AVX's CEO Discusses Q4 2014 Results - Earnings Call Transcript

| About: AVX Corp. (AVX)
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AVX Corporation (NYSE:AVX) Q4 2014 Results Earnings Conference Call April 28, 2014 10:00 AM ET

Executives

John S. Gilbertson - CEO

Kurt Cummings - VP and CFO

Analysts

Tim Young - Citigroup

Matt Sheerin - Stifel, Nicolaus & Company

Ruplu Bhattacharya - Bank of America Merrill Lynch

Operator

Good morning, ladies and gentlemen. My name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the Preliminary Fourth Quarter and Full Fiscal Year Earnings Release. All lines have been placed on mute in order to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn our call over to John Gilbertson, Chief Executive Officer. You may begin.

John S. Gilbertson

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

The March quarter sales were $351.2 million, which increased 1.5% over the December quarter. Our overall backlog increased almost 2% from the end of December, reflecting preparation for spring releases of new products and the strength of the 4G build-up in China.

We're seeing good demand related to the telecommunication infrastructure build -- build-out in Asia and this seems to be booming, and this is encouraging. Right now, we're not able to deliver enough product to meet the demand.

The April month has continued the favorable trend and the gross book-to-bill is currently running about 1.16 to 1. Sales for the full year were $1.4426 billion. Going forward we continue to see improving consumer segment with the conservative inventory management by many of our customers which may limit shipments until the economy improves further.

Some of the previous phone models' slow movement through the channel in the last two quarters has increased caution across the entire spectrum and forced push outs of new model builds from major suppliers.

The first calendar quarter is always a slower time for cellular phones and this has been the case this year. Yet on the positive side, some of our distributors continue to be increasing their demand though they remain conservative regarding inventory positions. They have not yet begun to speculate on increasing activity or load-up on extra inventory as in past cycles in the advance of market growth.

In this quarter, the distribution channel represented 44% of our overall shipments, similar to the previous quarter. We generally have strong share in this key channel and we expect that their demand will increase during the calendar year, which should lead to an inventory replenishment cycle if end market demand strengthens.

Europe distributors appear to be recovering at a much quicker pace. As we've indicated previously, at the current level of distributor inventory, a strong improvement in end market demand should help stabilize prices further.

Regionally, Europe continued to improve and increased to 29% of our total sales. This was up two percentage points from the previous quarter. And we anticipate further improvement this quarter. The Americas declined one point to 28% of the total and Asia sales were 43% of the total. Europe's relative strength has continued in April.

Covering some of the market segments, in the cellular market, as mentioned earlier, the new model growth appears to be slowing somewhat. Some models were pushed out to later in the new year and more of a wait-and-see strategy dominated this quarter's market as new phone features do not seem to be gaining the momentum as past new model introductions have.

The local China phone producers appear to be gaining ground, especially in the standard phone models. Smartphones are still growing, but at the rate of -- but not at the rate of last year. The movement is definitely to larger screen sizes and phones which may generate a new build cycle as this gains acceptance in the market.

The Chinese handsets and telecommunication infrastructure manufacturers are picking up their activity and could drive the smartphone growth rate up as the new 4G platforms are coming online in China. The 4G build-up appears to have surprised equipment suppliers in China and they are requesting more product to meet their new schedules.

The PC and TV sales continue to be weaker than normal. There are plans for new high definition TVs and that may also generate demand later in the year, but today the growth is restrained.

Tablet demand is taking up a lot of shortfall in the PC market. There is some confusion in the market as to which brand or platform is best solution. From some early indications, we think this will clear up more during the summer and fall with some shakeout in offerings.

There are questions about whether the notebook market will continue to suffer from the impact of tablets and whether products such as touchscreen notebooks and two-for-one devices pushed aggressively by some vendors can attract customers.

Global tablet shipments grew 25% sequentially and 30% year-on-year to reach 78 million units in the fourth quarter of 2013, benefiting some believe mainly by economic recoveries of Europe and North America.

Although the notebook market has been suffering from shipment declines since 2011, it still remains units above 150 million each year and remains a significant device category in the market.

Some published research estimates that global notebook shipments in 2014 will see a lower year-on-year drop than 2013 with new product development, new product solutions, and changes in the major players' marketing strategies.

The new hot item continues to be wearable products, but that is just beginning to find its place in the consumer market and to-date has not been a big user of components. The traditional server market is still good across the spectrum although some suppliers are doing -- not doing as well as others.

The big story continues to be cloud storage growth which will add strong demand to support hardware increases in the balance of this year. Medical and defense markets were good but not strong. We're seeing more F-35 aircraft orders and this is helping across many product lines.

The position now appears to be strengthening across several defense sectors and we anticipate this year to be stronger than last year as spending is not under as much pressure and the export business appears to be turning up.

In automotive, all the news continues to be good. We're seeing growth in all regions and product lines associated with automotive.

Our auto customers in Europe continue to be optimistic. There is now indication that the European market is growing beyond just an export market as more product is going into the domestic European marketplace.

The U.S. market remains good and that should continue to flow into the new calendar year. Global vehicle sales climbed to record highs in February, with gains accelerating to 7% year-over-year along alongside a double-digit increase in Asia and ongoing recovery in Western Europe.

Global car sales are expected to increase from 65 million units in 2013 to 72 million units in 2014, approximately a 4% increase. Our customers tend to be more optimistic than those reported numbers.

The other transportation area, rail transport and the industrial segment, is more sluggish and growth continues to be forecasted, but as yet we're not seeing what was anticipated, particularly in the emerging markets. We saw some improvement in Asia as the quarter progressed and this could help with more infrastructure spending in China if that materializes.

Aerospace, both military and commercial, continues to increase electronic content and adding to the volume. At this point, we believe that this segment will be stronger this year than it was in 2013.

I mentioned it last quarter but it still holds true, we're hearing a lot of common themes across all markets calling for more improvement this year than last. We'll just have to wait and see the results as the year progresses.

Sales prices are under moderate pressure and overall product delivery lead-times have not yet extended. But in general, we were satisfied with our margin performance this quarter which was aided by the decreased reliance on commodity type components and a greater share in our value-added products.

The movement away from commodity type components remains a key strategy of the company. This was another quarter where margin management was critical. We saw pressures on prices as uncertainty continues, but still in the range of past experience.

The end remains low and opportunity spot buying activity remains in this type of product. This always puts pressures on the commodity product pricing which fell in the 1% range during the quarter.

Yet this is still in line with or really slight better slightly better than our long-term historical pricing trends. We anticipate that this same trend will continue unless end market demand picks up in a more meaningful way.

We believe that the ceramic capacity utilization was flat to up slightly during the quarter as more of the component mix shifts to smaller case sizes and more high-capacitance products to support increasingly sophisticated electronic components.

We would estimate that the ceramic capacity industry utilization remains in the 75% to 80% range depending on the product type. The higher capacitance product segment continues to see high utilization levels even though it is also seeing pricing pressures. We're at the top of our existing capacity for this type of product.

In tantalum product, we maintain a higher production this quarter based on healthy demand in the product line. We're seeing more managed pricing strategies from competitors as opposed to just seeking cash flow in this product line. And this is good news. Right now we feel that prices can be held in a reasonable range if we pick and choose what businesses we participate in.

This quarter AVX gross margin performance at 20% reflects continued solid operating performance and a favorable mix of value-added components. We continue to examine all of our costs, especially overhead, in order to enhance gross margin.

SG&A expenses in the quarter came in lower at $28 million or 8.1% of sales. The profit from operations was $43 million or 12% of sales. For the full year, profit from operations was $159 million or 11% of sales.

Our earnings came in at $0.23 per share for the quarter with the strong margin management performance enhanced by favorable income tax movement.

Earnings for the full year were $0.75 per share. This quarter we paid $16 million in dividends and for the quarter we spent $7.4 million for facility improvements and equipment and had a depreciation expense totaling $11 million.

The visibility going forward remains uncertain and the order activity leads us to estimate that our shipments in the June quarter will increase in the 1% to 2% range. Activity in the new calendar year should track general economic conditions and long anticipated demand improvements.

But nothing leads us to believe that we'll see a large step-up in the next quarter. We would expect margins to come in near that 19% range, but as always, this will depend upon the sales level, selling price pressures, and the mix of products sold.

Our customers are still optimistic, but careful about taking on risks associated with inventory. The near-term is dependent upon the general macroeconomic concerns and how that plays out.

We continue to see increased design activity from many hand-held device makers and hybrid electrical vehicles as a need to extend battery life and enhance functionality continues and this should build as the year progresses. We anticipate an increase in new electronic applications in the spring of this year.

I would now like to open it up for questions.

Question-and-Answer session

Operator

(Operator Instructions)

Your first question comes from the line of Jim Suva. Your line is open.

Tim Young - Citigroup

Hi. Thanks for taking the question. This is Tim Young on behalf of Jim Suva at Citi Research. Can you work through revenue breakdown as a percentage of sales by end market and revenue breakdown by product? Thanks.

John S. Gilbertson

All right. This is the end market, automotive was 21%, cellular was 13%, computer, 15%, consumer, 9%, industrial was 13%, medical was 8%, military, 4%, networking, 4%, and telecom, 13%.

As to market products by division, ceramics were 14%, tantalum were 28%, advanced products were 26%, and the resale business was 17%, and connectors were 15% of the grand total.

Tim Young - Citigroup

Thanks. That's helpful. Can you talk about the overall pricing development in the March quarter? Is it normal or better as your gross margin is higher while revenue is just roughly in line with guidance?

John S. Gilbertson

Some of the aid that helped us in the March quarter was that we saw some tax issues and Kurt can go over that later. But in truth, the 1% decline in commodity is pretty much standard on a quarter basis. We would normally see 6% to 8% in a year. So 1% is pretty modest reduction in the commodity type products.

We were principally helped this quarter by operating performance which was very good and selling higher-margin products. We continued to focus on the strategy of moving away from commodity products to the high more technologically directed products. And this helped end this quarter and we think will help us as the year progresses.

Tim Young - Citigroup

Got you. Thanks.

John S. Gilbertson

Thank you.

Operator

(Operator Instructions)

Your next question comes from the line of Matt Sheerin from Stifel. Your line is open.

Matt Sheerin - Stifel, Nicolaus & Company

Hi, good morning John and Kurt. So a question on the gross margin. It looked -- John, it looks like more a function of mix because you mentioned relative weakness, seasonal weakness in consumer and computing. And I think the resale business, which is also lower margin, was seasonally weak.

But -- and you're guiding gross margin down about 100 basis points. Is that also -- is that mostly a function of mix where you should see a little bit of increase from mobile and consumer and computing?

John S. Gilbertson

You're correct, Matt. As we've talked in the past, the issue is the more commodity you have the -- and the more resale you have, the lower our overall margin is. If you look at the company without resale, you get really a better picture of what the company's doing and you're absolutely right, it was margin this quarter based on a couple of issues.

One, consumer was weaker, I would say, should say cellular was weaker and consumer was weaker in the March quarter than normal. So, we had a lower mix of that product line but still pretty much held our sales up.

So that was good news even though it was weaker. We would expect in the follow-on quarter to see more consumer pickup. Obviously, the cellular guys are busy year in the second quarter, second calendar quarter than they are the first calendar quarter, which is always down. And we should see more consumer, and as the year progresses we'll see more consumer as we again build-up for the holiday season and the new products in consumer.

Matt Sheerin - Stifel, Nicolaus & Company

Okay. And that book-to-bill you quoted, 1.16, fairly robust, but then you're guiding just 1% to 2%. Is that because the book-to-bill is artificially inflated somewhat because of the issues you're seeing on the telecom infrastructure side where lead-times and maybe bookings are higher there or what's behind that?

John S. Gilbertson

Matt, you're stealing all my thunder there. But you're exactly right again; the issue is we're seeing lead-times not order times move out, particularly in such issues as the 4G. That's a long-term development, but we're also seeing orders on the hybrid vehicles that are pushed out.

So, we're seeing more orders without, which is good to us. It's always an indicator that the customer long-term is coming back in the market. We went through a period some time last year where that beyond 90 days really moved in. It's now moving back out. So, that's good news.

We're seeing -- I think that's the first sign we're going to see that the OEM's are more optimistic. And that will move into the distributor market where they put more inventory in place there, okay?

Matt Sheerin - Stifel, Nicolaus & Company

Okay. Yeah, and just your thoughts on the cycle, it sounds like what you're saying is that your demand is certainly mixed, but if we get more than one of these markets actually starting to move, then given the inventory situation you could get into an inventory refresh cycle, but you're not really seeing any signs of that yet, right?

John S. Gilbertson

I'm not seeing that sign yet, Matt. We did see a little movement, particularly in the European distributors. The European distributors are a little bit more aggressive than the U.S. and Asia distributors. I think there's more optimism in Europe and that's coming online.

But on your second point, absolutely, and I've been saying this now for about three quarters. But I believe very strongly that if we see strong market -- end market upturn, we're going to be in a difficult situation as far as inventory at the distributors, at the OEM's and at AVX.

So, I think that if it should come back, we'll be in trouble there being able not to have the inventory that the channel has had in the past. A perfect example is this 4G build-up. It caught everybody by surprise.

We had purchasing managers from Asia flying in here overnight when they discovered that they were caught short with inventory at their position, inventory in the pipeline, and we were caught short based on their forecast and being able to deliver when they want to.

So, we're getting a lot of calls from the 4G infrastructure builders both in Europe and in Asia. So, that's the kind of thing that could happen across the entire spectrum.

Matt Sheerin - Stifel, Nicolaus & Company

And the products that your building for that end market, is that application-specific, so that not more commodities so that you actually have to ramp-up specific factories for those customers?

John S. Gilbertson

Absolutely. If you look at those things, they have longer lead-times. And their specialty products that require unusual testing, unusual test fixtures, some of them are burn in, and all those issues. We had to put in temporary help at two of our big factories, we brought in -- we put on another shift, we're paying overtime. Some of the customers are even subsidizing us with additional payments to cover the overtime in order to run weekends. So, we actually ran a couple of weekends in order to get some of this product out.

Matt Sheerin - Stifel, Nicolaus & Company

Okay. That's helpful. And just lastly for Kurt on the why was the tax rate low this quarter? And what you expect it going forward?

Kurt Cummings

The go forward rate is still in the 30% to 31% range as we had expected, but there were some unusual one-off discrete items in this quarter related to truing up of the taxes on a global basis and some impacts from audit period expiring. So, a number of discrete items this quarter, but we expect to be back in that 30% to 31% range going forward.

Matt Sheerin - Stifel, Nicolaus & Company

Okay, great. All right. Thanks a lot.

John S. Gilbertson

Thank you, Matt.

Operator

Your next question comes from the line of Ruplu Bhattacharya from Bank of America Merrill Lynch. Your line is open.

Ruplu Bhattacharya - Bank of America Merrill Lynch

Hi, thanks. Good morning. John, just to start off with, just wanted to get your thoughts on the overall market. As you look at fiscal 2015, what do you think the overall market growth can be? And do you see any share shifts happening?

John S. Gilbertson

Yes. I think we continued to see share shifts last year, which has surprised me a little. We don't normally see major movements. I mean if you pick up one or two markets -- one or two points, that's very unusual. And I think we're probably going to see a continuation of that 2%, 3%, 4% total market shifts. And we anticipate additional share gain in the second half of the year as the year progresses.

And what do I believe the year will be like? If it stays just like it is, I don't mean the economic numbers, but I mean if the situation is slowly improving like it is, I think we'll see a much better year in 2015 than we saw in 2014.

So, I'm very optimistic about the year provided some unusual anomaly doesn't occur or that we stop this slow progression. So, I believe this is good for us if we're moving up a little bit at a time, will help the economy and I'm pretty optimistic about this year.

Ruplu Bhattacharya - Bank of America Merrill Lynch

So, I mean would a mid-single-digit or slightly lower growth for the market, would that seem reasonable at this point based on what you're seeing from customers and overall market?

John S. Gilbertson

Lower growth did you say?

Ruplu Bhattacharya - Bank of America Merrill Lynch

No. I was saying for the overall market for fiscal 2015, do you think a mid-single-digit kind of increase in revenues is reasonable to expect at this point?

John S. Gilbertson

Yes. I do think it's reasonable to expect at this time and I might be at the upper range of that growth. Okay?

Ruplu Bhattacharya - Bank of America Merrill Lynch

Okay.

John S. Gilbertson

As the year progresses, not the total year-on-year, but I'm saying as the year progresses quarter-on-quarter, you could see that as we move later in the year.

Ruplu Bhattacharya - Bank of America Merrill Lynch

Okay. That's helpful. Thanks. And then wanted to get your take on tantalum. So, from what we're hearing, the price at the spot market was actually even lower in March to about $73. Based on what you're seeing, is there any danger of that going up and are you guys, do you think it's a good time to invest the money and buy more or do you think you have enough?

John S. Gilbertson

We continue to buy on the spot market when it hits a low point. And again, as I said last time, and I still believe this, we'll still see that price go up significantly as the year progresses. Second half of the year, not giving anybody advice, but you'll be happy if you bought $73 tantalum.

Ruplu Bhattacharya - Bank of America Merrill Lynch

That's helpful. And then wanted to ask you like during the quarter, you probably saw that there was some news out on fuel cells and suppliers who provide super capacitors, wanted to get your take on this. Do you think fuel cells and super capacitors can be a significant part of revenue for any of the players in this market?

And specifically where does AVX stand in that? Do you provide super capacitors and what's your share or what's your play in this?

John S. Gilbertson

Yes. We do provide super capacitors and we are a player in the market and know it real well. And the other player is also Maxwell, who resells a lot of product to some suppliers. I think perhaps it's been touted a little heavy from what we see in the market. We do believe that we'll see more ATV type electrical vehicles. That technology in fuel cells is a little bit further down the road in talking to our customers okay.

There's not a lot of volume in there yet. Now, will it be in three or four years? That's another question. But we're involved in that. We consider ourselves a big player and we are very tightly tied to the automotive guys. And we've got that you might say entrance based on our work on the electric vehicles.

And we've just started a new plant in the Czech Republic on the electric -- supplying components to the electric vehicles. So, that market's going to grow; it's going to grow next year and we have to wait to see which technology is the primary one.

Ruplu Bhattacharya - Bank of America Merrill Lynch

Okay. That's helpful. And just a couple quick ones for Kurt, on the SG&A side it came in at $28 million versus your guidance of $30 million to $31 million. Do you think you can maintain that going forward or do you think that ticks up or down?

Kurt Cummings

Well, it's certainly going to be in that range, $28 million to $29 million depending on the level of revenue of course. And there are a lot of factors that affect SG&A. But as John mentioned our cost control and controlling that cost is part of the answer for the earnings. And we're focused on that. So, our goal is to maintain the SG&A in that range.

Ruplu Bhattacharya - Bank of America Merrill Lynch

Okay. And last one for me. What are the CapEx expectations for fiscal 2015?

John S. Gilbertson

We expect, unless there is a significant increase in demand, that a similar level to this year.

Ruplu Bhattacharya - Bank of America Merrill Lynch

Okay, great. Okay, thank you so much. I really appreciate your answers. Thank you.

John S. Gilbertson

Thank you.

Operator

We have no further questions in queue. I would now like to turn our call back to the presenters.

John S. Gilbertson

Okay. Thank you very much. We look forward to seeing you at the end of the June quarter. And we appreciate you listening to us. Thank you very much. Bye.

Operator

This concludes today's conference call. You may now disconnect.

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