Executives
John Gilbertson - CEO and President
Kurt Cummings - CFO
Marshall Jackson - EVP
Analysts
Shawn Harrison - Longbow Research
Brian White - Jefferies
Steven Fox - Merrill Lynch
Jim Suva - Citigroup
Yuri Krapivin - Lehman Brothers
Andrew Huang - American Technology
Mark Hasenberg - Nottingham Capital
David Wren - The Sun News
AVX Corp. (AVX) F3Q08 (Qtr End 12/31/07) Earnings Call January 24, 2008 10:00 AM ET
Operator
Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the AVX Corporation Third Quarter Earnings Call. (Operator Instructions).
Thank you. It is now my pleasure to turn the floor over to your host, Mr. John Gilbertson, Chief Executive Officer. Sir, you may begin your conference.
John Gilbertson
Thank you. Good morning. I'd like to thank you for attending the AVX conference call regarding the results for the third quarter that ended in December. I am John Gilbertson, and with me today is Kurt Cummings, AVX's Chief Financial Officer; and Marshall Jackson, AVX's Executive Vice President.
The sales in the quarter increased to $430 million and reflect good growth quarter-to-quarter, even after taking into account the typical seasonal shutdown period during the second half of December. The revenue level was up 14% over the same quarter a year ago and 7% over the September quarter.
We have been successful in the integration the American Technical Ceramics into our operations. As you will recall, we purchased ATC at the end of September so this is our first full quarter including their results.
The ATC sales were better than expected in the December quarter and are forecasted to grow in the March quarter. We have the confidence that this acquisition is going to meet our expectations.
Normal demand remained good through October and November of the quarter and then declined late in the month of December. Our customers were clearly exercising inventory control measures during the second half of the month of December and we're delaying income and shipments.
We saw a positive gross book-to-bill in the December quarter. The new ATC acquisition is doing particularly well, with orders at a run rate now about 8% over the third quarter results.
The overall backlog for the company is up 13% from where it was this time a year ago, which is inline with the year-over-year increase in sales. The cellular handset producers continue to project additional growth in next calendar year and they are forecasting in the 15% range.
Our customers in general are indicating that in 2008 we'll see growth, but in a more modest projection as late due to uncertainty and the macro economy conditions. The medical and military markets are starting to show some improvement as we start the new calendar year and this is good news going into next year.
Our distribution customer saw good demand during the quarter and the distribution channel was 40% of our overall sales. The product inventory in this market channel continues to appear to be under control.
The commodity pricing declined about 1% overall compared to the prior quarter. This is well below historical trends. We anticipate these favorable pricing trends will continue in the near term.
As a percentage of overall revenue in the quarter Asian sales rose to 53% of the total which is customary in the December quarter. The Americas represented 25% of overall sales and Europe represented 22%. Europe remained active particularly in the automotive industry and at the present time this sector and the aerospace markets continue to hold up electronics in Europe.
The positive upturn in German business components this morning is a good sign going forward. The gross profit margin this quarter was 17.2% or essentially flat to last quarter. As mentioned earlier we are expecting the medical and military markets to continue to improve as this calendar year progresses.
As normally during the holiday bill period we saw more consumer and commodity related business. The component sales mix was weighted towards these lower margin products and we had planned shutdowns during the holiday period that limited operational performance.
SG&A expenses were $33.3 million in the December quarter or 7.8% of sales. We have been able to effectively manage these costs. After taking into account lower interest income as a result of the cash purchase of ATC, a lower effective tax rate earnings were $0.22 per share.
Other income during the quarter included about $1 million in write-offs, in connection with the reduced valuation of a major banks money market account whose investment manager invested a portion of the account in certain structured investment vehicles.
The market activity is difficult to predict with the current economic situation. But to-date we have not seen an unusual slow down in this quarter. Our orders continue to be encouraging, but obviously if the current turmoil continues in the financial world, it will impact us.
We would expect the March quarter sales to influenced by the market volatility and Asian New Year impact and could be down in the 2% to 3% range. This is normally a weaker quarter for both seller and consumer and we would anticipate that to occur this year.
Industry wide capacity additions have been slow in coming on board. So, we believe in industry capacity utilization where the commodity products remained around that 92% level which is healthy. The utilization is even higher on many of the more complex products where demand outstrips supply.
Margins are expected to remain steady next quarter, as our cost savings efforts should offset increases in material and utility costs as well as the affect of a weaker US dollar. We anticipate the June quarter to see a healthier overall margin percentage as we should see a return to more normal mix of products with more military and more medical products sales, assuming the economy holds up.
This quarter we repaid $5.2 million of debt assumed to the ATC acquisition, paid $6.9 million in dividends and repurchased 7.7 million of AVX stock from the market. Our overall financial position improved $808 million in cash and security investments as of December are $4.70 per share.
Overall inventories increased 4% sequentially to support the growth in sales, most of the increase related to strategic raw material purchases. During the quarter we spent $12.5 million for improvements and equipment expansion, while depreciation totaled $13.7 million for the quarter.
We have made and we'll continue to make investments in our strategic product line. There are uncertainties regarding the health of the general economy as widely reported. However, we are confident that our customer relationships and global operations will lead to improved results as the year progresses. I now would like to open it up for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question is coming from Shawn Harrison from Longbow Research. Please go ahead.
Shawn Harrison - Longbow Research
Hi, good morning.
John Gilbertson
Good morning, Shawn.
Shawn Harrison - Longbow Research
Just, first question if you could, maybe give us what the revenue run rate is right now or was in the quarter for the ATC business?
John Gilbertson
Maybe overall numbers for what we did in the quarter.
Shawn Harrison - Longbow Research
Yeah, what you did in the quarter.
John Gilbertson
We did about $22 million.
Kurt Cummings
22.5, Shawn.
John Gilbertson
$22.5 million, Shawn.
Shawn Harrison - Longbow Research
Okay. And then I am just a little bit surprised on the gross margin performance, given that the ATC historically has a higher profile margin business than AVX. Was the mix shift that negative or is there something else going on there that we should be aware of -- increasing nearly greater mix of the resale business this quarter or something else?
Kurt Cummings
Shawn it’s Kurt Cummings. There were really three factors to that. ATC's margins were as they were historically, which as you know are very good. And as a result of the acquisition accounting it required us to run it up the inventory that we purchased and therefore when you sell it you don't get the gain that had been embedded in it when you purchased it.
So that was one element. Another element is the weaker US dollar, it's still effecting our costs in Europe. And the mix, as you said, was still as we indicated on our presentation the mix in the December quarter and is still heavily consumer related and we expect that to improve going forward.
Shawn Harrison - Longbow Research
Okay, is there a way to maybe quantify how much the accounting was in terms of, just a head win quarter-to-quarter maybe or any of those three buckets?
Kurt Cummings
Because of the mix of products we sell, I hate to get into the specifics trying to estimate the effect quarter-over-quarter of the whole ball of wax. But the inventory adjustment is close to $1 million.
Shawn Harrison - Longbow Research
Okay, thanks a lot.
Operator
Our next question is coming from Brian White from Jefferies. Please go ahead.
Brian White - Jefferies
Yes, Kurt, when we look at the March quarter I think we are originally talking about maybe returning to more normalized margins because Medical would come back, now you are saying the June quarter. What is the dynamic that's changing or pushing out the margin expansion?
Kurt Cummings
Brian, I think if you'd listened to the last conference call, the notes we had on that said that we would expect that medical to start coming back in the March quarter, alright. So we didn't expect the margins to improve until the June quarter and we're still seeing that. We are seeing a little improvement in the medical starting into this March quarter, but we don't expect the medical to come back in a big way until the end of March or than March month and the June quarter to impact the June quarter shipments.
Brian Jeffery - Jefferies
Okay and when we look at your end markets, what end markets really surprised you in the December quarter in terms of strength and what looked a little disappointing?
John Gilbertson
Well, obviously cellular was very strong. It was strong pretty much till the last week of December and the question up there is; is that going to continue, how is that going to sell through. We've not seen a dramatic slowdown in cellular. So cellular is a big question. They're forecasting big numbers for next year. Actually some of the forecasts we're seeing now are over that. The computer was obviously strong, consumer held up I would say that the net working was a little stronger than we normally see in this December quarter. It was up about 4% of our overall number. So that's a good sign that some of the infrastructure on cellular is moving up.
Brian White - Jefferies
Okay, in network you're talking also about telecom infrastructure not just enterprise networking?
John Gilbertson
That's correct, yes.
Brian White - Jefferies
Okay. And do you have breakdowns for the markets in the quarter?
John Gilbertson
Percentages?
Brian White - Jefferies
Yeah.
John Gilbertson
Yes, I will go through, briefly automotive was about 12%, cellular was 15%, computer was about 24%, consumer was little over 12%, industrial was 11%, industrial was also up was a little bit of a surprise, medical about 4%, military around 5%, networking in that 3% or 4% range and the general category telecom right up we have the balance of that.
Brian White - Jefferies
Okay. Thank you.
John Gilbertson
Thank you.
Operator
Our next question is coming from Steven Fox from Merrill Lynch. Please go ahead.
Steven Fox - Merrill Lynch
Hi, good morning. Just going back over to that gross margin, still little confused especially when I look at the year-over-year comparisons. I was wondering if maybe we could talk about why gross margins this calendar fourth quarter or at that [72] level while a year ago you were a good 200 basis points higher than that. What's the difference versus year-over-year?
Kurt Cummings
Steve, its Kurt. I think a lot of the same elements we've talked about on each conference call. The currency has had a fairly large impact on that with our costs in Europe. And energy costs and metal costs have gone up. So, it's the cost headwinds that have affected it. I think that's primarily and I am sure there is some mix issues in there, but I think those are the main elements.
John Gilbertson
Steve, if you look at the overall numbers for commodities which you are well aware of, those prices have gone up quite a bit and if you look at the performance year-on-year consuming those cost increases, it's a pretty good gross margin.
Steven Fox - Merrill Lynch
And then when you look going forward I guess what it -- putting aside costs that you can't control.
John Gilbertson
Right.
Steven Fox - Merrill Lynch
What do you think the opportunity is, say two quarters from now. Like where do you think a normalized gross margin would be if those businesses come back say when you can exit to June quarter or something like that?
John Gilbertson
If you look at our numbers, we are running on the numbers I think it’s about 4.1% military. If you look at a normalized year for us, whatever normalized is anymore, say a year ago, I think we are running about 7% or 8%. So that's a significant increase in medical business that we will see which will help our margins. We think we are going to improve our margins in the June quarter, if the general macro economic situation stays. That looks positive.
I think that we are going to see more margin improvement from ATC, we are very impressed so far what we have been able to be done there. We're only starting to see some of the benefits of the restructuring. I am associated with that some of the things we are doing, so we think that margin we've started proving in that June quarter.
Steven Fox - Merrill Lynch
Okay. And then one last one from me, which would be if you look at some of the comments, you said that you saw some plant shutdowns towards the end of December, little concern from more modest customer outlooks. Are you saying that your customers are reacting to what's going on in the economy or not yet, I wasn’t clear on how you, what kind of picture you have painted?
John Gilbertson
Alright, what I am saying is, it looks somewhat unusual in that last two weeks of December. We've always been able to ship orders that were say, open or close to the ship date during that period. And this year, because of the turmoil I think in the market our customers were insistent don't ship us anything the last two weeks of December. Now that's picked back up in January but there was a very strong pressure from our customers this year not to fill in orders those last two weeks of December and that was unusual compared to previous years.
Steven Fox - Merrill Lynch
Got it. Thanks for clarifying.
John Gilbertson
Thank you.
Operator
Our next question is coming from Jim Suva from Citigroup. Please go ahead.
Jim Suva - Citigroup
Great, thank you very much. As a follow up to that can you talk about, now that we are pretty much three-fourths to the way to January. Are we back to a complete pick up of normal seasonality, what you would expect for January, are we still kind of seeing some customers being a little bit more cautious?
John Gilbertson
We will not say that. And again this is a hard number to always pick. Those first two weeks of January are always uncertain because the cell phone denies consumer people are looking at their inventory. Their sell through, flat screen TV, orders are generally down because they are waiting to see what happened with the inventory. So it's a very uncertain time those first two weeks. But I will say this. There is nothing unusual to-date in that first two weeks of January. I'm surprised it's a little bit stronger than we anticipated the first two weeks. So I would say no to your answer, we are not seeing that issue yet from our customer base.
Jim Suva - Citigroup
So just kind of the end December is when that really popped up then?
John Gilbertson
Right
Jim Suva - Citigroup
Okay as a follow-up ASPs being down 1%, not the end of the world. There so to speak, but it does in my mind if I am modeling correctly you noticed that it's kind of a little bit of a slide from previous quarters, several quarters have been flattish. Is that correct? And what do you expect normal ASP's to be down. You mentioned, I think ASPs are down 1% going forward should we expect that kind of going forward?
John Gilbertson
I think again the issue is a mix and if you look at our normal sales in that December quarter, it's very heavy consumer and those tend to be lower valued parts and we would see a grip more associated with mix than we would part on part and in some cases in the quarter we raised a few [prices].
Jim Suva - Citigroup
But the last few quarters, I think pricing was flat, is that correct?
John Gilbertson
It only was flattish, I think there we saw quarters but we dropped it a point or made a point and a half.
Jim Suva - Citigroup
And what do you consider normal long term?
John Gilbertson
Normal long term, we see to 4% to 8% price decline in this industry and as the volume increases, we have been able to make that up with the volume gain.
Jim Suva - Citigroup
So, still better than normal even if we get down with it
John Gilbertson
Much better than normal, it has been much better than recent history.
Jim Suva - Citigroup
Okay, thank you gentlemen.
John Gilbertson
Thank you.
Operator
Our next question is coming from Yuri Krapivin from Lehman Brothers.
Yuri Krapivin - Lehman Brothers
Good morning, everyone.
John Gilbertson
Good morning, Yuri.
Yuri Krapivin - Lehman Brothers
John, going back to the question of our gross margins, actually I'd like to look beyond the June quarter, if possible. So as you move in September and December quarters of calendar '08, which is a seasonally strong period for consumer business. So, what will happen to your gross margin then, will they drop again after this sort of one time pop in June quarter, will they go back to 17%-18% in the second half of calendar '08.
John Gilbertson
No, I don't believe they will, Yuri. I think that what we are going to see if we can model it the way we believe it right now. You will see an improvement in some of infrastructures which is better margins, some of the medical business, some of the military business, some of the what we call power related business associated with solar energy activity and we will see an improvement in that margin.
Another thing is, we didn't ship as much of our power business this quarter as we would normally do. So we would expect that to improve the margins as the year progressed. But as a general statement, normally whatever the year progresses and margin is when you get there, the December quarter generally drops down in a normal cycle from whatever the previous quarter was due to the consumer business taking a dominance during holiday resale business.
Yuri Krapivin - Lehman Brothers
Okay, and then you mentioned that book-to-bill ratio was positive for the December quarter, could you be more specific what was the actual ratio.
John Gilbertson
I think that number was somewhere around 1.045
Yuri Krapivin - Lehman Brothers
Okay, and then [back log] up or I think you said 13% year-over-year, I am assuming that includes the ATC acquisition. So ex-ATC do you have the number?
Kurt Cummings
I don't have that number offhand but it did go up, even without ATC in there.
Yuri Krapivin - Lehman Brothers
Okay. And then with respect to the tax rate going forward?
Kurt Cummings
Yeah, I would model the 27% effective rate on the year-to-date basis that we have today.
Yuri Krapivin - Lehman Brothers
Okay. Thank you for your comments.
John Gilbertson
Thank you.
Operator
Our next question is coming from Andrew Huang from American Technology. Please go ahead.
Andrew Huang - American Technology
Hi guys, can you hear me okay.
John Gilbertson
Yeah, Andrew, we can hear you all the way to California.
Andrew Huang - American Technology
So, I guess my first question is kind of a more big picture. I feel like the industry has been in this need of capacity utilization like above 90% for quite sometime much longer than historical cycle. So I first want to get your thoughts on that?
John Gilbertson
I believe, I think I said this last time and I repeat it, I think that we are going to see late in the year more capacity come in place, due to the complexity of the machinery, the shortage of suppliers some conservatism in the market particularly in the far east. It's been difficult to see a lot of capacity come in place. But I think that we will start seeing it in this summer late in the year more capacity come in place and as you next conclude if the economy holds up and won't be a big issue but if the economy does not that will be an issue and we should drop and we could possibly drop down them from that 90 to 92 which is unusually high.
Andrew Huang - American Technology
Okay, and then would you characterize your kind of guidance for the March quarter has been inline with normal seasonality below or better?
John Gilbertson
No, Andrew, I would say if I don't listen to the news and all that I would say they are inline with normal expectations. We are not seeing anything today that says that March quarter would be unusually difficult.
We are doing a little bit better in the cellular market than we have in past years, there seems to be more activity there. There are a lot of the higher end phones that seems to be in, expediting for replacement and a lot of activity on the low end phones that are coming. So we think that right now it is going to be a typical March quarter.
Andrew Huang - American Technology
Okay then last question. I think sometimes you give us some color on the product breakdowns, do you have that?
John Gilbertson
Sure. If you look at the mix of products, the sales my division, ceramics was about 12%, [Talim] was about 18% the advanced products increased to 28% and the resale business was about 30% while the connector business was about 12%.
Andrew Huang - American Technology
The answer you said advanced products was 28%.
John Gilbertson
28%. And if you look at those that's a good quarter for them and we hope that will increase.
Andrew Huang - American Technology
Okay. What is that or how would that the mix shift affect your gross margins from a product mix perspective normally?
John Gilbertson
Again, as we do more of the advanced products we would think that would help our mix of margins.
Andrew Huang - American Technology
It's okay. Thank you.
John Gilbertson
Thank you, Andrew.
Operator
Our next question coming from Mark Hasenberg from Nottingham Capital. Please go ahead.
Mark Hasenberg - Nottingham Capital
Good morning.
John Gilbertson
Good morning, Mark.
Mark Hasenberg - Nottingham Capital
If we can get back to the cell phone are if permitted. You said you saw that slowdown in the last week of December and I guess things seem to be pretty much on schedule here. But would you look out, you said that you only have optimistic outlook.
Looking at the product mix and the development things that you are doing would you look at 2008 versus 2007, are you seeing more proprietary products shift to more sophisticated cell phones the opportunities for better margins. Do you have any feel at all of what the inventories look like of cell phones coming on the year?
John Gilbertson
Mark, I guess the answers -- I have no issued information today that relates to the cell phone. All I can do is tell rumors in the industry which we are hearing that it's in good shape and there is not concern, but we don't have any numbers in general.
As to next year several customers are very bullish and one in particular that the units will go up significantly because of the demand in China and Asia. We just got a request from one of the larger companies that is very, very bullish for next year. And they are saying, they are going to see a higher end product more of the again the GPS systems all those things would make for more complicated units, and that looks very bullish for next year.
So, we believe that if that market can hold up that that will be a strong area for us and again eat up a lot of components in the industry. As you all are aware even the low end phones that go in market like China and Asia eat up components which help that utilization around the world.
Mark Hasenberg - Nottingham Capital
Right, you said the capacity that. Your market share in the high end phone is dramatically higher isn't it in and the margins are substantially better?
John Gilbertson
Obviously, the margins would be better and we are doing more advance products is a good example. There is more advance products go into advance phones and they are what you might say the commodity version. If you are talking about that $50 phone we have very few advance products in that. When you go up to $100 and $150 and there is a lot more advance products in there. I think also a thing that seems to be changing that we are hearing in this year that we didn't hear last year, is a resurgence of resale that people are bringing their phones in and wanting more higher end phones. We perhaps didn’t see quite as much of that last year as we've seen in previous years but they are forecasting next year that there will be a return to more resale business, more of [payer] business.
Mark Hasenberg - Nottingham Capital
Right, do you have any information again other than rumors about what's happening in the flat panel TV markets?
John Gilbertson
The projection for flat panel TV's is very high for next year. Every one of our customers are saying it’s going to be a boom year related to the Olympic games. I think the general view is it’s going to be very aggressive until that event occurs and they are putting in a lot of stock, a lot of inventory, a lot of activities, a lot of new things, they are going to see new types of products that we are going to see in the next four to six months, if they at the current time are very bullish.
Mark Hasenberg - Nottingham Capital
And at what point would you see, that significantly impact your orders?
John Gilbertson
We think that those orders will start in the second calendar quarter of next year or this year.
Mark Hasenberg - Nottingham Capital
Okay, alright. Okay, thank you very much.
John Gilbertson
Thank you very much, Mark.
Operator
Our next question is coming from David Wren from The Sun News newspaper.
David Wren - The Sun News
Hello, yeah, I was wondering if could tell me why your company is suing Myrtle Beach residents to try and make them pay to clean up TCE contamination at your headquarters here in Myrtle Beach?
John Gilbertson
Okay, as you know, David that particular lawsuit was related to an article that you wrote in 1990's remember that related to other people using TCE in the area. And I don't think that lawsuit says that if there's other people who have added TCE to the area that they would be included in any action going forward.
It's not against anybody in the area, that the homeowners and as such. It's against people who have used the component and as you are aware your articles you wrote in the 1990's regarding the airbase which is right next to us used that in large quantities.
We thank you very much and we thank everybody for calling in today and we'll see you at the next conference call. Thank you.
Operator
This concludes today's AVX Corporation third quarter earning's 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!