Power-One Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Power - (PWER)

Power-One (NASDAQ:PWER)

Q1 2013 Earnings Call

May 02, 2013 5:00 pm ET

Executives

Larry Clark

Richard J. Thompson - Chief Executive Officer, President and Director

Gary R. Larsen - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance, and Treasurer

Analysts

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Operator

Good day, everyone, and welcome to the Power-One First Quarter 2013 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Larry Clark, Investor Relations for Power-One. Mr. Clark, please go ahead, sir.

Larry Clark

Good afternoon, everyone. Thank you for joining us today to discuss Power-One's 2013 first quarter results. Joining me today are Richard Thompson, Chief Executive Officer; and Gary Larsen, 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. In addition, we are including an accompanying slide presentation that you can refer to during the call. You can access these slides in the Investor Relations section of the website.

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 be 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 as filed with the SEC for a discussion of the risk factors that may have a material impact on results.

I will now turn the call over to Richard Thompson, Power-One's Chief Executive Officer. Please go ahead, Rich.

Richard J. Thompson

Thank you, Larry, good afternoon. Before I spend time on today's call discussing our first quarter performance, I would like to spend a few minutes talking about our recently announced acquisition agreement with ABB. I will then spend some time reviewing the operational highlights of our first quarter, as well as provide some commentary on the global PV market.

After our remarks, Gary Larsen, our Chief Financial Officer, will discuss the key operating metrics and drivers for our Renewable Energy and Power Solution business units and provide greater detail on the financial statements, including results of operation and second quarter guidance.

As you know, on April 22, 2013, Power-One and ABB announced that their respective Board of Directors have agreed to a transaction, in which ABB will acquire Power-One for $6.35 per share in cash, with $1.028 billion equity value. The transaction is structured as a merger and is subject to the satisfaction of customary closing conditions, including approval of Power-One's shareholders and a special meeting as well as receipt of customary regulatory approvals.

As discussed in our joint press release on April 22, we believe that this combination will create the most comprehensive equipment software and service supplier in the solar PV industry. The strength of each company in the solar space is highly complementary.

Additionally, Power-One's traditional power conversion business complements ABB's power conversion electronics resources, particularly in industrial applications. With respect to the timing, we expect that the transaction will close sometime in the second half of this year. We are in the process of preparing a proxy statement that will be available to our shareholders, and we'll go into more detail on the logistics of the shareholder approval process and we'll provide more background information regarding the proposed transaction.

In the interim, we will be unable to speak to any more details regarding the proposed transaction than what we have already discussed and ask that you focus your questions on this call to current quarter financial results.

Now, turning to the results for the first quarter. In the first quarter, we recorded total revenue of $205 million, up $7 million, from $192 million in the fourth quarter of 2012. Our Renewable Energy SBU accounted for the revenue increase as we benefitted from stronger-than-anticipated demand in Europe, with particular strength in Italy, the U.K. and France.

Asia Pacific revenue was lower sequentially, with Australia experienced a decline after a very strong third and fourth quarters. North America revenue increased based on continued healthy demand for our string inverters delivered to residential and commercial customers, as well as modest contribution from our new ULTRA utility-grade product and residential microinverters that began shipping in the quarter.

Our Power Solutions segment revenue was $58 million, down from $68 million in the fourth quarter of 2012. The power business continued to be impacted by a general market weakness across several of its end markets.

For the quarter, we recorded an operating loss of $4 million. This was primarily the result of a $4.3 million in litigation charges as a result of the ongoing SynQor litigation. Exclusive of the litigation charge, we essentially broke even on an operating income level, which was more than $13 million improvement from the fourth quarter of 2012. This was the combined result of cost-reduction actions that we have undertaken at both SBUs and better-than-expected revenue in our Renewable Energy business.

Let me spend more time discussing our new products. First, as I just mentioned, the ULTRA, our liquid-cooled central inverter, began shipping commercially in the U.S., and for its introduction, the European market last year. While our revenue for ULTRA in the U.S. market was modest for the quarter, we are encouraged by the early success that we are seeing. Today, we have received purchase orders from customers for over 140 megawatts of the product in North America and for 250 megawatts, globally, for delivery in 2013, some of which will be shipped in the second quarter.

Second, our TRIO family of 3-phase string inverters designed for commercial rooftop applications continued to sell well in Europe, and now it has received certification to Euro standards in the U.S., we expect it to begin to gain traction. The TRIO product family offers significant LCOE benefits versus central inverters, frequently used in large rooftop plants.

Finally, we began shipping our new microinverter in the U.S., while we continue to believe that this sub-segment of the market offers interesting growth opportunities, they will likely remain only a small part of the residential market and situations where it can offer the lowest or the best-of-value proposition is somewhat limited. Nonetheless, with strong market for third party financing in the U.S., we expect demand for residential PV systems to remain healthy and that microinverters will capture their fair share of that market.

I would now like to briefly discuss the global market outlook for PV demand in the major markets in Europe, North America and Asia Pacific. Despite expectations for weakness in both Germany and Italy, those markets saw healthy demand in the first quarter. Demand from certain customers in Germany was subdued, as a result of concern over potential trade wars with China on PV panels, leading to an overall environment of uncertainty.

However, high-level discussions in the government about further cutting solar subsidy as a way to lower the cost of electricity to the German consumer, actually created a stimulus for project developments to accelerate their plans in advance of any change in policy.

Strong opposition towards lowering or eliminating solar subsidies removed this item from near-term political agenda of the Social Democrats, confirming that there is widespread support in the country for solar power as a viable alternative to the more traditional sources of power, such as nuclear.

Inverter demanded in Italy improved from the low levels in the fourth quarter, as developers pushed towards getting approval of projects in anticipation that the feed-in tariffs from Conto Energia V program may be depleted by the middle of the year. That said, the Energy Ministry has stated that at least there will be ongoing demand for about 1 gigawatt of installations per year in the country, even after subsidies run out.

Going forward, we continue to believe that demand in both countries will stabilize into somewhat lower levels later in 2013, and then eventually return to growth in 2014 and beyond.

As we mentioned on prior calls, there are other countries in Europe that are experiencing increased solar demand. France, the U.K., Austria, Belgium and Eastern Europe are all expected to show growth in PV installation in 2013, offsetting some of the declines in Germany and Italy. In fact, as an example, the market in the U.K. is currently quite robust, as the country is committed to renewable energy. The feed-in tariff environment is expected to remain stable for the foreseeable future, and the investment environment for large PV scale projects continues to be favorable.

We are established in all of the key markets in Europe, and look forward to benefiting from incremental demand in many of these markets due to stable policies and steady move towards grid parity, as overall system costs continue to decline.

In North America, the market is expected to grow by over 40% in 2013, driven by large commercial and utility segment, which is benefiting from state-renewable portfolio standards and the continuation of Federal investment tax credit.

In addition, the abundant supply of third-party financing is driving demand on residential and small commercial, which is also expected to experience attractive growth rates in 2013.

In Asia-Pacific, growth of PV installations is expected to be strong this year, primarily driven by Japan, China and India. Japan is also experiencing very strong demand this year, as the government has put in place some of the world's highest feed-in tariffs and the market is responding. Even with anticipated 10% reduction in tariffs, demand is expected to remain robust for both small rooftop applications and, more recently, large commercial and utility applications. We still view the Japanese market as a relationship market, and we are planning to enter this market through our recently announced strategic alliance with Panasonic.

China is expecting growth in PV installations being driven by the commercial government's desire to support its domestic solar industry and the need to reduce the country's carbon footprint, which is causing air quality issues in many regions. We generated a modest amount of revenue in China during the quarter, as we approach this market selectively by focusing on APCs and utility companies.

In addition, our strategic alliance with Phono Solar, a subsidiary of SUMEC Corporation -- Group, a $5 billion Chinese-state-owned industrial conglomerate, should enable us to further penetrate the market.

In India, the outlook for demand is favorable, given the high cost of electricity and the need for more reliable grid and off-grid distributed power. The government continues to support pro-solar policy. Despite our challenges in this market in 2012, India remains an important market for Power-One. And we are hopeful that in 2013, we can replicate some of our success that we achieved in 2011.

In Australia, we experienced lower revenue in the first quarter as we are coming off a strong year in 2012, and some of our distributors are working down their inventory levels. The market has traditionally been a residential and small-to-medium commercial rooftop market, but is now beginning to see larger commercial- and utility-scale projects. We believe our products will sell well into the segment of the market, and we look forward to another good year in Australia.

In summary, we are positioning our early business to be a strong global competitor with a full complement of product offering and service capabilities in every key market around the world.

As we have mentioned, our proposed merger with ABB will accelerate this growth, and we look forward to closing the transaction in a timely manner so that we can began to benefit from the combination of both companies.

Before I turn the call over to Gary, I'd like to spend a few moments discussing our Power Solutions business. We just recorded our 10th consecutive quarter of profitability, as the management team has made significant progress in operational performance over that time, despite a challenging revenue environment.

In the first quarter, we not only experienced some seasonality issues, but we also continue to pair low-margin business in the network power system segments so that we can focus our resources in other end markets that show more promise. We plan to grow revenues in this segment, primarily through new product introductions and share regain at selective strategic OEM accounts.

We plan to leverage our strength and power density, power efficiency and rugged packaging and have launched new products aimed towards ruggedized industrial and transportation application. We continue to target new business in higher-margin, higher-growth adjacent markets, such as power conversion applications for hybrid power systems used in off-grid or full-grid environments, as well as products used in heavy-duty truck, bus, off-road and military hybrid electric vehicles. These markets and applications are well aligned with our strategy and capabilities and should provide us with incremental growth opportunities going forward.

I'd like to turn the call over to Gary for a discussion on performance of each of the SBUs, our consolidated financial statements and guidance for the second quarter of 2013.

Gary R. Larsen

Thank you, Rich. Now, I'd like to provide more details on our first quarter financial performance. During the first quarter of 2013, we recorded revenue of $205 million, coming in above the expected range discussed on our fourth quarter conference call.

As Rich mentioned, this was driven by higher sequential revenue on our Renewable Energy SBU, primarily from Europe, partially offset by a decline in our Power Solutions segment revenue. Consolidated gross margin for the first quarter was 19%, up from the 13% gross margin in the fourth quarter. Gross margin was positively impacted by progress we made on our cost-reduction actions undertaken in both SBUs, improved cost absorption in our RE factories due to higher volume, and the absence of the inventory adjustment charge taken in the previous quarter.

Operating expenses increased by $3 million sequentially to $42 million for the quarter and up $6 million from the previous year's quarter. Included in this quarter's operating expenses were charges of just over $4 million related to the ongoing SynQor litigation.

Absent these litigation charges, operating expenses declined sequentially by just over $1 million, reflecting our focus on controlling cost across both SBUs. As you may remember, in late 2010, SynQor won a judgment for infringement on certain patents against multiple power supply vendors, including Power-One. At the time, Power-One recorded a liability for the judgment, except for a portion related to sales prior to the filing of the lawsuit. Our assessment was that this portion of the judgment would not survive the appeal being filed by the defendants. However, in March 2013, the Federal Appellate Court issued a ruling, upholding the lower court's ruling in its entirety. Although Power-One is evaluating further options regarding this case, we have increased our litigation accrual to reflect the portion of the judgment relating to prefiling sales, resulting in the $4 million charge taken in the first quarter.

As a result of litigation charges, we generated a loss from operations for the first quarter of $4 million versus an operating loss of $13 million in the fourth quarter of 2012, and an operating profit of $19 million in the first quarter of 2012.

Net loss attributed to common-stockholders for the first quarter was $7 million or $0.06 per share. This includes the $0.04 per share net loss on the litigation charge. Note that as we recorded a net loss for the first quarter, we are required to use our $122 million of basic shares in calculating earnings per share.

Our Renewable Energy SBU posted $146 million in revenue for the first quarter versus $123 million in the fourth quarter of 2012 and $149 million in the first quarter of 2012. Income from operations was $6 million, reflecting the higher revenue and the favorable gross margin impacts discussed earlier.

Our geographical revenue split in the first quarter is as follows: EMEA represented 81% of RE revenue, with 33% of total RE revenue coming from Italy, 15% from Germany and 33% from the rest of the region. Asia-Pacific represented 6% of total RE revenue and North America was 13%. We shipped 765 megawatts in the first quarter, up sequentially from 628 megawatts shipped in the fourth quarter of 2012. We experienced higher volume in both the commercial and residential markets, but lower volume in our utility segment, as we only shipped a modest amount of our new ULTRA products in the U.S. However, bookings for ULTRA in the U.S. were quite strong, as this product gains traction in the marketplace.

Our end-market split by megawatts was 53% for the commercial sector, 21% for the utility sector and 26% for the residential sector.

Turning to the Power Solutions SBU, revenue in the first quarter was $58 million, down from $68 million in the fourth quarter of 2012. As Rich mentioned, we experienced general market weakness in a number of our key end markets in the first quarter. Additionally, in the first quarter, we exited some low-margin business in our network Power Solutions segment in order to focus our resources on other end markets with higher growth and profit potential.

Revenue from the server stores and networking end market was 48% of the total Power Solutions segment revenue, while the industrial market represented 39%; and Network Power Systems was the remaining 13%.

Regarding the regional sales breakdown, Asia-Pacific accounted for 42% of revenue; North America, 32%; and EMEA, 26%. Power Solutions operating income for the quarter was just under $2 million, representing an operating margin of 3%. The Power Solutions SBU has been effective at reducing its breakeven revenue level, allowing the SBU to remain profitable in the first quarter despite the market weakness reducing our revenue.

Turning to the interest and other income expense line, we recorded income of a net $700,000. This reflects a $1.2 million pre-tax foreign exchange gain as the euro weakened against the U.S. dollar in the quarter, offset by a $600,000 charge in interest expense related to the write-off of previously capitalized deferred financing costs, as a result of the amendment to our credit facility.

The first quarter effective tax rate was negative, reflecting our inability to fully utilize our U.S. losses. In the first quarter, we recorded income in foreign jurisdictions and a loss in the U.S., which included the litigation charge previously discussed.

I would note that forecasting the effective tax rate can be difficult when we are reporting a loss or near breakeven. This is because there may be income in jurisdictions where we record tax expense, while experiencing loss in jurisdictions where we cannot record a tax benefit, which was the situation in the first quarter.

Moving to the balance sheet, our cash and investments balance was $290 million in March 31, an increase of $24 million since the beginning of the year. For the quarter, cash generated from operating activities was $36 million, based on strong working capital management, as accounts receivable and inventory were reduced despite sequentially higher revenue. Capital expenditures for the quarter were constrained at $2 million.

Looking at working capital, days sales outstanding were 87 days, a decrease of 11 days from the fourth quarter 2012 level. DSO was positively impacted by stronger collections in Europe and North America, primarily in our RE division. Inventory was reduced by $11 million in the quarter, as we continue to work down RE inventory balances built up in prior quarters.

To conclude, I'd like to speak you about our guidance for the second quarter of 2013. In the second quarter, Power-One expects stronger RE demand in the United States and seasonal improvement in the Power Solutions business. This is somewhat offset by uncertainties related to incentive programs in Italy and Germany, and the potential impacts on demand of the European Commission's anti-dumping investigation against the Chinese solar panel manufacturers. Concerned about potential actions by the Commission, are hampering the financing of PV projects in Europe.

Considering all these factors, Power-One forecasts revenue of $215 million to $230 million in the second quarter of 2013, representing approximately a 5% to 10% sequential growth from the first quarter.

We are now ready to take your questions. Given that we have yet to file our proxy statement for the proposed merger with ABB, we are not in a position to make any additional comments regarding the transaction beyond what we've already publicly disclosed.

With that in mind, we ask that you limit the focus of your questions to our first quarter results.

Operator, we are now ready to poll for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Joe Maxa from Dougherty & Company.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

The question I have is on the North American success with the ULTRA product and really the globally. How much of those, of the orders, were recognized in Q1 of $140 million and $250 million? And then also, were they competitive bid? And how competitive was it?

Richard J. Thompson

Yes, Joe, thank you. We shipped a handful of ULTRAs in both North America and more so in Europe. The price points were certainly competitive as any time a new piece of technology comes to the field, the other competitors have to try to respond. When they can't respond to the technology, they have to use price. So we saw the situations very competitive. It would still -- still allow us to make a decent profit margin.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Okay. And as a follow-up, I'm just thinking about the size of the projects. Can you give me a range of how big some of these projects may have been?

Richard J. Thompson

Well, most of them were small. And I think the largest project we did was about 10 megawatts. We shipped about 50 total megawatts in the quarter. So the second half of the year, we have some much larger projects as you can see by the megawatts that we've said we've already booked, and we have more bookings coming in on a daily basis. These units will be made both in Italy and in our factory in Phoenix.

Operator

[Operator Instructions] Ladies and gentlemen, I'm showing no further questions at this time. I want to thank the participants for joining us in today's conference call. This does conclude our program. You may all disconnect and have a wonderful day.

Richard J. Thompson

Thank you.

Gary R. Larsen

Thanks, Saeed.

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!