AVX's (AVX) CEO John Sarvis on Q1 2016 Results - Earnings Call Transcript

| About: AVX Corp. (AVX)

AVX Corp. (NYSE:AVX)

Q1 2016 Earnings Conference Call

July 27, 2016 09:00 AM ET

Executives

John Sarvis - CEO and President

Kurt Cummings - SVP, CFO, and Secretary

Analysts

Jim Suva - Citigroup

Alvin Park - Stifel

Operator

Good morning. My name is Holly, and I’ll be your conference operator today. At this time, we'd like to welcome everyone to the AVX Corporation Preliminary First Quarter 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. [Operator Instructions] I’d now like to turn today’s conference over to John Sarvis, President and CEO. Please go ahead, sir.

John Sarvis

Good morning. I'd like to welcome you to the AVX conference call regarding the results for our first fiscal quarter that ended in June. I’m John A. 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 3.7% sequentially to $314.8 million as the end market demand continued its slow, but steady improvement. Orders for the industry during the quarter did pick up to a degree, as the end market products were introduced and it appears that most customer inventory reduction programs are complete.

The gross book-to-bill for AVX in the quarter was 1.07, resulting in a 7.2% increase in the overall backlog. In this quarter, the distribution channel showed some encouraging order and shipment enthusiasm and represents 47% of our overall shipments, up 2 points when compared to the previous quarter.

POS in all regions is running at a positive growth rate versus last quarter with the Americas being the most dynamic of all the major regions. Elections of strong U.S. dollar and political economic issues in Brazil are contributing to this sluggishness compared to Asia and Europe. Inventory restocking occurred in each region to support the POS growth, and we consider this necessary to support the business.

Positive distributer POS to book-to-bills this quarter kept us and keeps us optimistic that the competitive growth in the distribution channel will continue throughout the year.

Regionally, and looking at our revenue split, each geographic region by similar market conditions. As a percent of the total, each region basically kept its relative position, with Europe representing 28% of our sales, the Asia region at 42% of our overall shipments and the Americas at 30% of the AVX total.

The overall PC market continues to decline since the beginning of 2015, with the year-to-date 2016 shipments declining in the 10% range versus last year, which is it was the poor year in itself. Tablets have even gotten worse negative growth, and the introduction of Windows 10, new performance and then models have done little to stand the erosion of the market. As we have stated before, this is a secular ship to buy a smartphone first, then a computer and maybe.

Another factor eroding the market is the adoption of cloud computing, which alleviates the need to upgrade hardware as in the past.

We continue to pursue high performance designs in the PC market, particularly in the high end tablet and convertible segment. And we're optimistic that some of these designs might create more interest on the part of the consumer and the business customers to upgrade. The smartphone market grew 15% units last year, which was a continuation of the deceleration of the market growth rate. There will be further erosion of this growth rate down to the mid-single digit range this year and in future years.

Main factors are driving the slower growth, including market saturation, less carrier subsidizing new phones with contracts, a lack of compelling new features to motivate the user to upgrade.

One historical market leader is seeing their market share eroded by strong manufacturers in China and continuing pressure from Korean brands. When you combine the continuous decline in the dumb phone segment, the overall cellular phone market will be a very low percentage unit decline for the foreseeable future.

In the telecom infrastructure space, China suppliers are now finishing their last round of 4G-based station installations.

India is growing their 4G installations, and we anticipate growth through calendar year 2016. There are discussions of an intermediate 4.5G platform before moving on to 5G. These incremental steps will demand a higher quality and value-added electronic components than what we are used today in the current bandwidth.

The broadband infrastructure market continues a strong growth rate and primarily long-haul or city-to-city and continent-to-continent upgrades to 100,000 GB a second lines. New growth began in calendar year '16 with data centers or the cloud from 100 GB to speeds up to the movement of data from server to server and to the cloud and to a lesser extent, in and out of the cloud.

Major growth for the next couple of years will come from upgrading the Metro or within a city to 100 gigabyte. We anticipate a minimum of 20% compounded annual growth rate for the next several years as 10G gigabyte lines did not need our parts whereas a 100 gigabyte lines does.

The automotive segment continues to show steady growth globally. The demand for vehicles will continue, and the electronic content of those vehicles will increase. Some regions such as China might show a slowdown in vehicle sales, with the decrease in government incentives and some indication that may be an inventory build on some dealer lots. But other regions such as the USA and Europe will make up the demand.

The 3 key trends in the segment - in this segment are ADAS or advanced driver assistance, the connected vehicle and eventually, autonomous driving vehicles. All hybrid and all electronic vehicles will continue to grow as a percentage of the vehicle sales.

As these developments require a high level of electronic and interconnect content at a high-reliability level and a competitive price. Automotive will remain a very key area for our future growth and investment in new products and capacity.

In the industrial segment, the oil and the gas business continues to be down as we're seeing announcements in some companies are taking advantage of the lower cost of equipment, services, labor and steel to restart some exploration projects around the world. We are well-positioned to take advantage once the exploration business improves.

The TV segment is growing, largely driven by the lower cost of the equipment, TV panels, in addition to historical government subsidies. In the U.S.A., the market for this equipment will grow 14% a year for the next 5 years and a slight - and slightly lower growth rate worldwide.

Our power film and MLC capacitors are key enablers in this market. The implantable medical markets are stable, and we'll continue to work on new designs. There have been some inventory corrections in this market, which has impacted our near-term sales. We think our MRI-safe implantable pacer and defibrillator is increasing the design of choice for many doctors today as not all manufacturers have this capability, and we think this is creating a short-term slowdown in the shipments to at least one of our customers.

In the aerospace and the defense markets, we've had a very good order activity for commercial and military satellite programs this quarter in both Europe and the U.S.A. And the general outlook for defense program is more positive than it was a year ago.

In commercial aerospace, there's some slowing of aircraft orders this year, but a very healthy backlog is in place for the foreseeable future. Some estimates say that the market needs 40,000 new aircraft delivered in the next 10 years.

From the military aircraft side, the government is negotiating the next 2 buys of the F-35, and there's some talk that they may revive the production of the F-22. For AVX, this means good demand for our parts going into a myriad of avionics for these aircraft. Sales prices are under moderate pressure as overall production lead times remain consistent with the previous quarter.

Capacity expansions are underway in several of our key product areas that have been under pressure for the past several quarters. The commodity product pricing fell in the 1% range during the quarter, slightly better than long-term historical trends. We anticipate the ASP trend to continue like this as the capacity utilization for both ceramic and tantalum remains above 90%.

This quarter, AVX gross margin performance was 22.2%, was impacted by several issues. In connection with the unfavorable court ruling regarding an ongoing and electoral property lawsuit as previously reported and including in our financial or fiscal financial statements disclosures, we await the court's decision with respect to the ongoing sales of the affected product. Our sales of the product continue. In this quarter, we recorded $2.5 million of additional potential operating cost pending final resolution.

Also, as a result of the inventory corrections occurring at some medical device customers, the sales of our high-reliability components in this important market segment declined, and this negatively impacted our margins.

In addition, the rapid increase in the value of the yen versus the U.S. dollar during the quarter negatively impacted gross margins by approximately $2 million. SG&A expense in the quarter came in at $31.5 million or 10% of the sales, in line with our expectations.

The quarter results reflect a $3.6 million charge for estimated cost related to a legacy environmental cleanup issue at an inactive property as a result of ongoing investigations into old ground contamination and current remediation alternatives.

Profit from the operations for the quarter included the unusual charge, came in at $34.8 million or $38.4 million, excluding the charges at a 12.2% of sales.

Our earnings came in at $0.18 per share for the quarter or $0.19 per share excluding the environmental charge.

Higher other income, which included currency gains and other non-operating items, contributed to the higher net earnings. Our income is expected to drop back to the normal level next quarter.

For the quarter, we paid $17.6 million in dividend payments and spend $16.3 million for facility improvements and equipment.

Depreciation expense totaled $8.3 million, and tangible and amortization expense was $1.3 million. The order activity leads us to estimate that our shipments in the September quarter, which includes the summer holiday season, will be flat or up to 1% as compared to the June quarter.

We would expect margins to come in again near the 21% to 22% range during the summer holiday season and as usual, will be impacted by product mix and sales price pressures.

We anticipate an increase in the electronic applications across all platforms and markets, particularly in automotive. Our strategy has included the introduction of expanded range of interconnect and passive electronic products across a more diversified 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 our acquisition emphasis for some time now, but I want to assure you that 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, sales and earnings if we can - if they can be had at the right price.

I would now like to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Alvin Park with Stifel.

Alvin Park

Hi. This is Alvin speaking on behalf of Matt Sheerin. Just first of all, could you cover the end markets by percentage, please?

John Sarvis

Sure. In the automotive area, as we were flat to last quarter at 23%; cellular was down 1 point at 14%; computer was flat to last quarter at 14%; consumer was up 1% at 11%; industrial flat to last quarter at 11%; medical, as we referenced earlier, was down 1% at 8%; military flat at 4%; and networking at 4%; and telecom up 1% at 11%.

Alvin Park

Yes. Thank you. And in terms of distribution, could you able to provide more detailed color on what you've been seeing just in terms of like sell in, sell out and maybe some forward looking trends or color or insight that you've been seeing?

John Sarvis

Oh. Well, as I said earlier in the announcement, our distribution, we're seeing a recovery from last year on the distribution inventory side. And now we're seeing replenishments and also continued strong emphasis in their POS and their book-to-bill. So a much better trend than what we're seeing last year at this time. Relative to the military market, as I said earlier, we're now beginning to see more activity in the military area and aerospace area on some of the product releases in terms of bill schedules. So I think and automotive, as we said, is continuing to accelerate due to both the sales growth of the automotive bill of sales as well as the electronic content. So I think those are probably 3 key parameters that we see as far as improvement trends.

Alvin Park

I see. Thank you. And lastly, in terms of M&A, I mean, I know you've mentioned briefly, but could you provide any colors on your current pipeline that you have?

John Sarvis

No. I wish I could at this point. We have looked at several companies and are, as I said earlier, in discussion with several other companies at this point. And our primary focus is to look for high margin and more niche or specialized components that will generate the high margin and also have future growth opportunities. So as you might notice, those aren't - are very difficult to find at a price that is amenable to us. So

Alvin Park

I see. Thank you. Thank you very much.

Operator

[Operator Instructions] Our next question comes from the line of Jim Suva with Citigroup.

Jim Suva

Thank you. And congratulations to you and your team and AVX. Can you give the breakdown of the advanced and ceramic and all the different products? And then also, can you give us a little bit of hypothetical or help us understand the sales and gross margin guidance, like quantifiable terms maybe relative to seasonality or what you're starting to see? And was there any impact from Brexit? You mentioned political uncertainties in your comments, but help us, kind of quantify how should we look out to the next quarter on sales, on gross margins.

John Sarvis

Okay, certainly. All right. Let me start off by breaking out the breakout within the divisions: the ceramic component division this quarter was 16%, up 1% from the previous quarter; our tantalum products at 25%, primarily flat to last quarter; our advanced components was down 2 points to 26%, and I think it referencing the gross margin that - an impact to that was relatively impacted by the lower sales in the advanced group; and our resale products, our Kyocera resale products was up 1%, from 20% to 21%; and our connectors up 1%, from 11% to 12%, which was primarily driven in the automotive area. And I'll turn it over to Kurt on the margin.

Kurt Cummings

Hi, Jim, Kurt Cummings. The gross profit guidance. Well, let's start with the seasonality. That affects both AVX and our customers, particularly in Europe to the degree that the customers don't want to take deliveries during their shutdown periods, then that affects, obviously, our sales and gross profit. The other side of that story is to the extent that we take holiday shutdowns in Europe and the U.S., to a degree. We have less overhead cost absorption in production, so that can affect our gross profit as well. The other question I think you asked is do we - have we baked in or do you we anticipate any change from the Brexit? And no, we haven't. Other than the pound sterling losing value against the U.S. dollar as a result of that move, we don't have an awful lot of operations, either production or sales operations in the U.K. So we get some benefit from a weaker pound from a cost standpoint, but it's not very dramatic. In terms of the expected effect on our shipments, either within Europe or outside of Europe, I think that's an unknown at this point. But right now, we're not aware of any customer issues that are going to affect our sales levels.

Jim Suva

Okay, great. And then as a follow up, have you actually - and maybe I missed it. Did you quantify actually what the sales like quarter-over-quarter should be for the September quarter and the gross margins, kind of what we should model, just to be kind of reasonable?

Kurt Cummings

Well, I think that John in the opening remarks did address the expectation that sales would be flat to up 1% in the September quarter, our best estimate at this point and then that we said the margin should be between 21% and 22% during that season.

Jim Suva

Perfect. Exactly. And then last part, so seems like you had no impact from Brexit. Is it fair to say that then also your quarter schedules or your orders from OEMs at this point have not fluctuated compared to normal seasonality, what do you expect? And really the only thing that you've seen so far is the FX impact from all this political uncertainty?

John Sarvis

Yes, I would say most. Our OEM business has been relatively consistent and not really - it really hasn't been impacted either way at this point. The biggest - as I said earlier, the shift there has been primarily and the impacts we're seeing is in the distribution sales channels.

Jim Suva

Okay. And then my last question on M&A. I know you can't give details, but given the volatility in currency, does that accelerate or pause or impact the M&A cadence or timing at all, given the foreign currencies globally have been pretty volatile?

Kurt Cummings

Jim, this is Kurt. No, I don't think we focus on the currency effect. I mean, that affects, depending on where it is, the actual cost of the acquisition and then the cost of operations subsequently as well as the sales levels. But right now, as John mentioned in his remarks, the focus is complementary products, where we can broaden our product offering and utilize our strong sales and marketing organization around the world. We are looking at different things around the globe. So it's not a currency focus. It's more a product and the ability to grow sales profitably for the total group.

Jim Suva

Great. Thanks so much for the details and clarification. And congratulations to you and your team at AVX.

John Sarvis

Thank you.

Operator

At this time, we have no further questions. I'll hand the conference call back over to Mr. Sarvis for closing remarks.

John Sarvis

Again, we'd like to thank you for joining in on the call this morning. We had some encouraging news here in our first quarter. We got the summer months in the next quarter. And as we've alluded to in previous comments that there is a slowdown in - primarily in Europe that we'll have an impact in, but we're still looking at a moderate - flat-to-moderate increase this quarter in terms of revenue, with pretty consistent on the margins of what we had this quarter. Again, we will continue on the M&A front. And we'll continue our efforts there, and we hope that we will be able to be more encouraging on our next call relative to the M&A progress. Again, thank you very much for joining us.

Operator

Once again, we'd like to thank you for your participation on today's AVX Corporation preliminary first quarter earnings release conference call. You may now disconnect.

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!