Power-One, Inc., Q4 2008 Earnings Call Transcript

Feb.17.09 | About: Power - (PWER)

Power-One, Inc. (NASDAQ:PWER)

Q4 2008 Earnings Call

February 5, 2009 5:00 pm ET

Executives

Richard J. Thompson - Chief Executive Officer and President

Linda C. Heller - Chief Financial Officer

Kristyn Hutzell - Investor Relations

Analysts

Todd Cooper - Stephens Inc.

(Zach Shafron - Allen Reed)

Welcome to the Power-One fourth quarter 2008 earnings conference call. (Operator Instructions). I will now turn the presentation over to your host for today’s call, Ms. Kristyn Hutzell with Investor Relations.

Kristyn Hutzell

Thank you for joining us today to the Power-One 2008 fourth quarter results. Joining me today are Richard Thompson, Chief Executive Officer, and Linda Heller, Chief Financial Officer. By now you should have received a copy of today’s press release. If not, it is available on the company’s website at www.power-one.com.

Before we begin, I would like to remind you that this conference call may contain forward-looking statements reflecting Power-One’s views of future events, projections or expectations. Any such forward-looking statements may deal with or include matters which involve risks and uncertainties. Power-One’s actual results may differ materially from those results as discussed or information provided in the forward-looking statements. We refer you to the company’s reporting documents filed with the SEC for a discussion on risk factors that may have a material impact on results.

Additionally, in adherence with Regulation FD, we have opened up this call so that all interested investors are free to listen in. The press release and this conference call will be our only forum to answer questions regarding our estimated performance going forward. Consequently, should you have any questions regarding our estimate of sales and profits or other financial matters for the upcoming quarter as well as how they may affect our income statement models and balance sheet, this is the time that we are able to respond to these questions.

I will now turn the call over to Richard Thompson, the company’s Chief Executive Officer.

Richard J. Thompson

Good afternoon and thank your for joining us for our 2008 fourth quarter and year-end conference call. I will begin this call with a review of the company’s Q4 performance and summarize the progress we’ve made in 2008. Then I will outline our goals for 2009. After my remarks, Linda Heller, our Chief Financial Officer, will provide greater detail on the financial results for the fourth quarter and year-end 2008.

Despite the continued deterioration of the global economy and the impact of the strengthening US dollar on our financial performance during the fourth quarter, we were within our published guidance range with net sales of $130.4 million, down approximately 1% year over year, and net income of $1.7 million or $0.02 per share, which included a $0.04 gain from repurchasing debt at favorable prices. Excluding this gain, our EPS was still within guidance. These results indicated continued strong performance in our renewable energy business and an overall progress in improving operating efficiencies and realigning the company’s cost structure.

Additionally, while we’re encountering softening demand across all of our end-markets, we believe ongoing operating improvements and investments in technology are yielding market share gains in our power business particularly among our chief global customers. We’re also participating in more value-added, high-performance, and faster-growing programs in our customer base as a result of our broad product range and industry leading technology. While operating results were within our guidance range for the fourth quarter, we are experiencing softening demand from our customers, and as a result, the book-to-bill ratio was approximately 0.8:1.

This lack of visibility makes it difficult to predict revenue in the first quarter 2009, and therefore, we’re not offering revenue guidance for the quarter or the full year. Nonetheless, while we’re facing a challenging demand environment, we’re confidently growing our relatively momentum in the market and continue to drive our cost reduction and efficiency initiatives.

Next, I will recap what we achieved in 2008. For the full year 2008, sales were up 5.1% year over year to $537.5 million and net loss was at $0.20 for the year versus a net loss of $0.43 in 2007. While it became increasingly challenged to achieve our sales growth as the year progressed, we are pleased with our performance during 2008. despite disappointing volumes we made steady progress on operating margins and improved our balance sheet.

One of the key contributors to our stronger performance was our renewable energy business which grew more than 4-folds over 2007 and continues to expand with the market growth and through our strategic initiatives. I’ll discuss renewable energy in detail later in the call.

As mentioned earlier, we believe we are taking market share and one of the factors contributing to this is the progress we’ve made in a number of areas of customer service and responsiveness. A major challenge to Power-One going into the year was our core on-time delivery.

This metric involves a number of operating variables and by implementing and executing a detailed set of initiatives including manufacturing shop-floor controls, materials and logistics management, demand and supply planning, we improved on our on-time delivery to 88% in the fourth quarter. While this was shy of our 90% goal, we made progress despite transferring manufacturing production to Asia, dealing with vendor performance issues, and addressing an unusually high number of product transfers and new product introductions.

For the fourth quarter, gross margin was up 90 basis points year-over-year and 150 basis points since we began initiating corrected actions in the second quarter of 2008. We believe we will continue to make improvements in manufacturing efficiencies, and as a result, gross margin.

By the end of Q4, we were largely finished with our transfer of high-volume manufacturing to China from the Dominican Republic. We continue to implement planning features in our ERP system to allow level loading and to balance capacity across all our four plants and our EMS partners. We are driving towards our goal to operate each plant at 85% of practical capacity in order to create flexibility to address un-forecasted customer demand.

We made great progress on all of our supply chain initiatives which will be further aided by the transfer of production to China and we implemented a sales and operation planning process that is helping us run our plants more efficiently. In addition, we are making progress in our long-term goal to drastically reduce the number of components we used company-wide by consolidating vendors and utilizing more effective component engineering. These actions contributed to the sequential gross margin improvement throughout the year.

We also continue to invest in opportunities, and we believe we are doing so on a more targeted way building on what is already a strong technology foundation. This is evident in our faster than market growth, particularly in the renewable energy arena. A perfect example of our technology leadership is the prestigious 2008 Legacy Award in the environmental design category from Environmental Product Design Magazine that we earned for our Aurora PVI-Central Inverters that are used in commercial and renewable energy applications.

In our power business, Power-One has over 185 patents in our technology portfolio. We are able to deliver a full sway of product solutions combining AC to DC, DC to DC, and digital technologies to meet our customer’s challenging power system needs. The superior product technology has resulted in a number of sole source power projects with key server storage and networking customers.

As we continue to invest in processes throughout the company and in new technologies and product innovation to drive future growth, we are also tactically right sizing the company to align with the changes in demand. Accordingly, we are implementing, headcount reductions of approximately 20% which Linda will discuss in detail during her portion of the call.

We are also focused on strengthening our balance sheet, and in June, we raised $80 million in a convertible notes offering. The proceeds were used to pay down our existing term loan which extended the term of our debt, lowered our interest rate, and strengthened our balance sheet to allow us to pursue our turnaround objectives in a challenging environment.

During this past quarter, we were able to take advantage of the opportunity to buy back $10 million of our convertible debt for $5.5 million further improving our balance sheet.

Recapping our achievements in the renewable energy market during the year, we had a very impressive year growing approximately ten times the market growth rate and achieving 333% year-over-year revenue growth. Our best-in-class products already have a reputation in the PD market place for industry-leading efficiency, reliability, and ease of installation, and we continue to add to our product portfolio extending our footprint and market penetration to residential and commercial customers as well as independent power providers and utilities throughout Germany, Italy, and Spain.

At this time, we are developing new add-on display and monitoring accessories to residential and commercial PD customers. We continue to build sales and support infrastructure in France, Greece, Portugal, the Benelux countries, and Eastern Europe, and we identify new market opportunities for future expansion. We continue to invest in this market and expect a substantial market gain in Europe during 2009 and 2010 as well as additional success throughout the rest of the world.

As I mentioned last quarter, we are designing products for the wind market that we expect to introduce later in the year. These products will address the markets of large wind projects, which is roughly equal to the worldwide solar markets, and hither fore has largely been a captive inverter market. Our 2.5 megawatt inverters which we expect to launch in Q4 this year are medium-voltage, liquid-cooled, and can be carried well to supply up to 10 megawatts of power.

I will now discuss the objectives for 2009 many of which are ongoing from our restructuring initiative to become a lean, efficient, and profitable company. From a revenue perspective, we are focusing our sales resources, custom-engineering teams, and service-delivery resources on our large customers in servers and storage, networking, and telecommunications. Our goal is simply to gain more share of market and power products purchased by these customers. Additionally, we are refreshing our AC to DC front-end and embedded DC to DC standard product families to make climate servers initiative gold standard and to be more universally adaptable in a wide spectrum of customers who purchase from our distribution partners.

In the renewable energy arena, we’re extending our go to market resources in North America and Asia and developing pre- and post-sales service offerings for residential through large-scale commercial customers. Product introductions will include isolated inverters to address the power needs of thin-film applications from single-phase products for residences and small businesses and three-phase isolated string-inverters that deliver up to 12.5 kilowatts of power for large commercial customers.

Operationally, we are trying to focus on our on-time delivery. It is a dull weather for both customer service and profitability. During 2008, we improved from 60% at the beginning of the year to the high 80s at the end of the year. This year our goal is on-time delivery of 95%. Our achievement in this arena is dependent on restoring poor performance in our factories, creating a robust and cost-competitive supply chain, and continuing our quest for low-cost manufacturing in our plants and with our EMS partners.

As we achieve these goals, we will continuously right-size our capacity to lower our breakeven, and yet retain competitive cycle times to capture un-forecasted demands. For reaching our goal of 95% on-time delivery, we are addressing many of the issues required to achieve our gross margin initiative of mid 20s by the year-end 2009.

Last, we must continue to reduce our working capital demands to liberate resources to invest as required. While we made progress on receivables as a percent of cash due, our DSO is still unacceptable. Likewise, inventory is too high to support our current customer demand, and we continue to implement sales and operating processes, master scheduling, and supply chain initiatives to increase our inventory turns by the 4 to 5 range by year end. While many of these goals are technical, they require serious modification of internal processes to be successful. Again, our goal is to be a lean, efficient, and consistently profitable company.

I will now turn the call over to Linda for a detailed discussion of Q4 and year-end financial statements for 2008.

Linda C. Heller

During the fourth quarter of 2008 we recorded revenue of about $130.4 million, a decrease of approximately 1% from last year’s fourth quarter revenue of $132.3 million. Revenue for the quarter was negatively impacted by $4.8 million as a result of the US dollar strengthening against most European currencies. Net income for the quarter was $0.02 per share which included a net gain of $3.9 million or $0.04 per share from a repurchase of $10 million in outstanding convertible debts versus a loss of $0.07 per share in the same quarter last year. Excluding the gains from debt repurchase, our results were within the guidance range we provide last quarter despite the global economic environment. The continued progress we have made on our strategic initiatives including expense reductions contributed to our result.

For the full year 2008, Power-One’s revenues increased 5% to $537.5 million from $511.6 million in 2007. Net loss for the full year 2008 was $17.5 million or $0.20 per share compared to a net loss of $36.4 million or $0.42 per share last year. In Europe, fourth quarter sales rose by 14% driven by strong performance in the renewable energy market. Sales in North America decreased by 2% versus the year ago quarter as a result of our effort to access non-strategic market segments. Despite robust sales in the first half of the year, Asia declined by 24% in the fourth quarter as a result of contract manufacturers reducing inventory exposure and transitioning to manufacturing centers closer to their points of consumption, specifically Eastern Europe and Mexico in order to more effectively support Europe and North America.

During the quarter we updated and in some cases modified our customer market classification. As a result there was shift in revenue classifications between market segments as compared to previously reported figures. My discussion of market segmentation reflects the upgraded classifications for the current quarter only. The renewable energy market experienced solid growth during the quarter with sales of $18 million or 14% of sales versus $6 million or 5% of net sales in the fourth quarter of last year. Continued softness in the networking and telecommunications equipment markets, particularly in North America caused a decline in sales to $48.5 million or 37% of net sales versus 47% of net sales during the fourth quarter of last year. Lower sales in this market were partially offset by increased shipment of our gardening products which had been delayed from our third quarter. In addition, a portion of the decline was due to the customer market reclassification.

Industrial market sales were stable at $26.8 million as compared to the same period last year. The reduction in sales from a strategic exit of low-margin business was offset by increases from the revamping of our standard product line.

Sales in the computer and office equipment market segment totaled $28.6 million or 22% of sales which represents an increase of 44% against same-quarter sales from the prior year. Increased demand from several key customers as well as the modification of the customer market classification contributed equally to the year-over-year improvement. Other markets represented the remaining sale of $8.5 million. The decline was primarily due to reclassifying customers into other market segments.

The OEM channel totaled 75% or $97 million of net sales for fourth quarter. Distributors followed at $28 million or 22% of net sales, while service providers totaled $5 million or 3% of net sales. The composition of these segments did not change significantly during the quarter as all segments were impacted by the general economic slowdown.

For the full year 2008 sales to OEM was 74% or $399 million of net sales, distributors were at $113 million and sales to service providers were $25.9. Our 90-day backlog at the end of Q4 was approximately $69 million compared to approximately $76 million for the same quarter last year.

Net bookings for the quarter were $104.6 million compared to last year’s fourth quarter booking of $122.7 million. Bookings for the full year 2008 were $530 million with a book-to-bill ratio of 0.99. Recently, we have seen a decline in backlog for three primary reasons. First, our customers are reducing our exposure in providing longer-term visibility; second, we have had a sharp reduction in delinquencies at our factories as a result of the focus on improving our on-time delivery; and third the strength of the US dollar negatively impacting Euro-denominated bookings.

We continue to make progress on our gross margin which improved to 22% in the fourth quarter of 2008 compared to 21.1% in the same quarter last year. Despite declining volumes during the past two quarters we have managed to maintain the gross margin largely attributable to improving operating efficiencies as well as favorable product mix.

Operating expense for the quarter decreased to 21.7% of sales as compared to 23.3% of sales in the fourth quarter of 2007 as a result of streamlining and organization and focusing on expense reductions, as well as decreases associated with a stronger US dollar during the fourth quarter of 2008.

SG&A expense decreased to $17.8 million from $18.7 million reported for the fourth quarter of 2007. Engineering and quality assurance expenses decreased to $10.5 million compared with $12.1 million incurred during the same quarter last year. The decrease in engineering and quality expense was due to the shift of engineering resources to lower-cost locations, favorable assessment packs, and a decrease of discretionary spending. While engineering and quality expense decreased overall, development costs associated with the wind and solar power products increased between periods.

As a result of the improvement in gross margin and a rejection of operating expenses, we achieved breakeven operating income despite lower revenues compared to the previous quarter. Included in other income is the gain on the repurchase and retirement of $10 million of outstanding convertible debt. During December we repurchased these bonds at a discount of 45% and lowered the net gain of approximately $3.9 million and we reduced our ongoing interest expense by approximately $0.8 million annually.

Our consolidated tax provision for the quarter was $0.1 million and income from our joint venture was $0.4 million as a result of our equity share in the joint venture’s fourth quarter earnings.

I will now discuss our cash flow and balance sheet. Our cash balance was $28.4 million at the end of Q4, a decrease of $11 million from the third quarter, primarily due to the repurchase and retirement of $10 million of outstanding convertible debts of $5.5 million, the reduction of foreign bank lines, and negative cash flow from operation. Cash used in operation was $4.6 million from the increase in accounts receivables and a decrease in accounts payable which were partially offset by the reduction in inventory.

During the quarter we continued to make improvements in reducing inventory which declined by $11.8 million. Accounts payable also decreased by $10.3 million from our continued efforts and improved supplier relationship. However we were negatively impacted by customers delaying payments in December which contributed to the increase in accounts receivable by $3.8 million during the quarter. Consequently DSOs increased in approximately 100 days, up 9 days from 91 in the previous quarter with both North America and Europe having increases. Similarly, days working capital rose from 92 days last quarter to 101 days in the fourth quarter.

As Rich discussed, we are seeing a weakening demand in many of our markets as a result of the economic slowdown. Consequently, we are taking proactive measures to weather the downturn and position the company for significant growth and improved profitability once the economy recovers. In order to align the company with current market dynamics we are reducing our global headcount by approximately 1000 with the majority of reductions having occurred in January. While the current economic situation necessitated staffing reductions, a portion resulted from efficiency gains from cheap processes and the transfer of products to China and the Dominican Republic. When all actions are completed, we will have reduced the global headcount by approximately 30% from the employment high-level lost during the third quarter of 2008.

Severance charges of an estimated $1 million will be incurred in the first quarter of 2009 and another $0.3 million in the balance of 2009. We expect to recover these charges within three months of being incurred from the related salary and benefit saving. As we enter 2009 we are prepared for a challenging environment and are aggressively managing costs in order to align the company with the environment. We remain focused on our strategic initiatives and our recovery efforts and we will continue to take the necessary action to further improve profitability and working capital efficiency. Due to the unpredictable economic climate and poor demand visibility, we will not be providing revenue or earning guidance at this time. We would now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Todd Cooper with Stephens, Inc.

Todd Cooper - Stephens, Inc.

First Rich, many congratulations on exceeding your goal of renewable energy revenues accounting for 10% of total sales, but are you seeing weakening demand in this market as well as the others?

Richard J. Thompson

I would say it’s more seasonal as you would expect; the first quarter in this business is slightly down from the fourth quarter. So, we’re not seeing really any unusual demand pattern changes in the renewable energy business.

Todd Cooper - Stephens, Inc.

Okay. Rich, can you discuss your decision to repurchase debt versus conserve cash at this time.

Richard J. Thompson

As we looked at an opportunity, it was an unusual opportunity with a very steep discount as suggested in our comments, and we felt that it was the right step taken for the company at that time. Our cash as you saw ended the year at approximately where we began. So, we’re at $28 million and we ended the year at $28 million. So, we believe we have adequate cash in today’s environment. We do expect to create cash through the balance sheet. You saw us reduce inventory. We have actionable plans to continue to reduce inventory. You also saw our receivables go up in the fourth quarter, and these were delays from some very blue-chip customers who I would suggest were posturing their balance sheet as well. So we expect cash to start to grow; it has throughout the first few weeks of this quarter, and we believe we were in good enough position, that’s what our forecast showed us to be able to take advantage of the opportunity before us.

Todd Cooper - Stephens, Inc.

Okay. On your on-time delivery of 88%, what kind of lead times are you quoting depending on this?

Richard J. Thompson

Basically our lead times, as you are aware, are 8 to 12 weeks generally in this market, on average. Right now, we’re actually quoting shorter lead times than that, and response to the market place requires us to be a little quicker on our feet particularly with our supply chain, but we expect to be able to meet or improve on the industry required lead times throughout this year.

Todd Cooper - Stephens, Inc.

Given the environment, do you expect to see more turn business during the first and second quarter?

Richard J. Thompson

Yes, I would say so, Todd. I think historically we’ve seen anywhere from 30% to 50% turns. Turn is a book and ship in the same quarter. We would expect this quarter as an example to have about 40% turns business. So, we don’t expect the environment to be anymore extraordinarily different than it has been in the past, but we see as a competitive advantage the ability to respond quickly on un-forecasted demand as a true upside for us. So, we’re trying to drive the efficiencies in our manufacturing facilities across the world and our EMS partners, and in our supply chain as well to take advantage of those shorter cycle times from our customers.

Todd Cooper - Stephens, Inc.

Okay. I am sorry; what did you say that lead times had been running?

Richard J. Thompson

Yes, we’ve been quoting 8 to 12 weeks normally. We would like to shrink that about 2 weeks on each end. We’d like to get down to 12 to 10 weeks.

Todd Cooper - Stephens, Inc.

What have the turns business been running?

Richard J. Thompson

The turns business historically is between 35% and 50%. This quarter we would expect about 40% to 45% turns business which is normal.

Operator

Your next question comes from the line of (Zach Shafron with Allen Reed).

Zach Shafron - Allen Reed

Just a couple of questions. One, can you be more specific, Rich or Linda, roughly how much cash you’ve been able to collect since the end of 2008? And then two, if you think about the orders in the backlog roughly either in dollars or percentage terms, what portion of that is related to renewable energy?

Linda C. Heller

I will answer on the cash that we collected. Quite frankly what we saw is that December was an aberration where we saw our cash collections or average daily cash collections go down as compared to October and November, and then what we’ve seen in January is that it pops back up to what we saw in October and November. So we have grown cash by a couple of million during the month of January from where we started. We still saw and we said in Q3 that we have seen a slowdown by the EMS customers from the large ones, starting in Q3 and that trend has continued.

Richard J. Thompson

On the renewable energy business, in the fourth quarter, Linda shared with you our deliveries were about $18 million in the fourth quarter, and we would expect our normal seasonality even in that business of about 10% during Q1.

Zach Shafron - Allen Reed

Is that a fair characterization as a percentage of the orders as well?

Richard J. Thompson

For renewable energy, the orders, it’s a configured order of business. The lead times in renewable energy are much shorter; they’re 4 to 6 weeks. So, we normally have more turns business in renewable energy just as ordinary course of business. The order patterns really haven’t changed significantly other than we’re coming off a very down Q4, we’re at the low end of our range, and as the economic softness continues, we would expect seasonality and some softness to influence Q1. So, net-net, I believe the renewable energy business is strong. It’s certainly down seasonally as we expect, but we don’t see a large influence of economic trends in the renewable energy business.

Operator

I will now turn the call back over to Mr. Richard Thompson for closing remarks.

Richard J. Thompson

Thank you for joining us. The company is pleased with our performance. I know it’s a very difficult environment to be in; the second half of the year if you go look at the numbers, first half versus second half, you can see that our initiatives are working. We’re making progress on a daily basis, and we expect to continue to improve our business going forward. On the other hand, as the economic conditions change, if they worsen you’ll see a management team that’s not reticent to take out cost. We are operating this company to achieve a profit and will continue to do that as quickly as we can. Thank you for joining us and we’ll talk next quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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