uses so you can’t tell. But they’re still a significant customer because they, we cut across quite a few product lines. But as far as Durel’s concerned, that of course is in significant decline.

Bob Fetch – Lord, Abbett & Co.

Can you update us on your thoughts on your “2012 objectives” which you’ve discussed previously?

Robert D. Wachob

In 2012, we don’t believe we’ll get to a billion dollars by the end but we would hope to be probably 60%, 70% larger than we are today.

Bob Fetch – Lord, Abbett & Co.

Which means you’d be a little less than maybe the $900 million, you hope?

Robert D. Wachob

Yes.

Bob Fetch – Lord, Abbett & Co.

Or talked about last quarter as well, in earnings might be a lift?

Robert D. Wachob

I believe last quarter we talked about it as 2013.

Bob Fetch – Lord, Abbett & Co.

So pushed it out a year and with similar earnings of $7.00?

Robert D. Wachob

Yes. Lower sales but higher earnings.

Operator

Your next question comes from Dana Walker with Kalmar Investments.

Dana Walker – Kalmar Investments

I feel like I’m water-skiing behind a very competent high engine boat. Let me go behind Bob Fetch. Gross margin, how would you describe your gross margin today versus where you believe it might be a year from now? And talk about the tugs and pulls on gross margin that you saw in the quarter.

Dennis M. Loughran

As we look out into that long term time range Mr. Fetch just talked about, we see periods of time when we can achieve that close to 30% range. As you look into next year, as capacity fills up some of these things, we won’t have any major capacity coming online until the first quarter 2010. So we do believe that next year could be an improvement but we’re looking at on average this year, through the absorption impact. As you can tell from our inventory numbers, we’re only, we’re down at what we think is close to our target levels across most of our businesses. So we’ve only achieved $2 million or $3 million reduction but so next year we probably don’t expect that in a growing position.

On some of the businesses absorption will be better and we always have price impacts and foreign currency exchange, which this year has impacted us negatively in the operations. We do have hedge facilities contracts on most of our currencies that offsets in other income but at the expense level for the first half on the second quarter, at the local levels they’re dealing with that certainly. So, we’re at 32.6 I believe, or 32.1 and so we think that’ll improve next year.

Dana Walker – Kalmar Investments

Describe what it’s like to be running with such much more modest inventory levels. How is it changing the way your customers interface with you and how is it changing the way you behave internally?

Dennis M. Loughran

I think the ability to run with lower inventory levels is preceded by how we’ve changed how we operate. And so the businesses have shortened their supply chains, so by producing more stuff in China we’re much shorter supply chain than we would have been several years ago. But the businesses have to operate lean and we have a continuous six fig improvement process that allows cycle times within the facilities to be shorter and to lower lead times, and I think you do run into the benefit of most of our facilities not running at capacity. Woodstock for foams is but they’re running with our leanest level of inventory and so I think we’ve got operations that over the last three to four years have improved their lean and able to ship out with lower lead times.

And it’s really, we’re responding to customers. They are asking for shorter lead times and to this date, most of our businesses are keeping up with that and maintaining very good customer relationships and delivery statistics.

Robert D. Wachob

I also think we have, we’re experiencing less volatility at our customers and therefore we’re able to pull down the inventories as they have become more predictable than they were 18 months ago.

Dana Walker – Kalmar Investments

Your satellite TV business was benefiting from the high definition upgrade going on. Has that run its course?

Robert D. Wachob

No, still is. And that’s part of what kept it from going down more.

Dana Walker – Kalmar Investments

The drivers behind your foam business, you said that some things are better, some things are less which is would always be the case in a portfolio effect. Do you view any of the very strong drivers to not be sustainable as you look at a softening environment?

Robert D. Wachob

No, we think we’re sustainable and part of it is that we, the products that are growing are higher priced and they’re replacing products that are 15% to 20% lower priced.

Dana Walker – Kalmar Investments

A fair amount of your growth though is cannibalizing your lower value product.

Robert D. Wachob

Yes and that’s by plan because they’re competitors out there in Korea who pursue the Rogers minus 25 strategy and so we’re moving as quickly and we’re having success doing that into new products that they can’t do. They can do the old stuff; they can do 40 pound density really easily and so that’s disappearing but it’s being replaced by 12 and nine and six.

Dana Walker – Kalmar Investments

When you, quite frankly, described and I hate to use the expression “quite frankly” but when you’re very candidly admit that your healthcare push for Dermabak isn’t progressing, can you talk about what you thought you saw versus what we have today and whether it is now something that you dig a hole and bury and move on?

Robert D. Wachob

Yes. What we thought was that the material being a bacterial barrier with sufficient differentiation to get people to switch because everyone else had to use a film to get the bacterial barrier. What we found was that unless we could be both a bacteria and a viral barrier without a film, it wasn’t enough for people to go through the trouble of switching. So you can ask what’s important. Unfortunately, you never really find out until you have the product and say, “What do you think about this?” That’s when we found out over time it wasn’t going to work. It doesn’t mean we’ve given up trying to make one that can satisfy those two criteria; it’s just we’re pretty convinced we won’t sell what we have.

Dana Walker – Kalmar Investments

As China goes 3G, as the iPod brings forward 3G products, I’m not sure whether there’s a chicken or an egg at work here but is there likely to be more momentum outside of China, as China goes and as we have more handsets that provide the functionality that people want or are the two not connected?

Robert D. Wachob

No, absolutely. I was surprised recently when I read that only 10% or 11% of the phones in use in Europe are 3G. That’s a pretty good indication of what’s available in the future. Because they’ll need a lot of infrastructure if that number grows to 20% or 25%. They’ll have to increase the infrastructure significantly.

Dana Walker – Kalmar Investments

Final question: if you were to project how you believe your, pardon me, your microwave business were to progress from here, your high frequency business, how would you view the lower end of that range versus the higher end of that range over the next couple years?

Robert D. Wachob

I believe that business should be able to sustain a 10% to 14% compounded with an annual growth rate.

Dana Walker – Kalmar Investments

When was the last time it was within that range?

Robert D. Wachob

2006.

Dana Walker – Kalmar Investments

So you believe 09 is when we get back into that range?

Robert D. Wachob

Yes.

Operator

At this time, there are no questions. Mr. Wachob, do you have any closing remarks?

Robert D. Wachob

Thank you very much for attending today and have a nice day.

Operator

That concludes today’s Rogers Corporation second quarter conference call. You may now disconnect.

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Source: Rogers Corporation F2Q08 (Quarter End 6/29/2008) Earnings Call Transcript
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