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

Fairchild Semiconductor Corporation (NASDAQ:FCS)

Q4 2011 Earnings Results Conference

January 19, 2012 9:00 am ET

Executives

Mark Thompson – President, Chief Executive Officer

Mark Frey – Executive Vice President, Chief Financial Officer

Dan Janson – Investor Relations

Analysts

Terence Whalen – Citigroup

Parag Agarwal – UBS

Craig Berger – Friedman Billings and Ramsey

Venk Nathamuni – JP Morgan

Suji de Silva – ThinkEquity

John Pitzer – Credit Suisse

Steve Smigie – Raymond James

Kevin Cassidy – Stifel Nicolaus

Brendan Furlong – Miller Tabak

Bill Ong - Ticonderoga Securities

Mike McConnell - Pacific Crest

Operator

Good day everyone and welcome to the Fairchild Semiconductor Fourth Quarter and Year-End 2011 Earnings Conference Call. Just a reminder, today’s call is being recorded. Now for opening remarks and introduction I’ll turn the conference over to Mr. Dan Janson. Dan please go ahead.

Dan Janson

Thanks. Good morning and thank you for dialing into Fairchild Semiconductor’s fourth quarter and full-year 2011 financial results conference call.

With me today is Mark Thompson, Fairchild’s President and CEO, and Mark Frey, our Executive Vice President and CFO. We will start today’s call with Mark Frey, who will review our fourth quarter financial results and discuss the current status of first quarter business. Mark Thompson will then discuss our product line results, end markets and operational performance in more detail.

Finally we will 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 on 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 file 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 principals. 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 within GAAP measures that we also provide. You can find a reconciliation of non-GAAP to the comparable GAAP measures at the Fairchild – at the investor Relations section of our website at investor.fairchildsemi.com. The website also contains a variety of useful information for investors including an extensive financial section to facilitate your investment analysis.

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 had a chance to review our earnings release, so I’ll focus on just the key points in my comments.

Overall demand was lower than expected in the fourth quarter with distribution sell-through down 20% sequentially and sales into our direct OEM customers about 6% lower than the prior quarter.

As we discussed in our earnings call last quarter, our primary focus in this time of demand uncertainty is managing our distribution channel tightly by reducing inventories and expenses. We made progress in all of these areas and plan to maintain a discipline in the first quarter.

Let’s review some of the details, starting with the income statement. For the fourth quarter of 2011, Fairchild reported sales of $339 million, down 16% sequentially and 15% from the fourth quarter of 2010. Adjusted gross margin, which excludes the restructuring of Asian retirement plans accelerated depreciation inventory reserve releases and write-offs related to fab closures was 30.4%, down 560 basis points from the prior quarter. Gross margin was impacted by lower factory utilization roughly a negative 140 basis points impact from 8-inch fabs start-up cost and normal price reductions.

R&D and SG&A expenses were $88 million in the fourth quarter, down $4 million sequentially due to reductions in spending and lower variable compensation expense. We continued to invest in R&D and applications engineering to support our future growth, but all other spending is being tightly controlled. Our fourth quarter results illustrate this point, with R&D spending up around 2%, while SG&A was down 8% sequentially.

Fourth quarter adjusted net income was $90 million and adjusted EPS was $0.15. Our adjusted tax expense was a credit of $6 million as we recognized a number of discrete tax benefits during the quarter. Our adjusted EPS would have been $0.09 at a normalized 15% tax rate. Diluted share count was down more than 1 million shares in the fourth quarter. We bought back nearly a million shares as we capitalized on the lower stock prices during the quarter.

Now, I’d like to review fourth quarter highlights of our sales and gross margin performance for our two major product groups.

PCIA sales were down 21% sequentially, 17% from the year-ago quarter due to weaker demand and further inventory reductions in the appliance, industrial consumer, and solar end markets. This is also a seasonally weaker period for most of the PCIA end markets. Gross margin decreased 950 basis points to 28.5% due primarily to lower factory loadings and start-up costs for the transition to 8-inch wafers. Factory utilization is well below the company average for PCIA and expect – and we expect margins to recover quickly once demand improves.

In our MCCC business, sales were down 10% sequentially and 7% from the year-ago quarter, as strong mobile analog sales were offset by weak demand from consumer and computing customers. We also took pricing actions to reduce our mix of low margin mature logic products, which impacted MCCC sales by about 5 percentage points in the fourth quarter. MCCC’s gross margin was down two points from the prior quarter at 35% as lower factory loadings supporting consumer and computing products offset the richer mobile analog mix.

Turning to our balance sheet, we decreased internal inventory dollars by about $25 million or 10% sequentially. Given the lower sales level, days of internal inventory increased 5 days to 96 days. We like to maintain internal inventories closer to 80 days, so we plan to work this down over the next few quarters.

Days of sales outstanding, or DSOs increased to 38 days and days of payables increased to 51 days. Free cash flow was $1 million and we ended the fourth quarter with total cash and securities exceeding our debt by $156 million. Free cash flow was negatively impacted in the quarter by approximately $18 million due to the one-time restructuring of our pension plans in Korea, which required a cash payment from an existing accrual to fund a new external retirement account.

For the full-year 2011, we spent $42 million to repurchase nearly three million shares. We spent $186 million in capital or 12% of sales and $17 million on acquisitions. We also reduced debt by $21 million during 2011. Even with these significant investments in the business share repurchases and debt reduction, we still increased our cash and securities to $456 million at the end of the year.

Turning now to forward guidance. We expect sales to be in the range of $340 million to $370 million for the first quarter as we continue to focus on reducing channel inventory. Our current scheduled backlog is sufficient to achieve the low end of this range. This guidance includes about 1% impact to sales from the flooding in Thailand.

We expect adjusted gross margin to be 29% to 30% due to lower factory utilization especially in January. We anticipate R&D and SG&A expending to be approximately $96 million to $98 million in the first quarter. The adjusted tax rate is forecasted at 15% plus or minus 3% for the quarter. Recall that our first quarter has 14 weeks to again synchronize our fiscal year with the actual calendar. As with last quarter, we're not assuming any obligation to update this information, although we may choose to do so before we announce first quarter results.

Over the last several months, our industry has experienced a surprisingly severe demand correction and we’ve responded aggressively to mitigate the financial impact. However, we're beginning to see a number of positive signs of demand inflection in our business. Overall bookings exceed billing so far in January. 13 week rolling fill rates are improving steadily, rush orders are picking up in some of our end markets and customers are recovering quickly from the disruptions due to the flooding in Thailand. These early signs of inflection in the cycle, coupled with favorable seasonality after the Asian New Year holidays, board well for demand in the coming quarters.

Now I’ll turn the call over to Mark Thompson.

Mark Thompson

Thanks Mark. Recall that a quarter ago we outlined our focus on reducing inventories and controlling expenses as we work through this period of weaker demand in many of our end markets. We tightly controlled our distribution business during the fourth quarter and despite the lower than expected sell-through we’re able to reduce both channel and internal dollars of inventories.

Let’s review the fourth quarter in more detail, beginning with the demand trends. We ramped into production a number of new programs in the second half of 2011 for our mobile analog business resulting in an 8% sequential sales growth in the fourth quarter. Our second half mobile analog sales were up 21% over the first half of 2011.

We now supply an extensive portfolio of analog and power management solutions for mobile applications including power management for virtually all subsystems, USB, and all types of signal switching audio, high definition signal management and a whole line of battery management and charging products. The combination of strong smartphone and tablet demand coupled with our share gains give us a great deal of momentum heading into Q1.

Our automobile business also held up very well in the fourth quarter. We continue to benefit from car markers transition to more energy efficient drivetrain systems and subsystems including high efficiency ignition and electronic power steering. While sales of our products into the auto end market were down a couple of points in Q4, for the full-year of 2011 we grew sales 26% compared to 2010. We expect continued solid demand in this sector in 2012.

Our sales into the consumer and appliance end markets were down about 30% sequentially, which is even weaker than our customer’s initial expectations. The decrease in demand was most pronounced in Asia, especially China. Q4 is normally a weak period for appliance demand, but the slowdown in the Chinese real-estate market coupled with reduced government incentives to buy appliances and the overall weaker economy clearly wait on demand.

Our customers in the appliance sector are still reducing their inventories and we expect this to continue through much of Q1. We did see signs of stability in the TV market with a number of rush orders at the end of the quarter as our customers replenish stocks ahead of the upcoming New Year holidays. We continue to see solid design win activity in these markets and are confident that our strong position in Asia and the trend for greater efficiency will drive future growth in this sector.

The industrial end market was also weaker than forecast and what is seasonal in its off quarter. Asia was again the weak point followed by Europe. Solar inverter demand remains extremely weak especially in Europe. We’re seeing solid design win activity in the LED lighting, inductive heating and industrial welding markets. We expect this business to improve gradually over the next few quarters as inventories stabilize and seasonality becomes more of the tailwind.

The solar inverter market is likely to take longer to recover, given the magnitude of the demand correction in that industry. Computing was also weaker than expected, partially due to the impact of flooding in Thailand, but the inventories in the supply chain appear well controlled. Q4 and Q1 are seasonally weaker quarters, but the industry is expecting new products later this year to drive greater demand. The ultrabook form factor offers the potential for more content as higher margins for Fairchild as customers seek the highest performance, small footprint MOSFETs available.

Fairchild continues to be a leader in trench fabrication and package technology to provide exceptional performance within the small form factors available in the industry.

Turning to our product lines, sales were down 10% from the prior quarter for our MCCC business as strong mobile sales were offset by weak demand from consumer and computing sectors. Our mobile analog business was up 8% sequentially due to sales growth across a wide range of new and existing products. An area of particular strength is our IntelliMAX intelligent load switches, which are designed into a number of leading smartphones and tablets. Intelligent load switching which incorporates its own protection and control is becoming essential in advanced smartphone designs in order to cope the power requirements for the various subsystems.

We began ramping a couple of significant new design wins in Q4 and expect to continue with this strong momentum in Q1. MOSFET sales into computing and consumer markets were below seasonal as customers continue to reduce inventories in response to weaker demand. There’s also some shifting of demand for us from the computer segment to the tablet market which we include in our mobile business. Our advanced trench processes allow us to supply industry-leading performance and form factors including our innovative 3x3 dual MOSFETs that are ideal for the new ultrabook form factor.

Finally, we took a number of strategic pricing actions to reduce our exposure to mature logic. This business has some of the lowest margins in the MCCC portfolio. These actions reduced MCCC sales by 5% point – at five percentage points in the fourth quarter. In our PCIA business sales were down 21% sequentially. In addition to normal weak second half seasonality, the appliance TV, computing and solar markets all posted lower than expected sell-through due to lower demand and continued inventory reductions in the supply chain.

The flooding in Thailand disrupted the supply of some of our optical isolation products which reduced PCIA sales by about five percentage points. Our IGBT business continues to hold up well as solid industrial demand for these products offset some of the weakness in the solar inverter sector. Our automobile business also performed well due to the continued growth of our ignition solutions and modules for power steering. Standard, discreet and linear products were down 13% from the prior quarter due to weaker demand and are increasingly selective approach to this business.

Looking at our sales channels in more detail, our direct sales to large OEMs and EMF customers were down 6% from the prior quarter due to modest schedule adjustments during the quarter and the impact of supply disruptions from the flooding in Thailand. Distribution sell-through decreased 20% sequentially which was more than expected. Despite weak demand, we were still able to reduce channel inventory dollars by 3% sequentially or weeks of inventory increased due to lower sell-through.

Factory utilization was in the mid 70s with high voltage manufacturing running well below this level. Lead times decreased in all areas except mobile and are effectively at normal levels for virtually all products. Overall product and pricing in Q4 was down about 2% from the prior quarter, which was worse than the prior quarter but within normal historical range.

In closing, I believe Fairchild made great progress in a number of areas in 2011 that positions us well for growth and improved profitability in 2012 and beyond. We invested heavily in our business to upgrade technologies, acquire new capabilities and fund R&D. We invested a significant amount of capital in 2011 to convert to 8-inch wafer manufacturing across all four of our fabs. Two fabs are now 100% 8-inch, and the other two are well on the way. We expect this transition to enable lower costs and improved margins for years to come.

We acquired two businesses to improve our capabilities in silicon carbide and MEMS-centric technologies. We expect these new capabilities to enhance content in a wide range of industrial alternative energy, automotive consumer and mobile applications. We also increased R&D spending 27% in 2011, compared to 2010, while SG&A was up just 1%.

In addition to investing in the business, we refinanced our bank debt facility, lowered our debt level and ended the year with a strong balance sheet. We also repurchased nearly 3 million shares throughout the year. While 2011 ended on a weaker note than expected, Fairchild is in the strongest position in our history to take advantage of improving demand in 2012.

Thank you. And I’ll turn the call back to Dan.

Dan Janson

Thanks Mark. We’ll 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 to one follow-up. Thanks, and let’s take the first question, [Jodie].

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question today from Terence Whalen with Citi.

Terence Whalen – Citigroup

Great. Good morning, thanks for taking the question. So it seems like looking at the results, one that surprises is that the sell-through declined 20% in the fourth quarter and that channel inventory maybe only declined mid single-digit million versus your $20 million or $25 million expectation. Can you talk a little bit about as the quarter progressed when you realized the weakness to distributors was sell-through versus selling and perhaps explain what you run over the quarter to give you insight into what sell-through is doing and why it’s acting so peculiar? Thanks.

Mark Thompson

Okay. So, Terence, the biggest delta from forecast and expectations was appliance in China. So, that was far and way the largest chunk. If you look at kind of the moving parts to that, the nature of POS is that it only -- you only really know what it is by the end of the quarter, and often the last week is very large. So, it is chronically difficult to forecast.

To de-risk the plan, we readjusted build plans down quite substantially early in the quarter. And so, that’s how -- what the way it played out is we wound up having a big inventory decrease internally, but less so into the channel. So, again you’ve to – if you balance the thing, you add the two and we can partition it however, we want to partition it.

If you look at the background to the weakness in appliance, there has been substantial incentive that the Chinese Government has put in place for buying particularly high-efficiency rated appliances. And it works -- the incentives works the same there as they do a replace cells, which is they don’t necessarily stimulate demand; they simply shift the timing of purchase.

Those de-risk continued at the end of the first half, and there was talk back and forth, whether they will be renewed or not and they want it up for the second half not being renewed. And it took the key appliance OEMs a while to come to grips with that, and their systems aren’t as particularly their procurement and inventory management systems aren’t as sophisticated as some of the Western Company. So, it took a while for the scope of what needed to be done from their end to flow through back through distribution to us and that became clear during the fourth quarter. And so, we took according action.

So, again if you look at the – our commentary, the build plans have been -- were aggressively reduced to try to take care of our estimate for the magnitude of the problem. They were most aggressively reduced in the high-voltage area, which again is why you saw a much larger selective impact to the PCIA numbers and in term why the high-voltage plans are well below the Company average of 70% utilization. So its – it really is quite heavily concentrated. And we think that the correction process should begin to reverse itself by the end of the current quarter.

Terence Whalen – Citigroup

Okay. Thanks for that explaining.

Dan Janson

Hi, Terence, this is Dan. One of the thing I would add is that we also had a -- we didn’t originally in our guidance assume that there would be an impact from the Thailand flooding. At the time we got it, there wasn’t in Thailand flooding problem. So, that actually was a little bigger hit than we were expecting as we work through the quarter was about a 2% to 3% hit to revenue.

Terence Whalen – Citigroup

Okay, thanks, Dan. And then if I could squeeze in a quick follow-up, I think are we getting this, one this morning from clients. In general, when you look at some of the other semiconductor results particularly in analog and the signal that we’ve seen this week, we’ve seen perhaps less of an impact by the reduction in sell-through. Can you perhaps -- based on your observations of what you heard so far from semiconductor companies report maybe why your results are slightly weaker whether its geographic, whether it’s application-driven or a particular distributor exposure, if you could help anyway? Thank you.

Mark Frey

Sure. Terence, I’ll handle that. And may be specifically with linear as the most prominent example, I think there is two things you should think of, number one, you can’t assess the business reconciliation on just two quarters. So, if you go back in time we were growing more earlier in the year whereas they were shipping less. So, if you go back actually where they previously peaked to December quarter their revenue will still be down more than ours.

Secondly, just in terms of market sector exposure, they’ve a much higher exposure to auto, which has been less impacted and non-appliance industrial, I should say. And specifically China, about 77% of our sales are in Asia with a little less than half of that Mainland China, sorry, Greater China and almost the third of our sales are Mainland China. And the economic impact in that location has certainly been a lot more than even places like Europe. And therefore we’re happy where they’re from the long-term, but in the short-term, it’s pretty painful.

Mark Thomson

Terence, one other element of the total picture is, if -- again, as Dan and Mark said is when our original estimates were put out, I think the flood that happened at the start of the day before and so it was impossible to size what its impact would be. And so, the – there was one piece that was easy to understand, which was the opto-coupler business, which is manufactured there and a significant increment in the fourth quarter.

The somewhat surprising one was the impact on lead-frame supply, which happened to map directly into mobile. So it didn’t hurt the numbers, but it took away probably $5 million of upside that we could have taken. Normally, when you go into a quarter, you’ll have your forecast and then it’s always changing as you go through the quarter and our supply chain is normally able to respond to that. So a little bit of weakness in one place, strengthen in other.

So, what happened was a chunk of real strength we were not able to respond to it because we couldn’t get the lead brands. And so that – one of those things were the recovery is under ways, it will be fully recovered from a supply point of view in all places by the end of the first – by the end of the current quarter. But that was another chunk that hit us in the fourth quarter.

Terence Whalen – Citigroup

Thanks Mark. I appreciate the insight. Thank you.

Operator

We will take our next question from Parag Agarwal with UBS.

Parag Agarwal – UBS

Hi, guys. Thanks for taking my question. I just wanted to dig into your guidance. Now you indicated that you’re seeing some upwards trend in ordering some structures. And I was just wondering how do you expect the various end markets to play out in the first quarter. And also if the first quarter is on 13 week basis, it looks like it is still down from December. So just wondering if – do you think that the margins are bottom or we think that they should – there is more downside going forward?

Mark Thompson

So Parag, let me try to cover that – first the simple part, which is if you look at the – if you turn the 14 week quarter into a 13 week quarter, and then look at the mid point where its down 2% relative to the fourth quarter, which is exactly the seasonal average. So normally when we put our guidance together we both look at patterns of orders and backlog and so forth. We also look at history and then sort of align its history, and so that’s the way to look at that is typical seasonal.

If you look at the sort of the strength and weaknesses, the strongest by far are for us in the first quarter will be mobile and automotive. Both of them currently look to be up sequentially from the fourth quarter, again, based on our strong and strengthening positions in those places. If you look at the opposite end of the spectrum, as I already commented, the appliance space we think, normally Q1 is a stronger quarter for appliance. We think that some of the inventory over hangs will probably prevents that from occurring. But we think we will be largely reconciling themselves by the end of the quarter.

Computing is somewhere in the middle, in the sense that its – normally it’s a pretty weak quarter for computing. With that said, the – there is a lot of interest in the ultra book. And so there – the other thing is that the inventory is very clean there and so there were lot of aggressive actions that were taken by sort of the whole supply chain in the second half of 2011 and so we’re seeing – better than seasonal strength so far there both in terms of order rates and point of sale.

So – and then the – as that we comment and we think solar which has been a big – it was a significant IGBT driver in the first half of 2011 and in 2010. We think we will likely stay dead at least through the first half then may be all year long. You know that hasn’t been big dollars, but it’s been a nice business. It was never more than $10 million a quarter and its now running at probably a third of that. As I said, we’ve no plan and we think that it will stay quite depressed.

And then the large display area has been surprisingly strong as well. And so that had a pretty weak period last year, but again I think it was people took inventories down very, very aggressively and are now at the point where it’s sort of hand to mouth and there is a lot of new designs that are coming out and so that’s also stronger than seasonal for the first quarter. So those are hopefully the major elements of market commentary.

Parag Agarwal – UBS

Okay, great. And as we think about the pricing going forward and also your margin trajectory, how should we think, I mean, how that is going to shape out going forward?

Mark Thompson

So in terms of pricing, the – we think that it’s going to be an average year in that regard. You know our – most of our business is under longer term contracts and so those are – those typically get renegotiated every six months and some cases every year. And so we don’t see sudden shifts either favorable or unfavorable in the way that, that plays out. So we think that – if you took a four or an eight quarter average for pricing and then laid it on top of 2012 that wouldn’t be – it would be a good estimate and Mark, why don’t you walk through the way to think about margins for the first half of 2012.

Mark Frey

So seasonal for pricing is between 1% and 2%. And as Mark said, we’re around there. And you want me to roll Q1 to (indiscernible)?

Mark Thompson

Yeah.

Mark Frey

Just to give you more clarity around the impact of lower utilization and profile for coming out of it, as you’re probably aware accounting requires you to time the impact of utilization slightly different way than the immediate loadings in the factory. So there is a delay effect. And you could see that actions in Q3 began to take margins down in Q4 and the margins remain low in Q1. Most of the accounting gets washed out in Q1, so for the same build plan that we’re planning for in our guidance in Q1 if we were doing that in the absence of the carryover effect from Q4, our margins would be in the 33% to 34% range. And obviously we think that would be then begin to ramp back up again to where we were before as we got our revenue above the $400 million run rate level.

Parag Agarwal – UBS

Okay. That’s very helpful guys. Thank you very much.

Operator

We will go next to Craig Berger with FBR Capital Markets.

Craig Berger - FBR Capital Markets

Hey guys. Thanks for taking my question. Can you give any sense from talking to your distributors how much their customers downstream are burning inventory or said differently, where do we think kind of consumption shipments might be if we look at the first half?

Mark Thompson

So – Craig, it varies a lot and I think by location. That if we look at the U.S for example, I think the inventory corrections are – or I’d say largely complete and I think probably the expectations are fairly close to equilibrium between sort of the take and the use. And if – at the opposite extreme, if you look in China we know that the OEMs there are, particularly, on the appliance side, are still aggressively reducing inventory and will likely continue to do that through the first – the first quarter.

But right – but we think certainly by the second half of the first quarter more things should be in equilibrium than not and we would expect that to see turn into point of sale improvements. So, if you look at the rate at which the various indicators inflect, as Mark commented, the order rate has been – the rolling average for the order rate has been steadily increasing since October and is now in a very healthy state actually. If you look at point of sale there it tends to inflect by segments and so point of sale is inflecting on everything so far except for the appliance space and so that’s another non-regional way of looking at it. So if you combine those two things, you see that there is some residual correction remaining in the first quarter, but we think by the end of the first quarter things should be moving much more toward the equilibrium.

Craig Berger - FBR Capital Markets

Thanks for the detail. And then just to follow-up, can you help us understand your design win traction in mobile, what that suggests for 2012 growth and as part of that, how big is tablet? And then lastly just one point of clarification, what's the OpEx impact from the 14th week and how do we think about Q2? Thank you so much.

Mark Thompson

Okay. So if we look at the design win traction for us its very broad and sort of all the peripheral analog content and product management content that I highlighted really sort of in all the subsystems around the CPU, we do regulators interface, enable high-definition, battery charging and particularly switching charge management circuits for lithium-ion and so forth. If you look at tablet, the leading tablets look more like the phone that they were derived from than a notebook and that’s one of the reasons why we aggregate those together in a common business unit.

We think that our growth in mobile will be in a very strong double-digit, probably in the 20% to 30% in 2012 versus 2011 assuming that the sort of end-market estimates are correct and I think they’re more likely to be than not. And if you look at tablets as a part of that, so that would put it somewhere in the low $300 million range for 2012. And if you look at tablet portion of that, it would be about 15%. So we think the total market, the total sales into tablets for us will be in the $40 million range during 2012.

Craig Berger - FBR Capital Markets

Thank you.

Mark Frey

The OpEx question, we guided a mid-point of 97 on a 13 week basis that would be about 90. When you think about rolling that into Q2, add $2 or $3 million for -- we’ll probably have a merit action in April and the equity program will notch up a bit too. So – and obviously we’re going to maintain our spending in kind of the flattish mode until we see clear indications of the demand profile improving.

Craig Berger - FBR Capital Markets

Thanks so much.

Operator

We’ll go next to Venk Nathamuni.

Venk Nathamuni - JP Morgan

Hi guys. Thanks for taking my question. Hi, Mark you did mention that you were loading inventory into supply chain and I know in the past calls you’ve talked about your target inventory to be in the range of 7.5 to 8.5 weeks. Is that still the case? And as a follow-on, where do you expect utilization rates to be next quarter? Thanks.

Mark Thompson

So, if you look at our -- in an equilibrium setting we would always seek to run in that range where there’s little inventory as possible. So, it will never look exactly right in either the very peak or the very trough. So, we then tend to turn to dollars and look at our forward estimates. So, if I look at our current channel inventory versus where we think the end-markets will take demand in the middle of 2012, we’re probably still $10 million to $15 million heavy in terms of where we’d ideally want to be.

We were supporting that level of business on about $200 million. We’re kind of $215 million, $216 million now. So – but that is heavily concentrated in the high-voltage space. So in fact, so again if you look as I commented, things roll-over at different times and they recover at different times.

We're seeing very clear recovery everywhere except for the high-voltage and similarly our channel inventory is actually pretty close to 9 to 10 weeks even at the trough for most of our businesses. So, its really a concentrated fix that we've and that will be, as a big chunk of that of course is baked into our expectations for the first quarter and then maybe a little bit of trough in the second, but that’s kind of the moving parts on the channel.

Venk Nathamuni - JP Morgan

Okay and then on the utilization rates?

Mark Frey

We expect them to be up, but it depends on how demand moves in Q2 and obviously it’s a little early to be giving guidance on that.

Venk Nathamuni - JP Morgan

Okay, great, thanks. And then just as a follow-up, you said you had some inventory write-offs during the quarter. Could you quantify that for us in terms of the effect?

Mark Frey

They were more than normal.

Venk Nathamuni - JP Morgan

Okay. Okay, great. Thank you.

Operator

We’ll take our next question from Suji de Silva with ThinkEquity.

Suji de Silva - ThinkEquity

Hi, guys. Could it be possible to tell us how far above target the inventory levels are for the appliance segment in particular in China?

Mark Thompson

So, the rough numbers as I commented on the channel, you know for the total company the channel is maybe $15 million above if it was perfect for the current state based on the overall outlook for 2012, probably $10 million of that is high-voltage in that range, you know these are rough numbers, but that’s a pretty good estimate based on what we know today.

Suji de Silva - ThinkEquity

Sure. And Mark, I tried to reconcile your comments about the appliance market having less similar tier versus mostly end-markets inflection back, but I -- and further China demand is stabilizing, improving to slightly appliance issues or not?

Mark Thompson

So, if -- I mean the China demand is definitely down from what it was from its peak of the first half of 2011, but the consumption the pull from distribution is well below that level, so there’s sort of two notches to built into an outlook. The first one is the pure inventory effects and then the second one will be when does appliance use start to grow again in China. So, we wouldn’t try to call the second one, the first one we can model better and that’s reflected in my $10 million comment.

Mark Frey

Suji, let me just add another point. So I think one of the things you have to keep in mind here is that, we know that there are some issues in China that we’re working through specifically in the appliance sector. Many of those issues were -- are the results of government policies to try to deal with inflation and try to avoid real-estate asset bubble. And we also know that China is trying to, remake growth at a faster rate. So we’re confident that; we’re in the right spots, we’ve got the right designs and ultimately in China people are going to buy more appliances.

They are going to buy more room air-conditions, because it’s still going to get hot in the summer. And what we also know is that, that the Chinese government is very serious about energy efficiency. Anybody that spend any time over there especially in the summer knows they have a hard time keeping up with the vertical demand.

So it wouldn’t make any sense for them to go, have a large number of very inefficient products being sold when there’s a much better option out there, and that’s really where our sweet spot is. So we kind of view this market as something that it needs to get through this period of correction, but ultimately we’re very excited about our exposure to China and the end-markets and the energy efficiency play that we kept going there.

Suji de Silva - ThinkEquity

Okay. Thank you, guys.

Operator

We’ll take our next question from John Pitzer with Credit Suisse.

John Pitzer - Credit Suisse

Yeah, good morning guys. Thanks for letting me ask a question. Guys, I guess my first question here is on the mobile market, it’s got a bright spot. You talked about your expectations for the full calendar year, just kind of curious how we should think about the seasonality in the March quarter for mobile, is that just going to be fully offset by kind of new program wins and then kind of what expectations do you’ve over the next three months for that part of the business?

Mark Thompson

Yeah. So, traditionally Q1 into your point is the worst quarter of the year. And it can be down as much as five and even high single-digit percent from the fourth quarter.

So, what we see is that so far the perspective on smartphone for 2012 is I think overall that is considerable unit versus typical and then more than overcome by design win activities on our part. So, that’s what goes into, so less than typical seasonality for at least the current crop of smartphones and then that being overcome by design wins on our part.

John Pitzer – Credit Suisse

Traditionally a clarification, excluding the extra week with debt business, we’re up sequentially apples-to-apples?

Mark Thompson

Yes.

John Pitzer – Credit Suisse

And then my second question is you talked about the impacts in Thailand, I think in the December quarter two to three percentage points of growth with the residual 1% in Q1, I’m kind of curious how does that breakdown between sort of the PC HDTV issues versus the opto issues and in your view is that loss demand or do we get a catch-up at some point and when would you expect that if its the latter?

Mark Thompson

So, a couple of things, we don’t think that there is going to be any permanent share loss as long as the recovery fully occurs during the first quarter.

There is probably in the opto-coupler space is the biggest impact, and we still think that’s probably $3 million to $5 million less than it could be if we had full supply for the year -- for the quarter. Again, that is on track to be back intact fully and we track that daily.

The piece that has essentially fully recovered is the lead-frame piece for mobile. So, that impacted us in the fourth quarter, but we think we’re almost entirely recovered on that side.

John Pitzer – Credit Suisse

Okay. Any idea when you get this catch-up demand back?

Mark Thompson

Probably Q2. That would be our expectation.

John Pitzer – Credit Suisse

Perfect. Thanks, guys.

Operator

We’ll go next to Steve Smigie with Raymond James. And sir, your line is open. Please check your mute button.

Steve Smigie – Raymond James

Yes, thank you. My question is with regard to demand for the products in China, particularly for air conditioning, does it that require government incentives, you think to get people to buy there is more energy-efficient devices or they just going to go for the cheapest solution without those incentives in place?

Mark Thompson

I don’t expect that will be required. Inevitably, you’ll see some overall shift in the market, but as Dan commented, the drive through efficiency is increasingly legislated. So, you look at two sides of it, one is legislation, the other is incentive.

The legislation will undoubtedly continue to push the mix towards high-efficiency systems. The incentives are -- as I commented earlier, they tend to take the same -- they have the same impact in China as they do in the rest of the world, which is they don’t really stimulate demand. They simply shift timing. So, if you’re thinking of -- if you’re going to buy something in the next 12 months, and there is an incentive program, you’ll buy it before the incentive program ends. So, to that extent, what it did is it moved demand from the second half of 2011 into the first half of 2011.

Overall, one of the great shifts that’s going on in the world today is the emergence of a middle-class in places like China, India, Brazil etcetera, and those are all hot places, there is all need for modern appliances and there is all tremendous interest in energy-efficiency. And so, if you look at our Chinese customers as well as our Korean customers, very heavily those are global businesses as well.

So, China has been one of the big markets. It’s a couple of quarter event, but the fundamentals are absolutely intact.

Steve Smigie – Raymond James

Okay. And into my last question, it’s a follow-up, are there any internal programs coming up or rolling off that could help you in the coming year? Thanks.

Mark Thompson

We don’t have incentive expectations in our outlook. There is speculation about whether or not China will put another one in place. Recovery doesn’t require one. And intact, frankly, I would hope that they wouldn’t because again all it does is they shift timing. What we’ll continue to see is legislation that will force systems to have certain levels of efficiency. And that will be a net benefit. And we think we’ll see movement in that direction particularly in China in 2012.

Mark Frey

And existing regulations in most geographies have different targets for different years as they step in, so for example, Energy Star has raised the bar for next year. And I don’t know if you follow, but the State of California recently putout requirements for 2013 for not just energy-efficiency, but energy standby…

Mark Thompson

Yeah.

Mark Frey

…and the amount of current debt, a charger is allowed to draw when the battery is fully charged. So those are beneficial. Dan can certainly send you a schedule for the different regulations by geography and/or by country and where we see them going.

Steve Smigie – Raymond James

Perfect. Thank you.

Operator

And we’ll go now to Kevin Cassidy with Stifel Nicolaus.

Kevin Cassidy – Stifel Nicolaus

Yeah. Thanks for taking my questions. I wonder if you could just give a little more detail on the comment about utilization being weaker especially in January.

Mark Frey

Well, it’s more efficient to keep everything unloaded in January because you start the quarter with your carryover from Christmas and New Years in the West. And then you know, it’s an early Chinese New Year, so we schedule our shutdowns around the national holidays, and they are clustered in January. That’s been the pattern for a number of years. Then in February and March, we’ll begin to load them back up again.

Kevin Cassidy – Stifel Nicolaus

Okay. So its just a standard. I was just curious because the book-to-bill is positive, I was wondering why it wouldn’t be loading, but…

Mark Thompson

And to be clear, the utilization is still low, but it’s starting in February and March. It will be higher than we ran it in December.

Kevin Cassidy – Stifel Nicolaus

Okay, great. Thank you.

Operator

We’ll go next to Brendan Furlong with Miller Tabak.

Brendan Furlong – Miller Tabak

Good morning. Thank you. Looking at the end of the June quarter, in March quarter, last quarter you said that you expect March to be bottom and you’ve a seasonal up, a non-seasonal up March quarter possibly and things that conspired again seen on the revenue and margin line, but if we look into June and factoring in you know, what you think possible rebound in June is, and also the get back from the 14 week quarter in March, and how should we look at the June quarter?

Mark Frey

Well, June is seasonally up 4% to 5% for our businesses in general. And coming out of this cycle we’d have maybe more optimistic expectations for what that would mean. So, I think the way you approach that is, you take here the midpoint of our guidance, divide it by 14, multiply by 13 and that’s your March quarter base. And you ramp that up in June, accordingly. And I previously said what to expect for our margin progression on just the timing of the factory loads in – the December and the March quarter. So we think that’s definitely a step-up in the June quarter, but the ultimate amount is going to be how rapidly demand recovers.

Brendan Furlong – Miller Tabak

Thanks for that. And then the other question on the margin side is as we progress through the year, the get back from the ramp of the new fab, and I think the ways that 140 bips or so you said this quarter, how should we think about that as the year progresses?

Mark Thompson

Well, that will – it will actually dip slightly for a couple of quarters, and then the quarter before we commission the fab, which would probably be December of this year, it might blip up a billion or two. And so, roughly, no more than the run rate impact you’ve seen in Q1. And then the efficiencies from the fab obviously will come after we put it in service in to which we’re planning on 2013, early.

Brendan Furlong – Miller Tabak

Great, thank you.

Operator

We’ll go next to Bill Ong with Ticonderoga Securities.

Bill Ong - Ticonderoga Securities

Good morning, gentlemen. So, just to clarify, about a year-ago, you talked about managing for the more linear quarter for the growth rate to reduce seasonal variability. So, that’s your standard goal? And then my last question is that were there any changes for your strategic plans for your foundry partners? As you anticipate in the closing of Mount Top fab, so just changes the business projects, but now that Mount Top is still open, any changes around that?

Mark Thompson

So, there is a couple of questions there, the Mountain Top, the previous Mountain Top strategy was not a foundry-based strategy, it was redistributing the loads elsewhere in the Company. So, the answer is no on that. We do have an active foundry strategy in our analog business where certain technologies, we rely on foundry partners and other technologies are supported in Portland, Maine. And what was the other…

Mark Frey

So, the question about seasonality is if you look at a 10% top-line growth rate, I mean it turns into a quarterly couple of percent improvement per quarter if you would linearize it, and I think the lesson is a reminder of what we already know is that a big correction will prompt a linear progression every time. And so, we’ve seen obviously very large adjustments in the overall system inventory, which basically eclipse our ability to be linear.

Mark Thompson

However, we started this cycle with eight weeks of inventory. We started the ’08-’09 cycle with 12. So, we’ve significantly mitigated it, but nevertheless this was been a pretty painful demand correction we’ve seen.

Bill Ong - Ticonderoga Securities

That’s helpful. Thank you so much.

Mark Thompson

Operator, we have time for one more question.

Operator

Alright, our final question today comes from Mike McConnell with Pacific Crest.

Mike McConnell - Pacific Crest

Thanks. Guys could you quantify just the home appliance just what percentage is the revenue now?

Mark Frey

Dan.

Dan Janson

Mike, I don’t know if I have that number at my disposal here. It’s a fairly significant part of the high-voltage business. Our high-voltage business as you know is about two-thirds of what PCIA is.

Mike McConnell - Pacific Crest

Okay.

Dan Janson

Alright and its -- I don’t know that it’s probably a bit less than half of that high-voltage business, but it’s a pretty substantial portion. The rest being made up of industrial accounts.

Mike McConnell - Pacific Crest

And do you think you know well kind of going through the inventory adjustments there and if you kind of outlined we’ll get through that in Q1. Do you think that we’re going to have to see the China government maybe move back to stimulating the real-estate market potentially or maybe changing some policies for that to begin to grow or do you think the absence there we can still see some growth after we get through this inventory correction?

Mark Thompson

Mike, I expect that, you know if you look at the pace of the emergence of the middle class and equipping themselves accordingly, its going to grow whether they stimulate it or not. And so, again the overall trajectory -- positive trajectory of that business is it doesn’t require any kind of stimulus at all. And it’s important to remember that the, well in general the appliance worldwide isn’t growing that rapidly. The penetration rate of fresh PC systems which really drive the efficiency is still very low you know maybe 20% in aggregate worldwide. So that conversion is going to drive growth for many years, almost regardless of what policy does. I certainly would hesitate to try to project China’s fiscal policy in 2012.

Mike McConnell - Pacific Crest

Certainly, yeah. But just the, and in longer-term just competitively we’ve had some of your competitors now start to look at entering into that IGBT market and obviously was a great driver for your margin profile, your mix-up strategy last cycle. How you’re feeling about your competitive positioning versus some of these new entrance that are starting to get more vocal not getting into the market?

Mark Thompson

Well, we really liked our leadership positions are wonderful because you can continue to build on. And so if you look at what it takes to make a compelling for example an SPM solution which might have 15 to 30 chips in it. There is strength in the IGBTs themselves which of course are the power management device, there is strength and drivers, strength in the ICs, there is the application knowledge in terms of efficiently driving motors that – those drive schemes and the multi chip packaging capability itself is quite sophisticated the card – as the thermal management is very – it’s a complex system. And it’s one that is good as our current implementations are, there are many vectors that we’re continuing to improve them on. So we think it’s a great space and its one that’s going to be continue to become more important and we have a lot of confidence in our ability to maintain a leadership position there.

Mike McConnell - Pacific Crest

Okay. And then my last one just to sneak one last, on just the – I believe you’ve talked about margins 33%, 34%, I just want to clarify with utilization, the expectations the utilizations were up slightly in Q1, should we think about that kind of profile than normalized rate or is that we should think about for Q2? I just want to clarify what that comment was particular to regarding timing that 33% to 34%?

Mark Frey

Its normally – it normalizes around the build plan that we’ve embedded in our guidance in Q1.

Mike McConnell - Pacific Crest

I see. Okay.

Mark Frey

Obviously we’re not saying anything about revenue in Q2 other than the direction indicators that we shared with you so far.

Mark Thompson

But if we replicated the Q1 build plan and Q2, that would be the approximate outcome.

Mike McConnell - Pacific Crest

Perfect. Okay, great. Thank you.

Dan Janson

Thanks Mike. Okay with that we’re going to conclude our call. Thank you for your interest in Fairchild.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today’s conference.

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!

Source: Fairchild Semiconductor's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts