Kristyn Hutzell - Investor Relations
Richard Thompson - Chief Executive Officer
Linda Heller - Chief Financial Officer
Steve Ferranti - Stephens, Inc.
Power-One Inc. (PWER) Q2 2009 Earnings Call July 23, 2009 5:00 PM ET
Good day, ladies and gentlemen, and welcome to the Power-One second quarter 2009 earnings results conference call. (Operator Instructions)
I will now like to turn the call over to your host for today’s call, Ms. Kristyn Hutzell of Investor Relations. Please proceed.
Good afternoon, everyone. Thank you for joining us today to discuss Power-One’s 2009 second 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 be 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 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. Please go ahead, Rich.
Thank you, Kristyn. I will begin with an overview of the company’s Q2 performance and then provide details of the progress we’ve made on our 2009 goals. After my remarks, Linda Hell, our Chief Financial Officer, will provide greater detail on the financial results for the quarter. We will then answer your questions.
Today we reported net sales of $91.2 million and a net loss attributable to common shareholders of $6.8 million or $0.08 per share for the second quarter. The difficult economic environment is still affecting our markets, which led to the continued decline in revenues; however, orders and renewable energy, which had suffered in the previous quarter due to the poor weather in Europe and tight credit conditions, recovered late in the quarter. As a result, we experienced a 35% increase to $17 million in renewable sales over Q1 revenue of $13 million.
The sequential decline in other market segments that comprised a traditional power conversion business was largely a result of continued weakness in our EOM customers and particularly in the telecom equipment sector. An encouraging sign, however, is that the book to bill ratio for Q2 was .98, which is the first time in over a year that the book to bill ratio has improved.
While we are seeing some indications that a bottom may be near, we expect the slow recovery in the second half of the year as demand improves.
Despite the lower revenue during the quarter, gross margin improved to 19.9% from 14.2% last quarter, as a result of continued operational improvements. We have been able to achieve component and logistic cost savings, despite the volume’s decrease.
Favorable product mix and improved efficiencies also helped offset the impact of lower volume. Our continued focus on reducing operational costs and increasing efficiencies led to our decision to close the Dominican Republic facility, which we announced in May. As Linda will discuss, we incurred a charge this quarter of approximately $4 million dollars, largely attributed to employee severance costs.
Through the first half of 2010, we will be incurring additional charges related to the closure, but we will also expect improvements in gross margin as savings in productivity gains began to influence Power-One’s operating results.
While there was minimal positive impact this quarter, we expect to achieve annual savings of $14 to $15 million once the closure is complete.
These operational improvements have also led to improved working capital utilization as evidenced by our significant cash flow from operations. We have been successful in managing our inventories lower and have improved our DSOs to reduce accounts receivable. This has allowed us to further reduce payables, thereby improving supplier relationships and reducing our balance sheet leverage.
Finally, during the quarter, we closed on the previously announced $60 million dollar investment from Silver Lake Sumero. Additionally, we modified the covenants of the existing 8% senior secured convertible notes and repurchased $22 million face value of the 2008 notes. This recapitalization increased our flexibility to continue both our restructuring as well as our investment in new growth opportunities of the existing 8% senior secured convertible notes and repurchased $22 million face value of the 2008 notes. This recapitalization increased our flexibility to continue both our restructuring as well as our investment in new growth opportunities.
At the end of this quarter, the company’s net debt position improved $14 million to $43 million. Our net debt calculation includes a face value of all debt obligations, including the convertible preferred shares. Our longer term goal, of course, is to be a net positive company.
Next, I’ll review the main objectives of our strategic focus for 2009 and provide details on the progress of each of these objectives. The strategic focus incorporates the goals I’ve been discussing with you each quarter and provides an expanded view of the overall goals we are targeting as we create a lean, efficient, and consistently profitable company.
Our first objective is to protect our revenue base, which includes the leveraging marketing opportunities in renewable energy, increasing penetration in key accounts, and timely new product introductions.
The renewable energy market showed signs of improvement in the second quarter, as noted earlier. We are establishing strong business relationships and working to develop the market channels within this sector.
We expect that these efforts will generate considerable global opportunities, initially in Europe, the largest PV market, and extending to Asia North America. Within the renewable energy market, we are developing a global service solution, increasing go-to-market resources, investing in additional engineering design resources to broaden our product line, and creating a global manufacturing strategy to support customers in key geographical areas.
During the quarter, we restructured the marketing teams in power and renewable energy markets in order to more aggressively and efficiently generate leads and pursue business opportunities. We recruited Tom Dalton, formerly of Honeywell and Lineage, to head up power conversion sales activities. Tom will be reviewing our product roadmaps, redefining how we go to market, and determining how to better deploy our sales resources to drive the power business.
On the product front, we announced non-exclusive agreements with Infini and Technologies and Texas Instruments, licensing our digital power technology. These licenses demonstrate our ability to provide industry leading technology solutions and furthers our goal to open the digital power control market for future growth.
In early July, we announced two high efficiency digital point of load converters that have the latest generation topologies and provide 20 amps and up to 93% efficiency for server and communications applications.
Like one point of loads, these products seamlessly integrate power management and conversion to significantly reduced design time, board level parts count, and to improve power system performance. This continued attention to increase the functionality and efficiency of our product line enables us to extend our reach into our markets and ultimately positions the company for increased growth opportunities.
Additionally, many of our products now meet the gold standard energy star rating, certified under the climate savers computing initiative and we are aggressively adopting the pending platinum standard for new designs.
Using our industry-leading green products, our OEM customers can now offer lower total cost of ownership and environmentally friendly power solutions to their customers.
The second objective in our 2009 strategic focus is to improve operational performance by reducing our manufacturing footprint, rationalizing the supply chain, and improving on-time delivery. As earlier announced, we are transferring the production from our Dominican Republic facility to production facilities in Asia. We plan to use a combination of our internal resources and our joint venture partner in China, as well as contract manufacturers.
The transfer is expected to be largely completed by the end of the first quarter 2010. This restructuring action creates a more efficient manufacturing model that improves our ability to respond to customer requirements in a cost effective manner.
Operation metrics approved across the board and our supply chain and logistic group continue to implement aggressive actions to reduce our material and logistics cost and to increase customer satisfaction. Overall, practical utilization in our factories was 87% for the second quarter, which surpasses our goal of 85%.
Retaining flexible capacity allows us to respond to unforecasted customer demand, thereby improving customer satisfaction and our revenue opportunities. Additionally, our on-time delivery improved to 92% globally, which is tracking to our goal of 95% by yearend.
The third objective in our 2009 strategic focus is to achieve better working capital utilization, which includes restructuring the balance sheet, lowering inventory balances, and improving DSOs. As I discussed earlier, we made significant improvements on all of these fronts and we’re able to reduce our net debt position.
The fourth objective in our 2009 strategic focus and the one which we have made significant progress on up this point is to reduce the company’s cost structure. This includes lowering manufacturing costs, material and logistics cost, aligning SG&A expenses with the revenue stream, and reducing expenses as a result of the efficiency gains.
As mentioned, we improved gross margin to 19.9% the second quarter, despite lower revenue, which is indignitive of the progress we’re making on lower overall cost levels. Our goal is to improve gross margin to the mid 20’s by the end of 2009 and we believe we are on track to achieve this goal.
Additionally, we have reduced operating expenses by $10 million per quarter and are roughly at a $20 million run rate per quarter and expect continued improvements as the year progresses.
We will not be satisfied with our performance until Power-One becomes consistently profitable, yet we continue to make progress in restructuring the business to align resources with current demand, improve operational efficiency, and drive the company towards profitability.
In addition, we have significant growth opportunities and renewable energy and we expect to continue investments to fully leverage them.
I will now turn the call over to Linda for a detailed discussion of our financials.
Thank you, Rich.
During the second quarter of 2009, we recorded revenue of $91.2 million, a decrease of approximately 7% from first quarter 2009 revenue of $97.8 million.
Sales across our markets during the quarter were negatively impacted by the continued weak economic conditions, as well as the push-out of orders in some of our product lines.
A gain of $5.3 million from the repurchase of our 8% senior secured convertible notes due 2013 partially offset the negative impact on our results due to the decline in revenue.
Net loss attributable to the common stockholders for the second quarter was $0.08 per share compared to a net loss of $0.04 per share for the second quarter of 2008.
During the quarter, we recorded $3.9 million or $0.05 per share of restructuring charges, which were mainly due to the severance cost related to the previously announced closure of the facility in the Dominican republic.
Sales by geography during the quarter reflected the lack of demand, particularly from wireless service providers and our network telecom power systems product line and the continued reduction in demand from several key networking and storage customers.
As a result, second quarter sales in North America, Europe, and Asia were down $14.2 million, $31.9 million and $11.9 million respectively compared with the second quarter of 2008. Sales in North America and Europe were down $5.7 and $3.7 million compared to Q1 as the continued decline and demand from network power systems customers was partly offset by increased sales of our renewable energy product. Asia showed a $2.8 million improvement in sales as compared to Q1, due to the increased migration of our customers to Asia.
Sales in the network and telecom equipment sector generated $27.4 million or 30% of sales in the second quarter, down from $31.2 million or 32% of sales last quarter. The telecom business remains very weak in geography such as Russia, the Middle East, and Southeast Asia.
Sales in the industrial market were $17.6 million or 19% of sales while computer and office equipment sales declined 6% for the same period with $21.7 million or 24% of sales.
Revenue related to other remained stable during the second quarter at $7.7 million or 8% of net sales as compared with Q1. Sales in the OEM channel contracted during the quarter and totaled 69% or $63 million of net sales for the second quarter, a decrease of approximately 11% from the first quarter of 2009. Distributors were flat to actual sales last quarter, but increased slightly in composition with 28% of net sales or $25 million, while service providers were unchanged at approximately 3% of net sales as compared to approximately 2% of net sales last quarter.
Many of our customers are maintaining conservative buying patterns, which continue to impact backlog and bookings during the quarter. The changing market dynamics across all of our markets lowers our backlog due to several factors. First, our customers are only placing orders as needed and do not provide visibility into future orders. Second, the renewable energy business is a lower lead time business, which likewise decreases visibility into near term orders.
Finally, the decline in lead times and the significant reduction of delinquencies to our customers as compared to historical trends reduces backlog.
At the end of Q2, our 90-day backlog was approximately $47 million compared to approximately $107 million for the second quarter of last year. Net bookings for the quarter were $89 million compared to last year second quarter bookings of $149 million.
Though many of our markets did not accelerate in the rate of bookings in the second quarter, bookings and renewable energy improved significantly and rose more than triple over Q1 levels.
Total gross margins for the second quarter improved to 19.9% compared to 14.2% last quarter and slightly decreased from 20.5% for the year ago quarter. Excluding the special charges in gross margin last quarter, our Q2 gross margins still improved from Q1 on lower revenues as a result of the continued focus we are placing on reducing material and factory overhead costs.
Additionally, favorability in the product mix during the quarter also contributed to offsetting the margin impact of the lower volume.
Operating expenses for the quarter, excluding restructuring, held flat totaling 23% of sales as compared to 22% of sales in Q109 due to the lower revenue.
Cost reductions in operating expenses were offset by unfavorable currency impact and increases in certain administrative expenses. We had further headcount reductions during the quarter and trimmed personnel by 300, which brings the total year-to-date headcount reduction to 1,300 or 29%.
Other income during the quarter, included a net gain of $5.3 million on the repurchase of $22 million of 8% senior secured notes, an expense of $2.3 million resulting from unfavorable currency fluctuation.
Interest expense included $.6 million of additional interest in amortization of related costs from the Silver Lake Sumero transaction.
Net loss attributable to common stockholders also included accretion in dividends of approximately $.5 million related to the preferred stock issued to Silver Lake.
The second quarter consolidated provision was $.4 million, primarily resulting from profits generated from certain European locations. Our share in our joint venture second quarter resulted in income of $.1 million.
Turning to our cash flow and balance sheet, our second quarter cash balance increased by $47 to $76 million, compared to our cash balance of $28 million at the end of the first quarter of 2009. The increase was primarily attributable to the addition of approximately $41 million of cash from the $56 million of net proceeds from the investment in new capital from Silver Lake Sumero in May, less the $15 million used to repurchase the 8% senior secured convertible note.
Cash generated from operating activities was approximately $10 million in the second quarter. We also reduced our borrowings under our credit facilities.
Accounts receivable deceased $17 million during the quarter, due to reduced revenues and improved collections and the reduction of past dues from customers of $12 million.
DSOs during the second quarter improved across all our regions and decreased by nine days to 95 days compared to 104 in Q1.
Accounts payable also decreased by $14 million as a result of lower material cost and continued improvement in higher relationships.
We remained focused on reducing inventory during the quarter and the inventory balance decreased to $81 million at the end of Q2 from $89 million at the end of Q1. As a result of operational improvements, inventory decreased by approximately $7, which included approximately $2 million as a result of inventory charges.
During the second quarter, we received a capital investment of $60 from Silver Lake Sumero. Of the $60 million, approximately $4 million was used to pay for direct cost related to the financing, $15 million was used to repurchase $22 million of our 8% senior secured notes, and the remaining $41 million will be used in operations and to fund strategic initiatives.
We have recorded debt of $36 million as long-term, preferred stock of $19 million as a mezzanine, stock warrants of $3 million as additional paid in capital, and a solid 133 derivative liability of $2 million as a long-term liability in our balance sheet.
Issuance cost of $4 million were recorded against the preferred stock and as a long-term asset as appropriate. As a result of the issuance of these securities, we will incur additional interest expenses as just under $1 million per quarter, accretion of the preferred stock of $.3 million and a charge of $.6 million related to the 10% preferred dividend.
Of these $1.9 million in additional charges, approximately $.3 million are non-cash related charges. Decreased interest expense from the repurchase of the 8% senior secured notes partially offset these increases.
Although we are beginning to see some signs of stabilization in our markets, we expect our customers to be extremely conservative with orders. As we enter the second half of 2009, we will continue to run as lean as possible, thereby achieving further improvements in our operating efficiency and working capital and strengthening our balance sheet.
Due to the continued economic uncertainty, we will not be providing formal guidance for the third quarter or full year 2009 at this time.
We will now be happy to take your questions.
(Operator instructions) Your first question comes from the line of Steve Ferranti of Stephens, Inc.
Steve Ferranti - Stephens, Inc.
I want to see if you guys might be able to provide us with a little more color on terms of the timing on how the savings from the Dominican Republic facility shutdown might play out over the next say three or four quarters and maybe touch upon the breakout between cost of goods sold and operating expense.
Okay, great, Steve. Let me tackle the first part of it and I’ll have Linda break down the cost for you. We would expect to have this transaction completely closed or the factory completely closed and transferred by the end of the first quarter. The factory then will be closed by the end of the second quarter. So we should see a full savings in Q3 of next year. Again, that’s between $14 and $15 million dollars a year. It will be modest in Q3 of this year, building up as we reduce headcounts in Q4, and then into Q1.
So I would suspect in Q3, you would probably see only about 10 to 15% of the run rate savings building up to perhaps 50% of the run rate savings in Q4 and then probably 75 to 80% of the savings in Q1 of next year. Then following Q2, you would see 100% of the savings.
I’ll give you some generalized. We indicated that there would be $14 to $15 million of annualized savings. Approximately about 70% of that would flow through to the gross margin line and the rest would flow through into the operating expenses.
Steve Ferranti - Stephens, Inc.
Does that do anything to I guess change what you would consider to be your break even run rate on a revenue level?
We haven’t really discussed a break even run rate publicly, but obviously this will get us in close to the $100 million range, a sold break even, once we finish the savings plan. So our goal though is to continue to adjust our cost structure to our revenue base. Right now we believe we’re at the low point of that and as you know it’s always difficult for a management team to determine when they’re taking out unnecessary cost and when you’re cutting muscle.
So we’ve been pretty aggressive on the cost. I think you’re seeing that in the gross margin and you’ll continue to see it in OpEx as well.
Offsetting those cost savings and as we lower to a break even point though, Steve, please let me caution you. We are investing in the renewable energy space. We’re investing in go-to-market, which means both sales and marketing. It’s feet on the street in geography. We’re investing in more engineers to get our product line, the breadth of our product line completed and out to the market as quickly as possible, and we’re investing front end, which will be offset by revenue. We’re investing in a hybrid service solution to provide our renewable energy customers with after-sales services.
So quite a few investments. The payback is huge though. As you know, the renewable energy market is growing exponentially. Even with the slowdown in 2009, we are seeing a resumed growth throughout the second half of the year and into 2010.
So a long answer. I apologize, but we are lowering our break even. Some of that will be offset with investments for new opportunities in renewable energy.
Steve Ferranti - Stephens, Inc.
Just to kind of summarize then, is it safe to say that we may not see directly the full $14 to $15 million annualized coming out of costs, because it would be offset by some incremental spending in some of the investment areas you mentioned?
That’s true. You’ll see in certainly in gross margin. The gross margin, as Linda said, was about 70% of the cost savings. You’ll see that through the bottom line without a doubt. The 30% that goes into operating expenses may be partially offset or will be partially offset, let me not mince words, with investment in renewable energy.
Steve Ferranti - Stephens, Inc.
Last one for me. I was wondering if you could sort of walk us through your market segments and just touch upon how you see each of those trending in the second half of the year. Sounds like you still got some positive momentum in the renewable energy side. Perhaps you can just take us through the other segments and just sort of qualitatively give us an idea of what we might look forward to in the second half of the year in terms of directionally which way revenues are trending.
Renewable energy, as you saw, we increased nicely from first quarter to second. We expect to continue to improve as the year goes on. It’s renewable energy for us and I guess most other companies is all European. About 95% of our sales are into the Europe market, which by far is the largest PV installed base in the world. So we are seeing strength in renewable energy resuming from 2008. The events in 2008, which have influenced 2009, i.e. the retraction in Spain which has dramatically reduced the market and secondly it was a poor, poor winter, a very cold winter, which impacted the first quarter and the beginning of the second quarter. Thirdly, availability of financing now has come back on stream and we’re seeing some growth now in renewable energy.
So we feel very good about that space. At Power, we believe that we’re getting close to the bottom, if not at the bottom, today. The markets we served are COE, Consumer, and Office Equipment. For us, that’s servers and storage. I would suggest that storage is rebounding quicker than servers. Our server clients though are certainly encouraging us. We don’t respond to encouragement. We like orders. So we can’t say that that market has rebounded yet. Although you saw Intel’s announcement which said they were up certainly in chips. It was kind of offset by what Dell mentioned about their space. While we don’t service Dell, it’s an indicator of the total market.
Looking at our other spaces we service. Networking. Networking, our clients are well known. Cisco, Juniper, etc. I would suggest that their public statements are very positive for the second half of the year and we would expect to see some improvement based on those statements.
Lastly, we serviced the telecom space and that space I don’t know if it’s reached bottom yet frankly. The rectifiers that we fell into, large carriers, certainly not doing well. The onboard, DC to DC, the power that we sell is actually picking up with a few clients. So we’re getting mixed reviews there.
Lastly, the industrial space, which is our “other” industrial space is very high power units that are sold to rail in industrial situations. That market is definitely flat. We see some pickup in China on rail systems and even some in the U.S., but overall the industrial market is solidly boring.
So at the end of the day, I try to give you a picture. I think we’re at bottom, Steve. I think what’s leading us out is going to be networking and storage and the other markets are following. Servers should follow that, but we’re not expecting a big pickup, and I still don’t have a good read on telecommunications yet.
Steve Ferranti - Stephens, Inc.
Appreciate that, Rich. That’s all I have for now. Thanks for taking the questions.
There are no questions at this time. I will now turn the call back over to Mr. Richard Thompson for closing remarks.
Okay, well first of all, thank you for listening to our call. As our business starts to improve, I’m sure we’ll get some excitement and questions on these calls, which we certainly do encourage. We’re looking forward to our business. We look forward to talking with you next quarter. Thank you very much.
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect.
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