AVX's CEO Discusses F4Q 2012 Results - Earnings Call Transcript

Executives

John Gilbertson – President and Chief Executive Officer

Kurt Cummings – Chief Financial Officer

Analysts

Matt Sheerin – Stifel Nicolaus

Jim Suva – Citi

Joe Wittine – Longbow Research

AVX Corporation (AVX) F4Q 2012 Earnings Conference Call April 25, 2012 10:00 AM ET

Operator

Good morning. My name is (Chris), and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year Earnings 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) Thank you.

I’ll now turn the call over to CEO and President, John Gilbertson. Please go ahead, sir.

John Gilbertson – President and Chief Executive Officer

Thank you, Chris. Good morning. I like to thank you for attending the AVX conference call regarding the results for our fourth fiscal year quarter and the full year that ended in March. I am John Gilbertson, and with me today is Kurt Cummings, AVX’s Chief Financial Officer. I hope you had a chance to review our earnings release that was issued this morning.

The first quarter was an improving quarter. The global economic uncertainty, which led to an inventory level correction up and down the supply chain during the past several quarters, continues to affect the recent order and sales pattern, but the inventory situation, particularly in the distribution channel eased somewhat in the March quarter, as our sales to their customers increased in the quarter leading to a higher sales for AVX.

The worldwide distribution, POS or point of sales, was up 6.5% from quarter three actually up 10% in units. We saw an acceleration of POS through the quarter, with the March POS up 16% from the February number, and the highest since May 2011. Our shipments to distribution increased 7.3% from quarter three with the same acceleration in February and March. We are seeing improvements in the inventory correction in the channel, and to some degree, a level of restocking that has limited effect on inventory due to the strong POS. But further improvements, as we said in the last conference call, is anticipated to occur late in the June quarter. We expect them to see more bookings from the distribution channel as a result of their need to restock inventory.

In this quarter, the distribution channel represented approximately 35% of our overall shipments. The distributors appear to be seeing increasing activity with our customers and a continuing reduction in their months of inventory on the shelf. Overall, visibility concerns remain as many customers continue to be reluctant to order beyond the immediate demand, and that kept the gross book-to-bill for the quarter essentially flat.

Automotive for AVX, especially in Europe continues to be strong and continues to be driven by the Asian market. Normally, the first calendar quarter tends to be weaker than the quarter actually was. Apparently, the demand for all new smartphones helped this quarter as well as automotive, but we continue to see weakness in feature phones, which many of our customers are deemphasizing. The sales in the quarter were $363 million.

For a quick review of general market conditions, let me hit the high points. The cellular story, as mentioned earlier, continues to be about the same, fewer and fewer feature phones and much more price competition. Smartphones, where we are much stronger, now have about 30% of the overall handset market as compared to about 21% the previous year. And from where we sit, this will continue to drive up component demand. As smartphones continue to grow more, RF solutions and improved antenna performances are required and we are seeing growth in these segments. The increased data transmission rates associated with these devices put higher demands on telecom infrastructure development to sustain optimum user experience. And this segment is improving albeit slower than would be anticipated.

Demand for more deepwater and horizontal directional drilling exploration is increasing and this is offsetting weakness in military and defense. Aerospace remained strong during the quarter. We are seeing some improvements on solar and traction business once again. And this has helped our power business, which has been under some pressure with reduced government spending. This coupled with the base industrialized business should improve revenue as the year progresses.

In the automotive segment, we are seeing some slowdown in regional customers in France and Southern Europe, while Germany continues to move ahead and appears to be offsetting this weakness. Medical is improving from a slow year while computer remains weak, which is normal this time of year. As a percentage of the overall revenue in the quarter for the region, Europe continued strong with the automotive market continuing to be a player in that region. Other end markets in Europe are less robust. Europe represents 28% of the total. Similar to last quarter, while Asia sales decreased 1 point to 44% and the Americas sales increased to 28% of the total.

As we said last quarter, this first calendar quarter generally sees weaker prices and the commodity products pricing decreased between 2% and 3% during the quarter in line with long-term historical pricing trends. The uncertainty and the visibility of end market demand may continue to put pricing on selling prices going forward. We believe that capacity utilization eased during the quarter. We would estimate that ceramic capacitor industry utilization is near the 75% range depending on the product line. The tantalum capacity utilization is stable now in the 80% to 85% range. Our strong material inventory position and low cost to manufacturing continues to give us an edge in that market.

We believe we have partially offset the weakness in worldwide tantalum usage with increased market share and unit demand is beginning to rebound. Inflationary pressures during the past several quarters have affected the prices for many metals and materials and currency movement affects both our top and bottom line.

Currency movement during the year tended to increase both revenue and expenses compared to the prior year due to the relatively weak U.S. dollar. During the quarter, finished goods inventory dropped 11% in the quarter. The quarter gross margin performance at 21.5% reflects continued solid operating performance. We continue to address all of our costs, especially overhead in order to hold up gross margins.

During the quarter, we also continue to deemphasize marginal businesses based on weak selling prices. SG&A expenses in the quarter decreased when compared to the previous quarter and came in at $27.8 million, which was 7.7% of sales. The manufacturing plants continued to operate efficiently despite the lowered output during this quarter. And this has helped margin as well as control of SG&A. The profit from operations was $50 million in the quarter close to 14% of sales.

Our earnings were $0.29 per share for the quarter. We earned $0.22 from operation and also realized a $0.07 one-time tax benefit from various items in the quarter. During the quarter, we continued to generate positive operating cash flow estimated at $28 million. For the full year, total sales were $1.545 billion. Gross profit for the full year was $392 million or 25% to sales.

Earnings per share for the year were $1.27. Visibility continues to be (indiscernible) into the next quarters, but we expect to see increasing business that tracks the general economic improvement. Based in input from our customers, at this time, we would estimate that revenue in the June quarter could be up in the 2% to 3% range compared to the March quarter depending on actions from distribution.

We would expect margins to come in at the 20% to 21% range depending upon the sales levels and product mix. During this quarter, we paid $12.7 million in dividend or $44.2 million for the full year, which reflects the most recent increase quarterly rate approved by the Board of Directors. We spent 2 million repurchasing AVX shares on the market during the quarter and for the year that number is $8.4 million.

Our overall financial position continues to remain strong with over $1 billion in cash and securities and investments at the end of March. We spent $11 million for facility improvements and equipment expansion in the quarter and $49 million for the full year.

Depreciation expense totaled $12 million for the quarter or $42 million for the year. The electronic industry has growth opportunities. Our customers continue to design end market products with increasing lease sophisticated electronics in virtually every industry we serve. This is evident in the expanding smartphones, ultrabook, netbook, and tablet markets, telecommunication infrastructure as well as well as in automotive and commercial transportation.

We have the financial strength to continue to address our customers need for electronic solutions in order to create those existing consumer and industrial products and participate in strategic acquisition opportunities, several of which are under active investigation.

On the acquisition front, we are currently actively working three projects with one nearing the end of the due diligence phase. We expect to continue to seek more opportunities during next year.

I would now like to open the floor up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matt Sheerin with Stifel Nicolaus.

Matt Sheerin – Stifel Nicolaus

Yeah, thanks. Hello, John and Kurt. Just, I guess, starting off, John, if you could give us the breakdown of sales by product and by end market?

John Gilbertson

Okay. Good morning to you, Matt. Yes, if you look at the by product type, the ceramic components were 12%, tantalum was 24%, advanced components were 25%, the resale business was 27% and connectors were 13%. When you go into market segments, automotive, again, as I mentioned during the last conference call, continues to increase. Quarter-to-quarter, it went up 2 points. It went from 18% to 20% of our business. And again, if you look at that quarter that 6 points we picked up here recently in the cellular, 15%.

Computer was 12%. And computer again, as I’ve said in the narrative, was a little week this quarter and had dropped point, as did consumer, which dropped from 10% to 9%. Industrial, 13%. Medical improved up to 8%, and again medical has improved point in each of the last three quarters. Military, pretty much flat at 5%. I’d say it’s a little bit – it’s down more than that. It looks flat on this chart, but I think it’s a rounding issue. Networking, 4% and telecom, 14%.

Matt Sheerin – Stifel Nicolaus

Okay. And looking at your outlook, it sounds like distribution visibility, perhaps, a little bit better, point of sale better. But in some of your direct end markets, it looks like visibility is fairly cloudy at this point. Is that because customers – because lead times are short, they’re just sort of living hand to mouth and trying to figure out what the demand situation is going to look like later in the year?

John Gilbertson

Exactly, Matt. That’s the issue, because lead times are short. And we’re particularly coming out of a short, what I’d call a short lead-time quarter, because we don’t normally see as much volume in that first calendar quarter based on some of the cell phone activities. It’s typical to be more confused at the end of March than you normally are which is kind of hard to be. But anyway that visibility is pretty crowded now. But the distribution issue, I think, is playing out pretty much. I think similar to what you mentioned in one of your reports that we’re seeing some improvements in the March quarter, but we’ll probably see the bulk of that movement late in that June quarter. But we have seen activity in the distribution channel.

Matt Sheerin – Stifel Nicolaus

Got you. And I know you’re looking for, sort of, a flattish gross market on a little bit higher revenue. Is that more of a mix issue or are you also seeing some ASP pressures?

John Gilbertson

I think we’re seeing – we’re coming out of a quarter, as we mentioned last conference call, where this first calendar quarter has more margin pressures. And I think we are reflecting that view right now. We are seeing more selling price pressures then we saw, I'll say, this time last year, for instance. But this is typical to see this during this March quarter. I think that conservative mood kind of moves into the second calendar quarter.

Matt Sheerin – Stifel Nicolaus

Is that sort of in the – what low single-digit type of pressure?

John Gilbertson

Oh, yes, yes, yes.

Matt Sheerin – Stifel Nicolaus

Okay. Alright, that’s great. Thanks, John.

John Gilbertson

Thank you, Matt.

Operator

Your next question comes from the line of Jim Suva with Citi.

Jim Suva – Citi

Thank you, gentlemen, for all the details. Even though I am a CPA, can you help me remember about how this works with the EPA situation? Is it like you guys then appeal and you go back and forth with your lawyers? I assume there is a chance for you to respond. And then do you have to like book a reserve or contingent liability and put money into a trust or some type of insurance that would cover it or can you just kind of walk us through the situation and the various outcomes of how it could transpire?

Kurt Cummings

Hey, Jim, that’s a lot of questions. This is Kurt Cummings. As you saw in our release, we indicated that the EPA issued their press release and the order less than a week ago. So the company is still evaluating that enforcement order and trying to determine our response as well as our course of action. As we indicated in the press release that may involve taking a charge to earnings for some estimates of the liability, but we really can’t respond any further than that at this time.

Jim Suva – Citi

Okay. But do you get some type of ability to go back, and I guess negotiate or I guess, is it a discussion discovery process or is it just like a bill and the mail that comes?

Kurt Cummings

I don’t think it’s either of those two. As we have disclosed in our 10-K for many years now, we have been in discussions with the EPA over this issue. And I believe that there will be opportunities for further discussions.

Jim Suva – Citi

Okay. Then maybe if I can switch to a different question that you could probably give a little more clarity on. Tantalum pricing, as far as the input costs that you guys have, in past years it's kind of been going up, and then there has been some talk about supply being curtailed and supply coming back online. Can you just update us about the supply demand environment for the tantalum powder and pricing?

John Gilbertson

Okay. Jim, you maybe aware that the Australian miners, I’ve used that term and not the company, but basically Australian miners announced about, and don’t hold me on these dates, because they are changing all the time, but about eight or nine months ago, they were going to be reopen the mines. And that kind of put some – held the cost stable there for a while. Then recently, I would say, a month ago, three weeks ago, they announced that they were shutting it down again, due to a lot of issues that’s in their press release, not necessarily related to price. But that has again put the question of tantalum sourcing of the powder up in the air, so it’s hard to say what that pricing is going to do going forward.

Jim Suva – Citi

Okay. And do you guys like have enough to make it through the end of the year or how should we think about your supply?

John Gilbertson

We are well-positioned. We are very well-positioned as Mr. Cummings reminds me frequently.

Jim Suva – Citi

Okay. Thanks gentlemen for all your details, much appreciated.

John Gilbertson

Thank you, Jim.

Operator

(Operator Instructions) Your next question comes from the line of Joe Wittine with Longbow Research.