Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Fairchild Semiconductor International, Inc. (NASDAQ:FCS)

Q1 2010 Earnings Call Transcript

April 15, 2010 9:00 am ET

Executives

Dan Janson – IR

Mark Frey – EVP and CFO

Mark Thompson – President and CEO

Analysts

Ross Seymore – Deutsche Bank

Terence Whalen – Citi

Romit Shah – Barclays Capital

Parag Agarwal – UBS

Craig Berger – FBR Capital Markets

Tristan Gerra – Robert Baird

John Pitzer – Credit Suisse

Steve Smigie – Raymond James

Kevin Cassidy – Thomas Weisel Partners

Brendan Furlong – Miller Tabak

Bill Ong – Merriman

Operator

Good day and welcome to the Fairchild Semiconductor first quarter 2010 earnings conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Dan Janson. Please go ahead, sir.

Dan Janson

Good morning and thank you for dialing in to Fairchild Semiconductor's first quarter of 2010 financial results conference call. With me today is Mark Thompson, Fairchild's President and Chief Executive Officer; and Mark Frey, our Executive Vice President and CFO.

Let me begin by mentioning that we will be attending the Deutsche Bank One-on-One Conference on May 13th in San Francisco; Robert Baird Growth Stock Conference in Chicago on May 18th; and the Raymond James Investor Conference in Boston on June 10th, as well as other investor roadshow meetings during the quarter.

We'll start today's call with Mark Frey, who will review our first quarter financial results and discuss the current status of second quarter business. Mark Thompson will then discuss our product line results, end markets and operational performance in more detail. Finally, we'll reserve time for questions and answers.

This call is scheduled to last approximately 60 minutes and is being simultaneously webcast from the Investor Relations section of our Website at Fairchildsemi.com. The replay for this call will be publicly available for approximately 30 days.

Fairchild management will be making forward-looking statements in this conference call. These statements, including all statements about future results and performance, are made based on assumptions and estimates that involve risk and uncertainty. Many factors could cause actual results to differ materially from those expressed in forward-looking statements. A discussion of these risk factors is provided in the quarterly and annual reports we filed with the SEC.

In addition, during this call, we may refer to adjusted or other financial measures that are not prepared according to Generally Accepted Accounting Principles. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses that should be considered by investors in conjunction with GAAP measures that we also provide.

You can find a reconciliation of non-GAAP to comparable GAAP measures at the Investor Relations section of our Website at investor.fairchildsemi.com. The Website also contains a 2010 Q1 fact sheet and a financial section with updated unaudited financial highlights, including detailed breakouts of segment, regional revenues, gross margins, EBIT and EBITDA.

Now I'll turn the discussion over to Mark Frey.

Mark Frey

Thanks Dan. Good morning and thank you for joining us. I’m sure most of you have had a chance to review our earnings press release that was issued earlier this morning. So I’ll focus on just a few key points. We continue to improve our product mix in cost structure during Q1 to deliver another solid quarter of financial results.

We achieved a number of significant milestones in the first quarter, including the highest gross margin since the year 2000, record low channel inventory, and growing our cash and securities balance to now exceed our total debt for the first time in our history.

Let’s review some of the details starting with the income statement. For the first quarter of 2010, Fairchild reported sales of $378 million, up 7% sequentially and 69% higher than the first quarter of 2009. Gross margin on a GAAP basis was 32.2% and included $1.3 million of accelerated depreciation. Adjusted gross was 32.5%, up 220 basis points from the prior quarter, as we continued improving product mix by ramping new products and mixing out lower margin products.

Gross margin also benefited from higher factory loadings. R&D and SG&A expenses of $81 million were above our original forecast due primarily to higher variable costs, driven by stronger-than-expected demand. Our R&D and SG&A spending is expected to be slightly below 21% of sales in Q2 and on track to reach our target of 20% of sales due to the significant structural cost reduction actions during the year.

First quarter adjusted net income of $32 million included adjusted tax expense of 20%, which is at the high end of our expectations due to some discrete tax items and a distribution of profits in higher tax jurisdictions. Adjusted EPS was $0.25.

Now, I will review the first quarter highlights of our sales and gross margin performance for each of our product groups. In our MCCC business, sales increased 3% sequentially in what is typically the seasonally weakest quarter of the year. Sales growth was driven primarily through strong demand and new design wins at key wireless and computing customers. MCCC gross margin was up 1 percentage point sequentially to more than 35%, due primarily to the impact of new products and a better overall product mix.

We grew PCIA sales 11% sequentially, driven primarily by higher demand for power conversion solutions, high voltage MOSFETs, smart power modules used in appliance applications and power products for the automotive markets. Gross margin increased 3 percentage points from the prior quarter to 34%, due primarily to the ramp of new products at higher margins and mix-out of less profitable products.

Standard product sales increased less than 3%, while unit shipments actually decreased 8% sequentially, as we continue to ship our production capacity to a higher value product mix. Gross margin improved more than 3 percentage points compared to the prior quarter as a result of this effort.

Turning to our balance sheet and cash flow, we held internal inventory roughly flat at 69 days, as sales growth offset the $9 million increase in our work-in-process inventories in raw materials. We improved the mix of fast-turning inventory again in Q1, which enables us to provide comparable service levels with lower inventory. Days of sales outstanding or DSOs increased about 2 days from the prior quarter to 37 days, and remained better than our historical average. We generated $36 million of free cash flow during the quarter, bought back roughly $8 million of stock and ended the quarter with $481 million in cash and securities.

We are particularly excited that our efforts to reduce debt and increase cash generation over the last year enabled us to build a cash and securities balance that now exceeds our total debt. We have the best balance sheet in our history now, and we expect to further improve cash generation and reduce debt in coming quarters.

Now, turning to forward guidance, given our backlog position and new product momentum, we expect to increase sales to $395 million to $400 million in the second quarter. Our current schedule backlog is sufficient to achieve the low end of this range. We still have availability for certain packages in the current quarter, and we are working on numerous approaches to optimize supply, which combined could support sales at the high end of the range or better.

We expect to increase gross margin to 33% to 34%, due primarily to a richer product mix as a number of new designs ramped into production. We anticipate R&D and SG&A spending of $82 million to $84 million in the second quarter, which at the midpoint is slightly under 21% of sales. We expect to hold this level of R&D and SG&A spending until we reach our target of 20% of sales.

Net interest expense is forecast to be roughly $2 million to $3 million per quarter this year. The blended adjusted tax rate is forecast at 15% to 20% for the quarter, as with last quarter, we are not assuming any obligation to update this information, although we may choose to do so before we announce second quarter results.

Now, I will turn the call over to

Mark Thompson

Thanks Mark. We made significant progress over the last year in sustainably improving our product portfolio, tightening our R&D focus, streamlining our operations, improving inventory management and reducing costs. Our first quarter results clearly reflect this progress as we significantly increased sales, gross margin, and earnings while maintaining record low inventories.

What may be less apparent is the pipeline of exciting new products and design wins that are ramping now and expected to accelerate throughout 2010 and 2011. I will begin my comments with more details about these new opportunities and explain how we are building a sustainable advantage in key new technologies. I will wrap up with a review of current quarter performance.

PCIA posted 11% sales growth in the first quarter, driven by a broad lineup of power solutions supporting rapid content growth in consumer, industrial, power supply, and automotive end markets. We made significant investments in silicon and package technologies over the last five years, which has positioned us as a clear leader in power modules, high voltage MOSFETs, and IGBTs. We also invested heavily in power conversion technologies, including the acquisition of System General a few years ago that enabled us to provide industry-leading efficiency across a wide range of power requirements.

Our new technologies are ideally positioned to capitalize on our customers’ increased focus on improving power efficiency. Our innovative T-Series power conversion products provide the highest level of integration performance in the mid-power range available in the market. Our advanced package provides low profile form factors, which enables channel TV makers to further reduce thickness of LED backlight products.

We are ramping this product line rapidly in response to very strong demand. Our latest Fairchild Power Switch or FPS solutions provide industry-leading standby power consumption performance. We are scaling up production for these products to support new design wins in two major game platforms as well as a number of new set-top box designs. We are shipping our third-generation primary side regulator or PSR solutions that enable exceptional standby power performance, while reducing component count in low-to-mid power battery chargers.

We have a number of key design wins for these products and are expected to ramp in the second half of the year. Our high-voltage products posted a 13% sequential gain in sales led by strong demand in the LCD TV backlighting, power supply, server power appliance and industrial markets. Customers are increasingly choosing our power modules and power MOSFETs, and IGBTs to develop products with greater efficiency.

The move to more efficient designs is particularly evident in the consumer appliance market in Asia. The largest appliance makers in the world are moving rapidly to variable speed inverter type motors to dramatically improve the energy efficiency of refrigerators, washing machines, and air-conditioners. Fairchild is an industry leader in power module solutions, customers need to make this transition from single-speed AC motors to the latest inverter types.

The results are evident in the 36% sequential sales growth we posted for our smart power modules or SPM product line this quarter. We expect this strong growth trend to continue for many years, as customers continue to make the conversion to new designs. Our content in these designs is typically $4 or more compared to little or no content in the old generations.

When you consider that more than 60 million refrigerators alone will be built in 2010 and only a tiny fraction have converted to inverter motors, you can understand the opportunities. This is rapidly becoming a large and very profitable market for Fairchild. Sales for our power management solutions for the automotive sector jumped 15% from the prior quarter, as we expanded our market into power steering modules. We are designing power steering modules at three major automobile manufacturers and have more design wins in progress.

We expect strong sales growth for these solutions as carmakers seek greater fuel economy in their products. We also continue to be a market leader in high-voltage IGBTs for ignition coils. MCCC sales increased 3% sequentially in what is typically a down quarter. Our better-than-seasonal growth was due primarily to strength in computing demand coupled with a number of new products ramping into production for the handset market.

Over the last five years, we made significant investments to develop our analog franchise in the mobile segment. We built on our industry-leading analog switch technology and now offer a wide range of USB and multimedia switch solutions as well as high frequency voltage regulators for a number of handsets sub systems. In our low voltage MOSFET business, we are recognized as an industry leader in technology and performance. Our superior technology enables the smallest die size in best performance, which translates into higher unit output at industry-leading margins.

We continue to win new designs for our innovative USB analog switches in the handset market. We are ramping these new products at two major customers now and expect to proliferate these solutions at other leading handset makers in the next year. We are rapidly expanding our relationship with a new smartphone customer to a wide range of analog and power management solutions.

In our voltage regulator business, we are gaining share at a number of new handset customers and expect sales to grow significantly as these models begin shipping. We remain a technology leader in low-voltage MOSFET and as we roll out our latest PT7 and PT8 based products. These advanced trench products are 30% to 40% smaller in die size which allows us to provide greater unit output at attractive margins. Our new dual pool package technology provides the best combination of form factor and MOSFET performance available today. We are scaling that production to support new design wins for these products in computing, telecom, servers, and consumer electronics applications.

Turning now to the current quarter performance, we delivered results in the first quarter that exceeded our initial expectations in virtually all aspects of the business. We grew sales 7% sequentially in what is typically a down quarter, while further reducing our days of inventory in the distribution channel. Distribution sell-through increased 5% [ph] sequentially in the first quarter, which is significantly better than seasonal and our fourth consecutive quarter of growth. The strong sell-through drove reduction in channel inventory of about 2% from the prior quarter, resulting in a record low 7.8 weeks of inventory. While this level of inventory is quite low historically, the mix of pattern with products to slow returning inventory improved again in Q1.

After five consecutive quarters of reducing the inventory of our products in the distribution channel, we believe the supply chain is extremely lean at all levels. Order rates were robust across a broad range of end markets, with the greatest strength in computing, industrial and automotive.

Geographically, we posted double-digit sequential gains in North America, Europe, and Korea, while Asia continued to be very solid. Sales growth was similar and above seasonal in both our OEMs and our distribution channels. We raised adjusted gross margin another 2 points to 32.5%, which was the highest level since 2000. Many of the design wins I discussed earlier are just starting to ship. So, we expect to build on the margin and earnings improvement momentum through 2010 and beyond.

Overall, product pricing in Q1 remains a bit better than typical as is the case last quarter. Most of our product sales for the top tier customers were pricing trends typically negotiated well in advance. We are raising some prices on lower margin standard products to proactively manage our supply and free up capacity for faster growing more profitable products. Our margin expansion in MCCC and PCIA is driven primarily through new products and better mix. Pricing has not been a significant driver in those performances.

Factory utilization increased again in Q1 and we continue to improve equipment efficiency, optimize our product mix and selectively add capacity to support our customers. Lead times also increased during the quarter, reflecting our higher utilization. We are working closely with our top tier customers, which represent about 75% of our sales and believe we have excellent visibility to their demand. We maintained capacity reservation in our order management system for these key customers, so that they can be confident in our supply commitment.

In closing, I think there are a number of key points to take away from our current results and future guidance. First, our focus on power management and mobile markets has helped us to deliver strong sales and earnings growth. We invested heavily in silicon and package capabilities over the last five years to build a sustainable technology advantage that we are now leveraging to provide greater unit output at higher margins. We tightened our R&D focus a year ago, which is driving better execution on new products and in turn support sales and margin expansion.

Inventories remained lean throughout the supply chain and the mix of fast-turning products continue to improve. This allows us to better support customer needs at historically well inventory levels. Finally, we are effectively optimizing our supplies through improvement and equipment efficiency, product mix management, new silicon technologies that increase die output, selective use of external manufacturers and discipline capital investment.

I believe these actions will allow us to gain share in key power management and analog markets while sustainably improving margin and earnings. Thank you, and I will turn it back to Dan.

Dan Janson

Thanks Mark. We will now open the call to questions. I would ask that in order to allow more of you to ask questions, we limit each person to one question and one follow-up. Thanks and let’s take the first question, please.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Ross Seymore with Deutsche Bank.

Ross Seymore – Deutsche Bank

The results, just a question on the capacity side of the equation, what do you think your revenue capacity is today assuming kind of a normal mix? And are you going to have to spend more CapEx to adjust that?

Mark Thompson

Ross, our capacity currently obviously supports our current revenue range and probably a little more. Again, as you point out, it’s dependent on mix. The few things that we are doing steadily across or currently and we will be doing across the year is the bottlenecking of selective capacity additions and some aggressive lean programs as well. So, we will – our target is obviously to get it some better than $400 million in the current quarter, and our current plans will be to improve that each quarter during the year, and exit the year with a number somewhere between $420 million and $430 million, which we think is roughly consistent with expectations for demand.

Ross Seymore – Deutsche Bank

That change, how much do you have to spend in CapEx to do or is there more of efficiency?

Mark Thompson

No, it’s all efficiency. Our estimates that we put out in the 6% to 7% range are what we are holding ourselves to it.

Ross Seymore – Deutsche Bank

And one follow-on on the incremental growth margins, as we get to this point of utilization etcetera, it looks like it is closer to kind of the low-to-mid 50s implied in your guidance, how should we think about that going forward?

Mark Thompson

When you say low 50s, you mean like fall-through?

Ross Seymore – Deutsche Bank

Yes, correct.

Mark Frey

You know, I think fall-through is less part of the formula and essentially mix is much more important, meaning we trade off capacity that we were using for lower margin products to use it for the new product ramps that are at higher margins. But I think 50% is consistent, I don’t think that, that actual observation will change.

Ross Seymore – Deutsche Bank

Thank you.

Operator

Our next question comes from Terence Whalen.

Terence Whalen – Citi

Hi, thanks for taking my question. This one relates to the competitive environment, can you, Mark, can you comment on what the dynamic is right given that as you sort of mix out of some of your markets, other competitors come in to meet demand there, how do you view the longer-term competitive dynamic of some of those markets that you are walking away from, are those markets that you are permanently walking away from, or you know, as supply alleviates or there (inaudible)? Thank you.

Mark Thompson

So, Terence, I think, so the way to look at the things that we are or I would like to call marginalizing typically will have more than three suppliers and they are typically standard products that easily cross each other. And so, where we see opportunities to use our factory capacity for good new products then we minimize those. You know, I am not sure the difference between having four players or six players in some of those markets really changes the dynamic materially. And so, if you look at standard logic for example, there haven’t been a lot of new entrants in standard logic as one of the ones that we have minimized somewhat during the current cycle.

So, I think that there are a number of established players in those basis that can take us the capacity, but I am not sure it’s really – I don’t see a lot of new entrants, say moving in to take some of those. You know, there are certain categories or some small Asian players that are moving into some corners of standard products, but I don’t – it’s not a big trend that I can see.

Terence Whalen – Citi

Okay, that’s helpful. And then on, the follow-up question is on business unit gross margin, I think we are at 35% for MCCC and 34% for PCIA. Based on the pipeline of new design-ins and new products that you talked about in your prepared comments, what is the expectation for those businesses? Is one structurally going to have a lot higher gross margin than the other, or are they going to be similar going forward. And based on what you think is your new product capability and new design and penetration, where do the gross margins of those businesses go? Thanks.

Mark Thompson

Sure. So, Terence, the margin progression for both of those, we expect to be similar. So, right now as you point out, MCCC is moderately ahead of PCIA, and I would expect that to continue. That said, the performance of our PCIA units has been exceptional, and I don’t or I wouldn’t be surprised to see it post some very surprising and positive margin numbers in the not too distant future. The acquisition of System General was really a key aspect of getting much more advanced solutions out in the market, and we find ourselves in leadership positions in many aspects of power supply space, and those are at very attractive margins. So, I expect both of them to go up. I wouldn’t expect them to be separated by more than a few points at any given time. And odds are MCCC in front, but wouldn’t be surprised to see PCIA overtake them.

Terence Whalen – Citi

Okay, that’s helpful. Thanks and good luck.

Operator

Our next question comes from Romit Shah with Barclays Capital.

Romit Shah – Barclays Capital

Hi guys, good morning. Mark, I just wanted to follow up on the question about capacity, because it does seem like you are being much more conservative about adding capacity this year versus prior year’s event. I just wanted to get a little bit more, you know, insight your thinking on that, are you at all skeptical about you know resales continuing to be this strong or are you trying to ensure that you know, you don’t (inaudible) momentum that you guys have today?

Mark Thompson

So, Romit, much more the second point than the first. I do think that as an operating principle, you never want to get too far ahead of the demand picture. The demand picture is very solid. There is no signs of cracks in it at all. And no matter how hard we scrub, we can’t see any slackening. That said, margin progression requires that we steadily displace the lower end with the higher end and constraining the factor environment is the best way to ensure that, that happens. And so, we made – the other thing I would add is that we have become increasingly focused over the years, focused on fewer part numbers, narrower but more capable product family, that frankly are both capital efficient. And so, that allows us to do that. Finally, we see a lot of opportunities at the factory level with those cleaner product families to drive a lot of re-initiatives, so what we call it, free capacity.

So, we are also really challenging our manufacturing community who are stepping up nicely to give us that capacity without significant key additions. And so all those things net out to having the best interest of the company and therefore the shareholders to be in a constrained capital environment, while still being able to move the topline positively and significantly and disproportionately progress margins.

Romit Shah – Barclays Capital

Do you risk at all losing market share to suppliers that, that may have lower lead times in Fairchild?

Mark Thompson

I think our lead times today are at least competitive. So, I don’t see that as a negative driver. I mean, I think the key thing is in the places where we are targeting leadership, we are not being lean on capacity. They just always get to go to the front of the line first, if we need more capacity. Again 6% to 7% is more than $100 million if you take, you know, just the consensus numbers for the company for the current year as an estimate. So, it’s a lot of capital and you can get a lot of capacity with $100 million.

Romit Shah – Barclays Capital

And just a final question.

Mark Frey

Romit, I will add that most of the companies we compete with have announced capital targets about the same as our own.

Romit Shah – Barclays Capital

Okay, and that’s good to hear. Just a final question for me, do you guys expect channel inventories to stay about the same this quarter, the June quarter, or would you expect it to rise a little bit?

Mark Thompson

So, I would say that the channel inventories are in control and will remain in control. I think that last quarter we commented that, you know, 8 weeks is a pretty good competitive level. We are reasonably satisfied with our service levels, and you know, expect to put a collar around 8 weeks. So, it might go up a little, it might go down a little, but we intend to keep it roughly where it is today.

Romit Shah – Barclays Capital

All right. Thanks, great job.

Operator

Our next question comes from Parag Agarwal with UBS.

Parag Agarwal – UBS

Hi guys. Thanks for taking my question. In the past, you have talked about using a foundry for your dual flow package series, could you update us on the progress on that front and when we should see the external foundry come online?

Mark Frey

Sure. So, as we have previously commented, we have struck an important relationship with a leader in foundry services. That will begin to come online as in the form of customers actually buying products from that right at the end of the current quarter, and will begin to meaningfully impact the second half of the year.

Parag Agarwal – UBS

Okay. And –

Mark Frey

So, back to one of the earlier questions about capacity and capital, that is an important part of the ability to progress the year with a constrained capital budget.

Parag Agarwal – UBS

Okay. Secondly, you talked about having a greater visibility into the customer demand, just wondering how you see the second half seasonality and how much of production you see coming from your external foundry partner?

Mark Thompson

Sure. So, I am not – I guess I am not knowledgeable enough to predict seasonality for the second half of the year. I think all I would say is that the, as I commented earlier, we see no or absolutely no signs of any mitigation of the current, very strong demand environment, and normally, you would see something in the form of changes in order patterns and maybe a little bit of follow-off in point of sales distribution. There’s lots of little signs that you see. There is absolutely no evidence of anything changing. So, currently, the outlook for the second half based on all the data that’s available to us is quite strong. Where will be – you know, where anybody else, we will all know more in a quarter right, what it would look like, but at this point, it looks very strong.

Parag Agarwal – UBS

Thank you very much.

Operator

We will take our next question from Craig Berger with FBR Capital Markets.

Craig Berger – FBR Capital Markets

Hi guys, nice job and thanks for the question. Can you talk about how much visibility you have beyond the distributors or into your OEM customers, I mean to some of the sell-through strength out of just and your sell-through strength, you know, the downstream customers replenishing and as part of that, can you just help us understand, are lead times still going up or they starting to come down and when do you think they meaningfully come down? Thanks.

Mark Thompson

So, Craig, okay, couple of moving parts. First is that the order book for the outer quarters, Q3 and Q4 is unusually strong right now. And so, yes, the thing with as you know well, visibility and lead times wind up being inversely proportional right. When you have great visibility, you have a good order book, but lead times are long. And that’s inevitable consequence of booking up your factories. So, you know, if you take a look at that, the mix, what’s interesting about the pattern today. So, Q3 is more completely booked than I have ever seen it in my years as is Q4, but interestingly, the mix is the same as we are currently shipping.

So, if I look at our lead times, they range from single digits to the well out into the high teens depending on the package type and always the distribution, but it doesn’t skew the order pattern. So, that gives us a lot of confidence that there is not a lot of speculative ordering because typically when you get into the shortage-driven speculative order, it tends to match the lead times and that is not what we are seeing.

And so, we are seeing our customers’ supply chain doing a good job of trying to anticipate what their needs are and putting a fairly complete depth of orders out there to work with. So, you know, in terms of the inventory picture, we get weekly in some cases daily views of the point of sale data and so, we are quite committed and in fact if you look at how we do the ranges, we have for more than a year when we do our estimates, just take our – a scrub of our point of sale estimates, add that to our OEM schedules and that range is the one that we offer to the investment community. So, when I look at that, those have naturally some air bar associated with it. So, we don’t – there is no prospect for increasing distribution inventory in that.

For the OEM portion, we don’t have that visibility, you know, with nobody, none of the OEMs give their suppliers visibility into what they have got on their shelves. So, we have to for that rely on their own inventory reports and so forth. But there is no evidence at any level that we can see that there is anything looking like replenishing. In fact, I think it’s really an issue of more of a hand-to-mouth environment where I think inventories are very low in lots of places and people are working hard to just make sure they have got the product they need to build the products they want to sell to their customers.

Craig Berger – FBR Capital Markets

Thank you for that. And then I guess the next question I have is, did I hear you right that you guys are committed to keeping that 82 million to 84 million in operating expense spending until that is 20% of sales, is that right, so, even if that stretches into 2011?

Mark Thompson

Yes, we are committed to keeping it at that level until we hit 20%.

Craig Berger – FBR Capital Markets

And then just lastly, you talked, you have been talking a bit about new design wins in mobile and some of the other stuff, can you talk about specific devices that you are ramping into or the timing of when those hit, maybe who some of the top customers are, any other detail on the design wins driving new growth? Thank you.

Mark Thompson

So, if you look at the mobile space, we have worked hard over the last, particularly three years to make sure that our customers represent all of the leading smartphone makers, and so we feel very good today that we are nicely distributed in that space. So, as share shifts as it inevitably does in such a fast moving market, we are probably as agnostic as is possible to be regarding that. If you look at the things that are driving there, there is a range of things. There is a lot of interplay between people’s design. So, when we do an advanced regulator for one leading handset maker, you discover that there is interest in it in other places. So, the key things that are driving growth there, on the interface side, there is expanding interest in the data interconnect, in audio, and video interconnect, on the power management side, there is LED lighting solutions, obviously that’s a very important part of the whole user experience. And then, discrete and in some cases, small PMU kinds of things, power management units that drive feature migration.

So, that’s the family of products that’s expanding kind of both horizontally and vertically and are in all cases plugged into all the top smartphone companies.

Craig Berger – FBR Capital Markets

One last one, sorry, on the fab closures that you guys still have planned at this point, can you just remind us how much savings is still ahead of us and I ask that within the context of depreciation is still kind of high and well above your cap expense. Thanks so much.

Mark Frey

With the top and with normal depreciation falloff, you know, we are looking for another 550 basis points on just that for next year, towards the end of next year.

Craig Berger – FBR Capital Markets

Thank you.

Operator

Our next question comes from Tristan Gerra with Robert Baird.

Tristan Gerra – Robert Baird

Hi good morning. With labor shortages which hit the production of some finished goods in China in Q1, have you seen that, did this have any impact, small impact on your revenues, and if so, when would you expect that situation to return back to normal?

Mark Thompson

Tristan, certainly the labor situation in China in challenging for everyone. We were able to build what we plan to build in our China plan, and we didn’t see a lot of evidence that either our key suppliers or our customers were substantially impacted, but like many aspects of the supply chain currently, it’s in what I would describe as a hand-to-mouth environment.

Tristan Gerra – Robert Baird

Okay. And could you provide some more specific in terms of your pricing increases, what could be percentages and what percentage of your product portfolio would be impacted by those?

Mark Thompson

Sure Tristan. In general, we are not raising prices in our strategic product families at all. Our relationships, there are really two moving parts to that, you have to play your relationships with your key OEM customers for the long term and obviously when the pricing environment is better, you reduce less, when the pricing environment is worse, you reduce more, but there is a basic principle, which is prices do go down. Primarily what we are doing is we are using pricing to control demand in places in what I will call more spot market-like setting, and it’s the best way to modulate demand in stuff that you don’t necessarily want to support strategically and you don’t want to capitalize.

So, particularly, so if you look at where we increased prices, it’s overwhelmingly in our standard products portfolio, which is around 10% of our business, and obviously we haven’t raised all of those prices either. So, if you were to look at it on a flow basis, we are only increasing prices in a small corner of the business, let’s say fewer than 10% of our part numbers, and as I said, primarily to modulate demand.

Tristan Gerra – Robert Baird

Great, that’s very helpful. Thank you.

Operator

Our next question comes from John Pitzer with Credit Suisse.

John Pitzer – Credit Suisse

Yes, good morning guys. Congratulations. Mark, I understand your philosophy to try to maintain a good balance on capacity growth relative to what you want to do with the mix. I am kind of curious, if you take a step back and look at what the industry is doing around capacity, there are clearly some players out there that are adding pretty aggressively. So, I am trying to get a sense of when you look at some of the mix shift that you have been able to do, how much of that do you think is sustainable, you know, versus you being opportunistic relative to competitors’ lead times, and as those lead times come in, can you kind of hold the mix as rigid as it has been over the last few quarters? Thank you.

Mark Thompson

Yes, sure. I think we can. I mean, as I commented earlier, we are not starving the critical product families at all. And so those, we have we think good visibility into what the medium-term demand for our customers is, and we are making sure that we have got that lined up. The mix itself, again we have been pretty disciplined about our new product portfolios having aggressive margin thresholds in those. So, once the mix is that target and mid-30s isn’t quite target yet, but we will update that, then we would expect it to be maintained by the natural introduction of new products.

Our lead times, we would seek to have those be competitive, and we think they have been and we think they are. Everyone’s lead time is extending out or has extended versus say a year ago for sure. And I think that’s what you need, you just need to be competitive in order to maintain your share position in that environment.

John Pitzer – Credit Suisse

And then, Mark, as my follow-up, can you just talk a little bit about how you would expect the end market composition to maybe changed March [ph] into June?

Mark Thompson

I am not sure we expect it to change that much. If we look at the drivers, they remain roughly the same, you know, certainly expectations for computing are quite strong. I mean, Intel’s commentary obviously is a good indicator of that. All signs are that the third quarter will be very strong in smartphone space. So, we would expect that to remain vibrant.

There is a lot of really interesting stuff going on in the industrial space from smart meters to all kinds of things that need high efficiency power supplies, all that’s growing nicely. And the reception of things like your power modules for the conversion from hydraulic power steering to electronic power steering is getting very broad acceptance. It’s an easy and cheap way to improve fuel economy. Those we see the acceptance growing on. So, the basic drivers have good legs, and the trends at this point look pretty solid as far as we consume.

Dan Janson

Hi John, this is Dan. The only other thing I would add to what Mark just explained is that we are seeing, you know, a stronger consumer booking pattern now as we finished up the first quarter going into the second quarter, which is pretty common seasonally, but the consumer bookings, you know, point to a stronger consumer content going forward as well.

John Pitzer – Credit Suisse

Great, thanks Dan. I appreciate it.

Operator

Our next question comes from Steve Smigie with Raymond James.

Steve Smigie – Raymond James

Great, thank you. Lot of questions asked about the capacity here, but I don’t think you commented on if Mountain Top’s closure has been pushed back at all in sort of the timing over [ph] that might be, and along those lines, could you just indicate percentage utilization front and backend?

Mark Thompson

So, Steve, first the Mountain Top, our plan of record is mid-2011 and that has not changed. If we look at utilization, we have been at target utilization in aggregate essentially since the fourth quarter. And so, we don’t see that changing, and so the progress across the year that you will see on the topline will be primarily driven by selective capital additions and by lean kind of activities where you get basically more output for a given level of utilization. And that’s really what would drive the year.

Steve Smigie – Raymond James

Okay. And then just thinking about, you know, we are not too far away from people certainly think about what’s going to happen in 2011, and in terms of thinking about that, can you give some sense of how much you think dollar-wise you may have put into the channel for starting to rebuild, now clearly the days continue to come down, but some sense of, if you will, dollar restocking in sort of you look at 2011 over 2010 growth, you know, we want to make sure not double accounting there. So, any help you can give on that? And then last question is if you can just give some sense of where you think share count might be in the quarter, this coming quarter, thanks.

Mark Thompson

Sure, Steve. So, five quarters in a row, we have taken dollars in the channel down. So, that’s been the trend. So, there is, I don’t think a lot of opportunities to interpret anything I would categorize as replenishment in that trend. As I commented earlier, we are comfortable now with the level that’s out there we think a number in the 7.5 weeks to 8 weeks is pretty lean. And so, we are – what we need to do to maintain service levels, so we wouldn’t expect that to decline. So, again, we will match point of sales from this point on as we, as largely did this quarter, although slightly under short. And so, as POS in the event that it were to roll off at some point, then our shipments then would follow it down. As I commented earlier, we get no worse than weekly updates on that information. So, we can never be more than a few days disequilibrated from what the market is doing. And so, I think that we – potential for having too much inventory in the channel is pretty low.

Steve Smigie – Raymond James

Okay, just share count for this June quarter, please?

Mark Frey

129 to 130.

Steve Smigie – Raymond James

Great, thanks a lot guys. Great quarter.

Operator

Our next question comes from Kevin Cassidy with Thomas Weisel Partners.

Kevin Cassidy – Thomas Weisel Partners

Hi, great quarter, and thanks for taking my question. In your capacity (inaudible) your bottlenecks you talked about with some of the manufacturing, can you say whether it’s wafer-related or package or test and what are the plans undoing the bottlenecks?

Mark Thompson

Sure, so bottle, you know, they have scattered all over the place. So, if you look at where they occur sometimes the frontend, sometimes the backend, sometimes their assembly, sometimes the test. So, when we do our several time a week scrub on the new mix what we want to ship, our planning engine blows across the factories, and we take a look at where there are emerging bottleneck situations and then go fix those. So, it’s not overwhelmingly concentrated in one place or another.

Kevin Cassidy – Thomas Weisel Partners

Okay. Just as a follow-up, so there is no specific packaging shortage?

Mark Thompson

So, there are places where there are specific shortages. I mean, some of the OFN type packages particularly the larger ones for computing are pretty constrained not only for us, but in the industry. That’s becoming less of a problem in the sense that we are aggressively moving to smaller footprint packages, which we have got enough capacity then to get enough capacity for. So, that’s one place where there is definitely some shortages.

Kevin Cassidy – Thomas Weisel Partners

Okay. Great. Thank you.

Operator

Our next question comes from Brendan Furlong with Miller Tabak.

Brendan Furlong – Miller Tabak

Hi good morning. I guess approaching the same question. Just given your press release, just curious, if you can just delineate between you know, your constraints if you will between the backend and front end? Have you really on the front end put out some of our products and you just on aggregate not between different products, on aggregate a little bit constrained on the backend?

Mark Thompson

So, there is not a good proportionate constraint front end to back. It’s product, if you look at the cross product to package type and die type, there isn’t an overwhelming pattern to it, which is more or less what you would expect for a very broad based strength and demand. So, it’s not say categorized in computing products, therefore you would say, well it’s low voltage MOSFETs and you know, QFN and SOE package types. And so, it does lend itself, so the solutions lends itself to the one that we are taking, which is a broad-based approach to steady the bottlenecking. And so, if you look at the numbers, if you take the 400ish number that we have offered for the current quarter, and the number that I offered that we expect to be able to get to by yearend, then the 420 to 430, those are – those support some pretty significant quarterly progressions in the ability to service the topline. And so, that’s one that’s better than historical growth both for the industry or segments if you look at that. So, I think the plan that we are executing are consistent with the probable demand environment. I guess that may be the simplest way to put it.

Brendan Furlong – Miller Tabak

(inaudible) pretty low, that’s just the, you know, your visibility is much better in the comp industrial and auto segment versus PC that we are going to go through?

Mark Thompson

I am sorry, could you repeat the question?

Brendan Furlong – Miller Tabak

Your turns orders look low by storage vendors into June quarter. So, your communication in industrial and auto segment which pretend to be a more longer lead time, is that what, you know, is that what your turns are so much lower?

Mark Thompson

Yes. So, again I think the turns business is very low, I mean, large part, because people have booked in advance and so, I am not sure which is the chicken and which is the egg. But when people book a long time in advance, you don’t really have that much need for turns business and they don’t have that much need to place a short lead order. And so, that’s certainly the environment if I were to say for mid, let’s just say midyear for this quarter and the third quarter. That’s what the environment looks like.

Brendan Furlong – Miller Tabak

Okay.

Mark Thompson

It’s very broad-based, it’s not a single industry segment that looks that away, all looks that way.

Brendan Furlong – Miller Tabak

I guess the only concern, you know, everything in the quarter is great. The only concern is the PC display segment which is, you know, way better than a normal seasonality, with that, where you were all, getting a little bit better results in the PC space?

Mark Thompson

I mean, I worry about everything I guess, but I don’t specifically worry about that more than anything else. If you look at the, sort of the underlying dynamics that I think is playing out and putting out in stage in PC right now is that I think everyone deferred purchase in particularly in the first half of 2009. And companies did, everybody did well. You know, we are all waiting to see what was going to happen before the economy. And so, there is the thing that I think often been tagged with replenishment isn’t in fact it’s deferred purchase. So, I think the strength in current markets is being driven by, if I use myself as a specific example, you know, my Dell, my notebook computer charge circuit stopped working, it wasn’t portable anymore, it was an old computer, four years old. I didn’t replace it until this year just because we were like everybody else in a highly off-gear mode in terms of spending money. So, I think that’s played inside of all corners of the global economy and I think it’s showing up now as the economies are more healthy. Certain expenses particularly in productivity tools, you know, can’t be deferred indefinitely and I think those are coming in, and so, I think that demand is realistically strong. I don’t think it’s going on shelf, I think it’s going out and it looks like it’s got real legs to it.

Brendan Furlong – Miller Tabak

Okay, appreciate it. Thank you very much.

Dan Janson

Laura, we have time for one more question, please.

Operator

Thank you. And our final question comes from Bill Ong with Merriman.

Bill Ong – Merriman

Yes, congratulation on a solid quarter. Just wanted some clarifications on pricing, today’s pricing were newly introduced, generally higher than comparable products a few years ago due to more features and performance or prices still only about the same and just lowered your manufacturing costs?

Mark Thompson

So, Bill, there is a couple of moving parts to that. So, if you look at the ASP trend that we share, if I just look at the immediate trend, the ASP trend from Q4 to Q1 was up. So, even though pricing on a part number basis is down a little bit to ASP results. So, we sold, made and sold more of higher priced parts. Now, if you look in the categories, if I were to look in analog for example, I will just give three specific examples. In analog, it’s exactly what you describe. If you go from a discrete regulator to a small PMU, you have got more features in that and it does more things and it has a higher price associated with it.

If you look at the move from discrete solutions to integrated power modules, those have dramatic, as I commented, power modules for a refrigerator might be $4 or $5, and so that will show up as a single ASP at $4 or $5 as opposed to a Ruble [ph] of things or dime [ph]. If I got to MOSFETs for example, the thing that we are aggressively driving in the mobile space is we have got the smallest DC/DECREASE solutions in the world, so small in fact that we can sell them for less than our competitors and make higher margins than our competitors.

So, if you actually look on a socket-to-socket basis, there you actually see the ASP going down. You know, if you go from a say, 5 by 6 package to a 3 by 3 package, the actual price of the 3 by 3 is less, but the cost is disproportionately less. So, the margin goes up. So, there is not a single conversion that you can look in that. You got to look at the product category, but those examples will describe the broad trends that are driving our results.

Bill Ong – Merriman

That’s great. Thank you very much and nice job, gentlemen.

Mark Thompson

Thank you.

Mark Frey

Thanks Ong.

Dan Janson

Thank you Bill, and with that, that will conclude our call today. Thank you for your interest in Fairchild.

Operator

That concludes today’s conference. Thank you for your participation.

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!

This Transcript
All Transcripts