AVX Corporation (NYSE:AVX)
Q4 2015 Earnings Conference Call
April 26, 2016 10:00 AM ET
John Sarvis - Chief Executive Officer and President
Kurt Cummings - Senior Vice President, Chief Financial Officer, and Secretary
Jim Suva - Citigroup
Matt Sheerin - Stifel
Good morning. My name is Kayla and I’ll be your conference operator today. At this time, I'd like to welcome everyone to the AVX Corporation Preliminary Fourth Quarter and Full Year Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.
Mr. John Sarvis, CEO and President, you may begin sir.
Good morning. I'd like to welcome you to the AVX conference call regarding the results for our fourth fiscal quarter and the full year that ended in March. I’m John Sarvis and with me today is, Kurt Cummings, AVX’s Chief Financial Officer and we hope you've had a chance to review our earnings release and related disclosures that were issued this morning.
It was another challenging quarter for the markets. However, sales came in slightly over our predictions growing 5.8% sequentially and the gross profit came in on the top end of our predictions based on continuing favorable product mix, margin management as well as good operating performance.
Sales in the quarter were $303.6 million and reflect the increases in product bill schedules at our customers. Sales for the full fiscal year were $1,195.5 million. The translation impact of last year's strength of the U.S. dollar as discussed on prior calls reduced sales for the entire year when compared to last year. We sell in various currencies around the globe and the reported sales for the year were negatively impacted by approximately $50 million when compared to the prior year due to the strength of the U.S. dollar versus the Euro and the yen.
The change in the sales channel for Kyocera Resale Connector products in Asia effective April 01, 2015 also as discussed on prior calls reduced sales for the entire year by approximately $46 million when compared to last year. The remaining sales impact year-over-year can be attributed to sluggish economic conditions and our customers’ asset management programs to actively reduce their inventories on hand.
Orders for the industry during the quarter did pick up to a degree as the end market products were introduced. Gross book-to-bill for AVX in the quarter was 1.05 resulting in a 1.6% increase in overall backlog. In this quarter, the distribution channel continued to represent 45% of our overall shipments similar to the previous quarter. The inventory correction in the channel was completed last quarter and we actually saw a very small increase during this quarter completing our fiscal year with 10% less inventory in the channel compared to the end of last fiscal year. Given this current lower level of inventory, we feel our channel is positioned to turn new business into orders without creating an over-inventory situation.
POS and the Asia region is running at a positive growth rate versus last quarter influenced by the broad production of electronic devices as mentioned last quarter. The automotive market uptick was driven by government incentives. Europe and the America POS showed some improvement late in the quarter with both regions showing growth versus last quarter. The positive distributor POS book-to-bills in all three regions lead us to be cautiously optimistic that this trend will continue in the near future and support our growth objective for the distribution channel.
Regionally and looking at our revenue split, each geographic region faced similar market conditions. As a percentage of the total, each region basically kept its relative position with Europe representing 29% of our sales, the Asia region at 41% of overall shipments, and the Americas at 30% of the total. The overall PC market is expected to decline in 2016 by single-digits, and Q1 was worse than expected for global PC shipments dropping over 9% from last year's Q1. We believe there has been a secular shift from get a PC first, then get a phone to get a smartphone first and then maybe a PC.
Recently, we’re seeing more activity from the hybrid notebook market segment, and this device we can both be a tablet and a regular PC but with the horsepower of a notebook PC. These devices are demanding more electrical power than what a traditional smartphone or tablet can provide. These kinds of applications are demanding more enabling leading-edge solutions.
We continue to pursue new high performance designs in the computing market, particularly in the high-end tablet and convertible segment, which represents incremental business for AVX no matter what the overall market is doing. There continues to be a high level of activity for new designs and supporting new product ramp-ups with our customers. The smartphone market is an important part of our business and the smartphone manufacturers continue the battle over market share. The increased functionality such as electronic pay features and associated security is driving increased component growth in all new models. We are actively involved with most large producers including China-based manufacturers. We expect the overall market to increase this year in the single high-digit rate which is significantly lower than the previous growth rates. Part of the current year growth prediction was negatively impacted by Q1 inventory correction by a major producer.
In the telecom infrastructure space, China suppliers are now finishing their latest round of 4G base station installations after those expansion programs were delayed in most of the last calendar year. There will be future network expansion but it's unclear as to when this will happen and it is highly dependent upon China and other government decisions.
The broadband infrastructure market continues to be robust due to the need of more bandwidth on the internet. Along with the need for more bandwidth comes more demand for storage to support the increase of cloud-based storage and applications in the IT industry. A particular focus for us is in the segment of the solid state drive, where we have a significant level of new design activity with all major suppliers in this space.
The automotive segment remains our most important market, and the component and interconnect demand for vehicles remains at a robust level coupled with a low single-digit vehicle growth rate predicted for calendar year 2016. The future is very active with the latest legislature requiring all vehicles to have active safety electronic features. This movement along with the increased electronic features of the automobile is driving increased component demand and the need for advanced high speed interconnect modules.
Last year, China auto sales reduced to a low in July, but since then largely due to government incentives for fuel efficient vehicles, the market has grown each month except for February slow down due to Chinese New Year. This positively affects our business supporting my distribution channel comments earlier.
Hybrid and electronic vehicle demand is increasing and drive changed solutions are served by advanced power components group which has recently increased production capacity in support of this growth. We are now involved in many new designs with major automotive manufacturers and their suppliers around the world.
In the industrial segment, the oil and gas business continues to be down, but we've not slowed our product development and qualification efforts. We are well-positioned to take advantage once the expiration business improves. In other parts of the industrial market, we're seeing increased activity in security and surveillance markets with more devices developed to be the network into the Internet of Things movement. The solar and wind business is very active when we're seeing new power film business as projects come on board this quarter and more and more expected through the calendar year of 2016.
In the medical markets, the pacemaker, defibrillator and MRI markets are stable, and we are well-positioned in these critical manufacturers. We see new growth and other emerging solutions such as neurostimulation, diabetes management and other therapies where we are targeting growth through new designs with new enabling electronic products and interconnect solutions. We've seen more order activity in the military and aerospace markets during the last quarter, and over the course of this fiscal year, we expect some incremental improvement in the release of programs for production specifically in the government and commercial satellite markets. The increased demand for commercial communications, broadband, and homeland security is driving the need for more satellite launches. These satellites are using more sophisticated equipment for imagery and secure ground communication. Both our RF and robust high reliability components are required.
Sales prices are under moderate pressure as overall product delivery lead times have not changed for most components except for our automotive grade MLC high CD capacitors, tantalum capacitors and crystal oscillators where capacity constraints have necessitated a need to stretch our delivery lead times until additional capacity comes online. Although we don't like to extend lead times in such a sluggish market, it does emphasize the fact that there are growth opportunities that we are aggressively targeting for sales coupled with capacity expansion.
The commodity product pricing fell in the 1% to 3% range during the quarter similar to long-term historical pricing trends. We anticipate the ASP trend to continue like this as capacity utilization for both ceramic and tantalum remains above 90%. This quarter, AVX gross margin performance at 24.4% reflects continued solid operating performance as well as a favorable mix of the value-added components.
SG&A expenses in the quarter came in at $32.2 million or 10.6% of sales. The SG&A is up over last year primarily as a result of higher legal costs. We've worked this year on the resolution of a few intellectual property disputes and environmental challenges, so we anticipate that the future will see lower on coming legal Advisory costs. In that regard, the quarter results reflect a $1.2 million unusual charge related to legacy environmental remediation demand for one of our operating sites and a $418,000 charge relating to a verdict in an intellectual property lawsuit.
Profit from operations for the quarter including the unusual charges came in at $40.2 million or $41.9 million excluding the charges at 13.8% of sales. Our earnings came in at $0.19 per share for the quarter. As mentioned at the start of the call, sales for the full fiscal year were $1,195.5 million. The fiscal year gross margin performance at 24.2% was generally maintained throughout the year. I believe our team at AVX should be proud of the maintenance of strong gross margin percentage throughout a challenging year.
The SG&A expenses for the year came in at $119.7 million or 10.1% of sales. The year's results reflect $37.6 million of unusual charges related to two intellectual property lawsuits and $7.7 million of unusual charges related to legacy environmental challenges. Full-year profit from operations excluding the unusual charges came in at $169.3 million or 14.2% of sales. Our annual earnings came in at $0.60 per share including the net effect of the unusual charges and one-time tax benefits or $0.75 per share excluding these items.
For the year, we paid $70.5 million in dividend payments and spent $10.2 million repurchasing AVX stocks on the market. For the year, we spent $48.1 million for facility improvements and equipment and depreciation expense totaled $34 million and tangible amortization expense was $5 million. As I stated throughout this year, the visibility going forward still remains uncertain. The order activity leads us to estimate that our shipments in the June quarter will be up in the 3% range compared to the March quarter. If the distribution channel sees good end market demand and increases its inventory position, then the sales could be better than that. We would expect margins to come in again near the 23% to 24% range, and as usual be impacted by-product mix and sales price pressures. Our customers remain optimistic about new product introductions but still inventory risk adverse at this point.
We anticipate an increase in new electronic applications across all platforms and markets, particularly in automotive. Our strategy has included introduction of an expanded range of interconnect and passive electronic components across a more diverse range of vehicles and on board electronics around the world. At the same time, our strategy includes identifying complementary high-technology acquisitions that provide opportunities for non-organic sales growth.
I know you've heard me speak about acquisition emphasis for some time now, but I want to reassure you we have a group of senior managers devoted to this task, and we are actively pursuing a number of promising candidates that we believe can deliver growth in both sales and earnings if they can be had at the right price.
I would now like to open it up for questions.
[Operator Instructions] And our first question comes from Jim Suva from Citi.
Thank you and congratulations to you and your team at AVX. First of all, can you give us the product and the different division breakdown? And then following that, can you talk a little bit about, should we model it and expect any additional ongoing additional say legal, lawyer, EPA IP fees and the timing of such payment? Thank you.
Okay. First let me talk about the divisional split. Ceramics this quarter came in at around 15%, about 1% less than last quarter. Tantalum products at 25% also down 1%. Our advanced components is at 28%, up 2% from last quarter. The KDP and KCC resale product was at 20% and the connectors remain constant at 11%.
And Jim, this is Kurt Cummings. To answer your question, I think I need a crystal ball, but with respect to the IP issues, the two lawsuits we've accrued up to the jury verdicts, but still they need to go through the entire court process and have the judge approve all of the findings, so those are still open. I think we have appropriately accrued for our exposure, but until the judge finalizes everything we're just not sure.
And on the environmental front, we have a number of legacy environmental issues that we've dealt with over the past 20 years that are going to take time going forward as well. We've set up reserves for what we know so far, but it's very difficult with environmental remediation to say that there is no more to come or that our estimates are too high or too low. Unfortunately, we're just going to have to play that out as it goes.
Great, and then as a follow-up, can you talk about the pricing environment today say maybe versus a year ago or quarter-over-quarter, has it changed?
I don't think pricing wise it's been pretty constant for the last couple of years. We've seen softness in several markets but also strength, again, primarily in the automotive area which has probably been one of our most strongest markets over the course of the last two years, and you know, we've seen some volatility in the commodity side of the business, but if you look at it overall nothing unusual relative to pricing trends in the last couple of years.
Great. Thank you very much gentlemen.
Our next question is from Matt Sheerin from Stifel.
Yes, thank you. Could you, John, go over the end markets as a percentage of your revenue?
Sure. The automotive market as we mentioned earlier our strongest market is 23%, the cellular 15%, computer 14%, consumer remaining constant at 10%, industrial 11%, medical up a little this quarter, up 9%, military 4%, networking 4%, and the telecom down 1% at 10%.
Okay. And on that nice increasing gross margin, you talked about some of the puts and takes there, but it look like that mix of business with the stronger advanced products relative to the more commodity products being weaker, that sounded like that was a big driver as well as some internal cost controls. And I think you're guiding 23% to 24%. Is that really a function of mix as well where you may see an increase in some of the more commodity areas?
Yeah, it is. We anticipate the commodity area to be a little stronger this quarter than last quarter, we’ve put a little bit more pressure on the margins. Our task is to try to offset that with the more advanced products than the growth in those areas that can help us maintain that margin percentage.
The Kyocera retail business, the business that has moved to a direct basis, that's basically behind you, is that right, or do you expect any incremental business to move off?
No, no, no. That is behind us this year. We got that behind us, and don't anticipate anything in the future relative to KCC change.
Okay. And on distribution, it sounded like you're seeing inventories finally play out the inventory correction play out there. It sounds like book-to-bills in sell-in and sell-out are improving, but it didn't really change as a percentage. So as it does, it should favorably impact your margins right because margins through the channel tend to be higher?
Yeah, that is true, Matt. It depends primarily or a significant portion of that depends on the regions relative to Asia, Europe and the U.S. But as a general rule, that is right.
Okay. And just lastly for me regarding your M&A strategy, I know since you've taken over as CEO, John, you've talked about this being a priority and here we are a year later, you’re still looking at opportunities. Are you in terms of your strategy, in terms of exactly where you're looking and the types of companies, has that changed at all, and are you getting closer to any deals here?
It hasn't changed much. We are as I said earlier, continually looking at several different companies. We are involved in discussions and have been for the last several months with several companies, but what we're – again, what we're stressing and looking at is something that we can integrate into our current channels and make that transition smooth with a heavy emphasis probably more in the power reliability area as well as maybe in the interconnect area.
Okay. All right. Great. Thanks a lot.
[Operator Instructions] We have a follow-up question from Jim Suva from Citi.
Thank you. For those – some of us that weren't familiar, you've mentioned a Kyocera change a couple of times. Can you help us understand exactly what that is, the history behind it and where we should see it in kind of a time line impact?
Yes, the change was on the Kyocera connector products in Asia, which originally AVX had the sales channel. Last year, it was decided Kyocera would take the Asia connector group back internally, and again, that was effective as of April 01 of 2015.
Okay. So to be clear, we've completely lapped that; is that correct?
Okay. And any other changes that are rippling from this to other parts of your business?
No, no other impact there. No – nothing that we foresee happening in that area in the future.
Great. Okay. Great. Thank you so much for the clarification.
Our next question is from [indiscernible].
Yeah. Hi, I appreciate the improved short-term results and the dividend distributions, but I happened to yesterday run a 15-year return analysis of AVX on Bloomberg with dividends reinvested, and I ended up with a minus 0.33%, 0.35%, 0.52% annualized rate of return. Oftentimes during the conference calls, we've heard about new electronic products coming out and the like and somewhat similar commentary to what we're now hearing. Can you generally – I know you haven't been in charge for the great bulk of that time, but can you comment on the history and why things are perhaps different now than they have been?
I think if you look back over the history and you look at the strategy relative to AVX 10 years, 15 years ago relative to today's strategy, we're more heavily involved in our focus and more of our advanced and more of our less commodity more high end products, which has of course affected the sales and the return to get us in that position. So, we'll continue to keep that strategy as we go forward and as we look at acquisitions, we're looking at acquisitions that complement that strategy. I can't really comment based on 15 years ago, but I can basically tell you from where I know we were ten years ago to where I think we're going this way, and that's primarily the significant change there. And we started in an acquisition several years ago with the acquisition of ATC, and so we'll continue to look at those kind of opportunities, which will drive growth in our more advanced products.
Okay. And other than this change in distribution that's been announced with regard to Kyocera, can you comment on any other discussions you've had since you've started with Kyocera with regard to anything going on between the two of you?
This is Kurt Cummings, Michael. The relationship with Kyocera began back in 1990 when they purchased all of AVX, so AVX has been distributing their products, the electronics products because they're a fairly diversified company, in the three regions where AVX is very strong from a sales and marketing standpoint. The connector portion that they took direct was a bit more unique because often the connectors are a design specific activity with the customer, and they found that having their factories deal directly with the customers on the design of the connectors was perhaps going to be more efficient and better for them in the long run. But from the resale purposes for the other electronics components, AVX has been a very important sales and marketing arm for them outside of Japan.
So is it fair to say at this point that we do not know of anything other than the fact that Kyocera's likely to sit passively with their AVX interests?
As far as we know at this point.
Okay. Thank you.
And there are no more questions at this time. I'll hand the call back over to you presenters.
Well, listen, thanks again for joining the call today. We saw a positive sign, a positive quarter. We're looking forward to this coming New Year that we have before us and starting out much better than where we were last year with currency issues and change in sales channels. So, I think there's an opportunity for us this year. We'll continue to push ahead, strive the growth in revenue in both organic and also through acquisitions. So, again, we're looking for a very positive year, and we're very excited about it, and thanks again for your time this morning.
This is the end of today's call. You may now disconnect. Have a great day.
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