Executives
John S. Gilbertson - CEO and President
Kurt Cummings - CFO
John Lawing - VP, Advanced Products
Analysts
Jim Suva - Citi
Matt Sheerin - Stifle Nicolaus
Shawn Harrison - Longbow Research
AVX Corporation (AVX) F1Q 2011 Earnings Call Transcript July 25, 2011 10:00 AM ET
Operator
Good morning my name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings conference call. (Operating Instructions). Thank you.
John Gilbertson
Good morning. I’d like to thank you for attending the AVX conference call regarding the results for the first fiscal year quarter that ended in March. I’m John Gilbertson, and with me today is Kurt Cummings, AVX’s Chief Financial Officer and John Lawing, our Vice President in charge of Advanced Products Group.
First I’d like to thank our shareholders for all the support that you have given to us in the past year. We held our annual shareholders meeting here in Greenville last week, and we were delighted to discuss the company’s successful, operating activities and our vision for the future.
The June quarter was a good quarter, reflecting sales growths and solid operating performance. The sales in the quarter were $436.4 million. This was 4% higher that the previous quarter, and 10% higher than the same quarter a year ago.
The market we serve generally saw strong demand early in the quarter and more moderate demand as the quarter progressed. Our sales to the distribution chain of customers held up well, compared to the March quarter considering the uncertainty regarding the availability of a broad range of materials and components.
We saw some disruption to the order pattern associated with customers’ inability to procure other components for their production lines. This concern about supply disruptions appear to have eased as the quarter progressed.
Distribution inventories appear to remain in good shape, and their end customer sales seem to be holding up as we move in to the summer months. There appears to be anticipation of the easing of product from Japan will again improve orders as the quarter progresses.
But at this time inventories are being watched closely until a consistent supply of product and material is available.
This quarter distribution channel represented 42% of our overall shipments; up from 40% last quarter. We continue to work closely with both the global and regional distributors to help them manage their customers’ requirements.
In the market segment area, as mentioned previously, automotive electronics continues to challenge the passive and electrical mechanical industry. Activities in new car designs ranging from telematics to safety to electric cars are generating optimism for the future.
We expanded our Asian manufacturing in anticipation of this, and are reaping the benefits today. That focus is on Transient product such as TransGuard that functions to protect sensitive electronics like airbags and tire pressure monitors, and film products that help drive the electrical train and ATV and EVs.
In our interconnect solutions to support such sophisticated electronics with highly integrated moulded housings and we are adding additional capacity in the facility expansion and equipment in that product line.
In the telecom market, our new products in the RAF family are enabling our customers to keep up with the increasing traffic requirements. A new product manufactured with organic materials not only addresses environmental concerns, but allows for tighter tolerance and more efficient devices for our customers in this area.
This new product is opening up new markets which we had not served before.
The demand in telecom remains consistent with continual 3G and 4G roll-outs concentrating on LTE platforms. However, as these frequencies continue to increase, the demand for these new devices will also increase.
The aerospace and defense market has been flat, and inputs are that this area will slow as the year progresses. Avionics continues to do well, with recent market recovery and that growth appears to be firming up.
The industrial market continues to be the star in end market areas. As programs for high powered variable frequency motor drives to portable power supplies for welders and other industrial equipment are increasing.
Global emphasis on green energy consumption has caused renewed interest in solar and wind power, as well as smart grids.
Expanded production capacity in China for our power film caps and power ceramic line has come online to better supply this market. Solar inverters has more designs for large grid interface inverters and wind program expansion has been steady with China still leading the growth.
In the consumer electronics market, flat panel LCD TV is gradually shifting towards more LED and OLED. This change requires more high voltage products, which are one of AVX’s focus products.
Component counter ceramic capacitor is around 7 to 1000 units for televisions that have over 32 inch screens.
In the PC arena, we continue to be bullish on the growth of the tablet PC. Tablet demand continues to gain market strength with new models introduced each month. Each tablet requires miniaturized components and around 540 ceramic capacitors and four to eight tantalum components.
The 3G and Wi-Fi capabilities call for additional RF components which increase the overall opportunity for AVX designs. At the high end of the computing, ever increasing processors speed, multi-core and programmable logics are adopting our latest generation low induction products.
The smartphone activity continues to be strong; the demand for thinner and higher performing solutions is adding higher margin products to the handset product. This market segment is expected to grow from 300 million sets in 2010 to over 450 million in 2011.
There can be close to 500 ceramic capacitors, upto eigth tantalum components and five frequency control and multiple pilfering device opportunities that AVX can provide in each smartphone.
As a percentage of the overall revenue in the quarter, the European region continued strong, with the automotive market leading the way. Other end markets in Europe are less robust and most of the loco automotive production seems to be for export.
Europe represents 28% of the total of one point from last quarters’ sales, while Asia sales increased three points to 45%, and the America sales represents 27% of the total.
Much of the strong activity we are seeing centers around automotive, communication and computing markets in all three regions. The commodity pricing during the quarter overall remained steady. We believe that the capacity utilization remained at high levels during the quarter.
We would estimate the ceramic capacitor industry utilization remains near the 90% plus range depending on the product line.
The tantalum capacity utilization remained high in its practical limit in the 96% to 98% range. As the market availability for tantalum materials and components remains constrained. As we have said in the past, we have gained market share in this valuable product segment and believe we will continue to gain share in subsequent quarters.
The normal summer lead times for many product types have pulled in, as the uncertainty in ceramic capacitors and timing device availability from Japan has eased. Delivery pressure for materials and supplies have been replaced by inflationary pressures as the prices for many metal and materials continues to increase.
During the quarter, we kept pushing our own production levels steady. This quarter’s gross margin increased to almost 29%, reflecting a continued strong operating performance. A favorable mix of value added products offset the labor and material cost increases that we saw.
SG&A expenses in the quarter decreased slightly, when compared to the previous quarter’s spending, excluding unusual charges and came in at %31.1 million, which was 7.1% of sales.
The profit from operation increased to $93.6 million in the quarter; at over 21% of sales and 30% higher in the same quarter a year ago. Our earnings were $0.40 per share for the quarter, up from $0.31 in last years’ quarter.
During the quarter, despite an increase in our investment in critical material inventories, we continue to generate positive operating cash flow, estimated at approximately $35 million.
The June quarter distribution POS trend remained steady, but the order activity at the onset of the summer period has softened. It is difficult to tell if it’s truly demand related or reflective of their improved delivery lead times. But it looks like right now, that the gross book-to-bill will be about flat in July.
The September is particularly a tough one to gauge, with all the uncertainty surrounding the global economic and political conditions and the summer holidays. But we estimate that sales in the September quarter should remain flat compared to the June quarter or decrease in that 1% to 2% range.
We would expect margins to remain in the 27% to 28% range in the September quarter even after taking in to consideration the summer shut down of several operating plants.
As mentioned previously higher metal and material costs are putting some pressure on the margins and we are seeing some sales price pressures as the supply and demand situation comes more in to balance.
But the unknown, as everyone is aware, remains a macro economic situation, which is so uncertain in the US as well as around the globe; a positive which say that conditions can’t get anymore uncertain than they are at current.
This quarter we paid 9.4 million in dividends, which reflect the increased quarterly rate approved by the Board of Directors last year and spend 1.6 million repurchasing AVX shares on the market.
Our overall financial position continues to remain strong, with over 1 billion in cash and securities and investments at the end of June or almost $6 per share of outstanding stock.
Our overall inventories, particularly our investments in raw materials increased by $45 million during the quarter. This additional investment in critical material is to ensure adequate production material availability has helped with our competitive position at key customers. We feel that this long-term availability of materials has helped us gain market share.
This quarter we spent $15 million for facilities, facility improvements and equipment expansions. Depreciation expense totaled 10 million for the quarter. At this time we see our capital expenditure for the upcoming year to be in the $30 million to $40 million range.
As we have said before we have many things in our favor in the electronic industry, such as an increasing global use of sophisticated electronics in virtually every industry that we serve.
This is evident in the expanding smartphone and tablet market, telecommunication infrastructure, as well as in to automotive and commercial transportation.
As we mentioned, the tablet market is taking off and we anticipate many more increase in to that area, and this segment seems to be expanding the number of users of computing power; and today it has had limited impact on the more typical high-end personal computer markets.
The green energy endeavors around the world are putting pressures on our existing capacity in the high-end film business; and as mentioned previously, we will be expanding that capacity throughout the year.
The lead times in that product line remain extended and capacity will not come online until late in the year.
We had a financial strength to continue to make investments in either material equipment and people to support our growth in the expanding product lines and participate in strategic acquisition opportunities, several of which around your active investigation.
I would like now to open it up for questions. Thank you.
Question-and-Answer Session
Operator
(Operator Instruction). Your first question comes from the line Jim Suva from Citi. Your line is open.
Jim Suva - Citi
Congratulations to you and your team. It looks like you are a much stronger company that’s progressing. You made a couple of comments about the softening demand order or demand about your orders.
Can you give some indications about, is this just seasonality or a little bit more than normal seasonal. I know you have a lot of past history where you can reflect about what normal is seasonal, and maybe within that can you talk about other certain end markets that are a little bit more softer and may be some other end markets that are holding up considerably better.
John Gilbertson
Yes Jim, its difficult to say what’s going on. The Japanese issue obviously created a disruption in the information that we’ve got. But in general, I’d say, the positive sign is that the POS and distribution held up in this period, particularly towards the end of June. So those numbers look good.
But on the more cautious side, we’ve not seen activity in July. Now it’s very common for July to be weak because it is the summer month, vacations and there are a lot of shut downs. But in general, we keep saying that and then July comes in stronger.
This time July is not going to come in stronger. It’s going to be flat to down as we are seeing right now. The end markets that are strong are obviously the smartphones. The high-end smartphones are really doing well; the infrastructure is doing good.
Automotive; if there is an issue automotive, it’s the concern that may be it’s too strong.
Europe is relatively weak outside of automotive, but they are making a lot of vehicles in Europe moving basically to China and the Middle East; and that business is booming.
Everyone waits for another shoe to drop there. But it has not dropped and it’s remained strong even in July.
Other markets that are stronger than - you might hear about our avionics seems to be picking up. The issues around high-end computing servers, servers for enterprise related functions, those are very strong and that business is stronger.
I think you might hear in the field. There seems to also be small resurgence in the environmental issues; wind, power and solar energies. So those markets seem to be a little bit stronger after a relatively weak start to the year.
But we will not know until we get in to August, whether this is just a reflection.
Jim Suva - Citi
A quick follow-up. On the pricing outlook, our pricing, it appears to be stronger than normal. Stable is fabulous. But I also realize, cost of good sold have increased, whether its tantalum or aluminum or copper or some of your raw materials.
Can you let us know what your view is on pricing; you think it will still be stable here for a couple of more quarters, given the [COGs] issues or what’s your view on pricing or what you are seeing the channel.
[Technical Difficult]
John Gilbertson
To end up that statement Jim; essentially we won’t know whether this is end market or related to inventories or what the issue will be until we see what the August numbers look like.
Jim Suva - Citi
A quick follow-up. On the pricing outlook, pricing has been stable here for a while which is better than normal which is fabulous. But I also realize cost of goods sold such as tantalum, aluminum, copper, gold and those materials have gone up.
Can you give us your stance on pricing, will it remain stable and if so, how long or what should we think about for pricing and what you are seeing there.
John Gilbertson
It’s been an unusually a stable period in both ceramics and tantalum components. I would have to say, my impression right now is, we will see more pricing pressures; and you’d have to look at the issue again back to the Japanese influence on the market or the industry.
When it wasn’t available, a lot of that product moved to the suppliers who were not in Japan. So that stabilized the prices. Now that the Japanese production is coming back online, that means that they have got to sort of buyback some market share they lost. If they buy back market share that they’ve lost, that will influence the prices I’d say in the next two quarters.
But again the issue would be the use of the number of components in electronics is going up everyday. So I think that we will see a more stable period in the next few quarters than we traditionally have seen in the past in components.
Operator
Your next question comes from the line of Matt Sheerin from Stifle Nicolaus. Your line is now open.
Matt Sheerin - Stifle Nicolaus
Just regarding your comments about a soft start to the quarter in July, and then you talked about auto being strong. It sounds like a little bit of sluggishness across most end markets.
Is distribution seeing that as well? Is there any sign that distribution; because you talked about percentage increase in distribution sales in the June quarter?
I am wondering if perhaps they took on some inventory or even their customers took on some inventory earlier in the quarter when you saw the (inaudible) and [Arrows] talking about pull-in because of uncertainty with Japan; and do you think perhaps there is a little bit of a correction going on right now.
John Gilbertson
In general there in the middle of your comments I would agree with that. What we are seeing right now is, we were very concerned when July was not as strong as we anticipated to be. Obviously we talked to all the distributors in the market place and their POS is still good.
I think that the issue you relate to, they had bought a lot of product in, some of their customers had bought their product in. There is this constant thing in the world today about uncertainty. I think uncertainty is the issue right now impacting the order activity from distribution from some of our other customers.
If you look at two segments that are doing better than anybody else or who did not see a downturn in July are the automotive which they had no choice because still the Japanese situation hasn’t fully recovered in automotive and won’t until late in the year.
So that automotives wasn’t as influenced by Japan coming back on in components and other issues, because automotive finished have not yet and wont hit till the end of the year.
I saw a thing where Toyota said they wouldn’t be back until the end of the year in their automotive production.
The other area is avionics. Avionics has been strong, aircraft sales have been strong and that’s held up good. But I’d say the other markets have been lack luster in July.
Matt Sheerin - Stifle Nicolaus
You talked about the handset tablet space being strong for you. I know you have exposure John across most of the players that some of the bigger smartphone guys have had issues. RIM obviously has take numbers down.
Could talk about you exposure broadly speaking in the smartphone market, how diversified you are.
John Gilbertson
We are covering everybody. Our strength, our forte is truthfully in smartphones. We have scaled back a lot of our concentration in the lower hand phones, so we don’t see a lot of activity out of that lower end market. That $30, $50 phone, we are not strong in there.
We are in the smartphones, and what you are seeing in the market, there is no downturn in the smartphone market. I read something this morning, somebody said it’s slow. But from our perspective its not slow.
We are seeing shifts in the market share, rather dramatic shifts in the market share, but the overall phone activity as in smartphone activity has remained strong.
I think that when you see the new numbers come out at the end of the quarter, the results will be good.
Matt Sheerin - Stifle Nicolaus
So if one of your customers has weakness, you don’t seemed concerned because you’ve got exposure across the board, is that right guys.
John Gilbertson
That’s right. We are at the top markets. Some of the guys are not doing as well, but their market share is being very aggressively gone after by the other smartphone manufacturers with out naming names.
Matt Sheerin - Stifle Nicolaus
Could you provide us the breakdown of revenue by end market and then also by product category.
John Gilbertson
I couldn’t but Kurt always hands it to me and I’ll read it to you. Automotive was up about a 0.18% of our business. Again this time last year, to show you a difference between our business in automotive; a year ago 11% of our sales was automotive, and today its 18. So that’s seven points of gain in that particular area.
The cellular was 13%; it was down about a point there. Computer was flat at 12, consumer was flat at 11; industrial was up a point to 16; medical still 6. Medical has been for about a year pretty much at that level.
Military is at 5; and if you look at military a year ago, it was 8%. So you see that weakness in military. Networking was about 5, and again to look at it from a year ago, it was 2% a year ago. So that business is up; and telecom rounded out at 15. Did I answer that?
Matt Sheerin - Stifle Nicolaus
Yeah. Just a question on the auto market; is that mostly connectors or do you have passives in there as well.
John Gilbertson
We have passives in there as well Matt. The big passive seller for us; obviously there is tantalum there, but this FLEXITERM, it’s a way to use it and to terminate a ceramic of pasture in a very harsh environment that FLEXITERM has been a great seller for us in the ceramics inn.
But I would say our biggest growth from a year ago has been in the connector space. We just recently opened a new factory in the Czech Republic to service that market and we are putting more equipment in there and we are also upscaling our Chinese operation in connectors.
Operator
(Operator Instruction). Your next question comes from the line of Shawn Harrison from Longbow Research. Your line is open.
Shawn Harrison - Longbow Research
Another way to may be look at the channel is, your direct sales were essentially flat as sequentially with distribution being that much stronger. Is there something I should read in to that in terms of focusing in on some of the concern over Japan was much more to distribution versus on a direct basis or is there something within the end markets that led your direct sales to be essentially flattish quarter-to-quarter.
John Gilbertson
I would read that in that direction Shawn. I think that our strength is growing in the distribution market. If you look at the distribution market that we had probably this time last year, probably 37, 38.
So, our strength and our importance to distribution has really grown in the last year, and I think that not so much that they are doing is necessarily better than everybody else. But that they have given us more of their business to drive that one.
Shawn Harrison - Longbow Research
As follow-up on the demand environment, you said that the distribution POS is holding up strong, but the selling is the part that’s tracking down. So your POS from July over June was that up sequentially.
John Gilbertson
I don’t know that yet Shawn, all I know is the June, and the June POS has remained up a little bit in the June. But we won’t get the July until another two or three weeks. But surprisingly June was up and their POS has remained up pretty good.
In reality if you look at April, May and June, that was pretty much flat POS against all those months. So the quarter remained consistent across it.
Shawn Harrison - Longbow Research
Then on the inventory additions, how far out now do you have in terms of raw materials particularly tantalum. Are you still covered 12 months or is it longer than that.
John Gilbertson
We are well covered in that 12 month period. We forward priced a lot of issues; we’ve got some metals issue in there, materials; film is a problem that’s been forward prices. So we are pretty comfortable in that position right now.
Shawn Harrison - Longbow Research
Do you think any of your competitors have this visibility in to their supply chain out in the next 12 months or is it just probably your self with a steady material flow at a pretty stable pricing.
John Gilbertson
All I can do is what our customers tell us. I don’t know what they really have obviously. But the general input from customer is that we are in a better position as far as material goes.
Shawn Harrison - Longbow Research
Final question; just the sales by product type this quarter if you had that handy.
John Gilbertson
Sure. Ceramics was about 12% in the quarter; now that was up one point. Tantalum remained steady at 28% of our overall sales. Advanced Products was down a point to 24. The resale business was 26 and the connectors were 11% of the sales.
Okay. We’d like to thank you, we are sorry for the disruption. We look forward to seeing you next quarter, and we thank you for your participation. Good bye.
Operator
This concludes today’s conference call. You may now disconnect.
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