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Edited Transcript of AVX earnings conference call or presentation 26-Jul-19 2:00pm GMT

Q1 2020 AVX Corp Earnings Call

FOUNTAIN INN Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of AVX Corp earnings conference call or presentation Friday, July 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Sarvis

AVX Corporation - Chairman, CEO & President

* Michael E. Hufnagel

AVX Corporation - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Dorothy, and I will be your conference operator today. At this time, I would like to welcome everyone to the AVX Corporation First Quarter Earnings Conference Call. (Operator Instructions) Thank you. I would now like to turn the call over to John Sarvis, CEO. Sir, you may begin.

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John Sarvis, AVX Corporation - Chairman, CEO & President [2]

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Thank you, Dorothy. Good morning. I'd like to welcome you to the AVX conference call regarding the results for our first fiscal quarter of the new year. I'm Johnny Sarvis, and with me today is Mike Hufnagel, AVX's Chief Financial Officer. We hope you've had a chance to review our earnings release and related disclosures issued earlier this morning.

Orders declined again this quarter as inventory levels remain high in the sales channel and the global economy weakened. The global economic environment is in a flux. Uncertainties with respect to international relations and trade relations continue to put pressure on the global economy.

The POS continues to be slower than expected and is impacting the order rates at our distribution customers. Our overall automotive business continues to struggle with slower automotive market in all regions. Currently, we do not expect orders to improve substantially until the second half of the fiscal year.

Our core product delivery lead times remain extended on certain high-capacity ceramics. However, we are experiencing continued lead time improvements on our standard ceramic and tantalum products. In addition, with additional MLCC capacity coming online, combined with the current market conditions, lead times are continuing to improve, particularly in the commodity-type products. These improved lead times are also reflected in the reduced order rate.

Sales on the September quarter continue to reflect increased levels, resulting in sales decline in the 3% range as compared to this quarter. Our backlog has declined in light of the market conditions but remains strong and continues to support growth. As mentioned, markets continued to show weakness this quarter, reflecting the downturn in China's economy with tariffs being the primary driver, along with the slowdown in automotive sales and production in all regions.

Overall sales in the quarter were $401.8 million, down 8.5% to the previous quarter. The distribution channel represented 38% of our overall shipments, reflecting weaker distribution activity. Inventories remain extended above comfort levels with industry lead times being back to our normal level for MLC's low-CV and tantalum capacitors.

The distribution shipments were down 13%, and the global POS was down to the previous quarter. The Americas was 7% down. Europe was down 14%, whereas Asia was up 6% quarter-on-quarter. We expect a contracting shipments level through the next quarter as our distribution customers align inventory levels to the reduced lead time situation.

The overall book-to-bill for AVX in the quarter was 1.02. AVX total bookings were on the same level as in the previous quarter with a different split by region. The Americas were 10% down to the previous quarter, reflecting the higher inventory levels and standard commodities at our distribution partners. In turn, the demand for advanced components in the high-rel market remains strong.

Europe bookings were down 3% to the previous quarter, reflecting a softer demand from the automotive industry. Asia bookings were up 18%, which was attributed to the Chinese New Year holiday recovery, whereas the overall Chinese market remains under pressure due to trade conflict and weaker consumer spending.

Regionally and looking at our revenue split, market conditions in the regions were relatively unchanged from the previous quarter. As a result, each region's share of the market was almost relatively unchanged with the Americas at 29%, Asia at 29% and Europe relatively flat at 42% of our sales. In general, the global economic environment remains unfavorable. Uncertainties and relations to international relations and trade regulations continue to put pressure on the global economy.

The Global Purchasing Index sank into contraction below the crucial PMI level of 50 points. China dropped just below 50 as well as the Purchasing Managers' Index for Taiwan, South Korea and Japan. Most of the European countries were contracting at a combined 48 PMI. Germany had the lowest PMI with 44, reflecting a weak automotive industry. The U.S. continued to hover just above the critical 50 mark with very modest optimism.

The global GDP growth projections for 2019 are now 2.6%, down from a previous projection, calling for a slow start in the second half with only marginal improvements in calendar quarter 4. We continue to manage our manufacturing output to meet market demand.

I will address the various market segments that we serve. Automotive represents 43% of our total revenue, 3% up from the previous quarter, as we continued to win market share in a generally weaker automotive market with increased vehicle electronic content. After a strong 2018, the market struggled in the first half of 2019.

Year-on-year, light vehicle sales were down 10.7%. China was down 17.3% year-on-year. Europe and U.S. were down to flat, and Japan was 6.5% up year-on-year. We remain cautious for the second half of the year and are now expecting only a modest recovery in vehicle production. This is in due part to the large China market, which was originally projected to grow 3.6% in 2019. With ongoing trade discussions and a generally slow Chinese economy, forecasts for the year indicate China could be down 9% to 2018.

Even with the total global light vehicle output forecast down in 2019, we trust in the mid-, long-term growth in this industry. The electronic content in each model introduced in 2019 dramatically increased, and we continue to see new applications and demand for electronic components and solutions in the next-generation light vehicles.

We continue to work closely with the automotive OEMs, tier 1 and tier 2 manufacturers on new designs. Our advanced ceramic products, polymer tantalum, supercapacitors and electronic solutions such as antenna systems, interconnect solutions and different sensors and control units will be included in the new 2020 models.

Computer, network and telecom represents 23% of our overall revenue, a 1% down to the previous quarter. Computers were slightly down, and network revenue was flat for the quarter. 5G infrastructure continues to gain momentum on new designs, and the expected growth in this market continues to provide great opportunities for our antenna, RF capacitors and connectors.

Our cellular and consumer business was flat in total revenue this quarter. In this industry market, we strengthened our market position since the last quarter in our antenna solutions despite the overall main market of mobile phone is continuing to be under pressure due to weaker demand.

Smartphone production fell 2.7% year-on-year in quarter 1 to 373 million units. The overall handset production is projected to decline 1.8% for the year with the second half growing 1.4% driven by 5G acceleration. 5G is now estimated to account for 25% of all handsets by 2023, reaching 435 million units. This creates a significant opportunity for our passive and active steering antenna solutions which will be critical for 5G performance.

Our high-rel, medical, defense and aerospace sectors were 1% up compared to the previous quarter and represented 11% of our revenue. The continued demand for commercial aircraft and increasing defense spending, along with medical technology advances, will continue to fuel these markets for electronic components and solutions.

We expect growth to continue through 2021 as governments modernize their defense systems, pursuing new technologies and capabilities and accelerate the exploration from sea to space. The demand and backlog for advanced ceramic products that support these markets continue to grow, and we're aggressively expanding our capacity to support market demand.

High-reliability implantable device medical market is the primary source of AVX medical revenue. These devices include pacemakers, implantable defibrillators and neuromodulators for the treatment of pain and tremor conditions. The implantable market continues to show solid growth with revenue up 5.9% this past year.

Growth in the pacemaker and defibrillators have moderated over the last 2 years and was up in the 2.5% range. Revenue from implantable devices for pain management grew over 13%. This portion of the market will become our largest medical market within the next few years and has significant long-term potential.

The majority of the AVX revenue in the medical market is related to our tantalum capacitors, EMI filters and thin film components. A significant growth opportunity for AVX exists with our antenna and Internet -- interconnect solutions for implantable devices and a wide range of other medical applications.

As we've mentioned in past calls, in spite of the market correction being slower than expected, we foresee the overall long-term growth for electronic components based on many factors such as medical breakthroughs, new IoT applications, increased electronic content in vehicles, smart home devices that are connected to the Internet and new consumer wireless devices. We are and we live in a connected world which continues to require an increased demand of electronic components and solutions.

Our gross margin percentages was at 25.1% or 1.9 points down to the previous quarter, reflecting a different mix of product shipments and some price pressure on the low-cost commodity MLCC products. However, overall margins continued to be strong, reflective of our focus on improved operating performance in our operations and an improved product mix of higher-margin, value-added products.

Total SG&A expense declined this quarter to $41.9 million or 10.4% of sales, consistent with the prior quarter. Our overall effective tax rate for the quarter was 13.2%, including discrete items. Excluding discrete items, our tax rate would be approximately 21%. For the quarter, we paid $19.4 million in dividend payments and spent $34.4 million for facility improvements and equipment purchases. Depreciation expense totaled $18.6 million. The intangible amortization expense was $3.5 million.

For the quarter, cash flow from operations was approximately $54.3 million. As mentioned, we currently anticipate sales in the September quarter to be down in the 3% range. We estimate that gross profit margin in the September quarter will be in the 22% to 23% range, reflecting some good pricing pressure, particularly on commodity tantalum and ceramic products, in addition to the higher manufacturing costs related to cost reduction initiatives. Total selling and general administrative expense should come in between 9% and 10% of net sales. The blended tax rate should be approximately 22%.

We are facing a difficult market environment in the coming quarters. However, we are optimistic about our prospects over the balance of our fiscal year as we continue the expansion of the sensor, control and antenna products in our sales channels. Our design win pipeline continues to expand driven by the introduction of innovative products designed to address stringent application requirements in today's market.

I would now like to open it up for questions.

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Questions and Answers

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Operator [1]

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

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [2]

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Yes. Just starting off, John, if I can. You gave some breakdown of the end markets. But could you be more specific in terms of the way that you traditionally give the breakdown, so auto, computer, consumer, industrial, medical, et cetera?

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John Sarvis, AVX Corporation - Chairman, CEO & President [3]

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Thank you. Yes. I would be glad to. Starting with the automotive, again, 43% of our sales; the cellular, 10% of our sales; computer, 11%; consumer, 5%; industrial, 8%; medical, 6%; military, 5%; networking, 4%; and telecom, 8%.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [4]

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Okay. Great. And then by product segment?

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John Sarvis, AVX Corporation - Chairman, CEO & President [5]

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Okay. Starting with the ceramic components is 27%; tantalum, 16%; advanced components, 27%; and the interconnect, sensing and control grew 31%.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [6]

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Okay. Great. And so in terms of your guidance, you did talk about a continued weakness in distribution. It looks like, as a percentage, that's still a lot, so down double digits year-on-year. Could you give us a sense of what the distribution inventories look like now? And how long do you think it will take for distributors to work off, particularly given that their own end demand seems to be weakening and their customers are going through an inventory correction? So it was sort of like a double hit here that you're taking.

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John Sarvis, AVX Corporation - Chairman, CEO & President [7]

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Yes. Matt, the -- so I'd take the ceramic and the tantalum as a combined unit. We're running -- I think our distributor inventory channel is probably in excess right now of around 6 months of inventory, where normally, we're -- in normal market conditions, it's usually in the 3 to 4 months kind of range.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [8]

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Okay. And the automotive revenue number was actually better than I expected. Last year -- last quarter, you were down double digits year-on-year. And now with the sequential growth, you were down only 3%. Is that also a function of some of the product areas, particularly the high-rel, high case size capacitors where there's still strong demand due to the shortages? Or is it as you earlier mentioned, more share gains?

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John Sarvis, AVX Corporation - Chairman, CEO & President [9]

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Well, I think it's a combination of both. We have picked up some share in some of our product groups within our automotive market penetration. But a larger driver in that is probably the increase in activity we've seen in the mil/aerospace area where that is probably one of the most active markets that we have right now.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [10]

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Okay. And then in terms of your guiding down 3% or so sequentially, are you expecting weakness across the various markets or any ones holding up better than others?

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John Sarvis, AVX Corporation - Chairman, CEO & President [11]

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Well, imagine, as I think you probably also understand and -- this quarter is, for European automotive manufacturers, a period of slowdown, shutdowns, so anticipate production from that standpoint, I think. And the other contributing factor is also in the distribution channel and the other market segments where we're still working through these inventory issues that have accumulated over the course of the last several quarters. And so I think it will take probably somewhere in that 3-month range to get those inventories pretty much back in line, which means by the end of this coming quarter, we should be getting back in a stronger position for the second half of the year.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [12]

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Yes. Although typically, the Q4 is typically down for distribution. So are you expecting it to be sort of at this lower level through the end of the year? Or are you expecting things to pick up before then?

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John Sarvis, AVX Corporation - Chairman, CEO & President [13]

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I think we'll see some gradual improvement for the latter part of the year.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [14]

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Okay. And then on the gross margin, guiding roughly down 500 basis points year-on-year, you did talk about mix and pricing. Do you think gross margins are -- will be bottoming here? What's your sense in terms of what that may look like through the end of the year?

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John Sarvis, AVX Corporation - Chairman, CEO & President [15]

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Yes. I think this quarter, due to the 2 driving products that we have in the tantalum and ceramic area, we're beginning to see some price pressures that we haven't seen in previous quarters. So we think that will have an impact probably through the balance of the year, but probably more so by the end of the quarter, which should stabilize itself probably through the second half. So we don't see a continued decline in those after we get through this adjustment period.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [16]

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Okay. And then could you talk about the acquisitions that you've done a year or 2 ago? I know that's obviously a lot of automotive and diversifies your product lines. But could you tell me how those integrations are going and whether there's been cross-selling opportunities? I know there's a lot of auto exposure, so not sure if that relatively good auto number reflects that.

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John Sarvis, AVX Corporation - Chairman, CEO & President [17]

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Well, I -- we're still in the integration stage. One of the actions that we've taken earlier this year was we set up a different -- restructured our sales organization to help the integration process and by doing a combined sales organization between the interconnect and the S&C operations where there's so much compatibility. And we feel that we can gain more share of mind with their end customers with the combined revenues and product offerings from these 2 divisions. So we'll continue to work that as we go through the course of the balance of the year.

And on the antenna acquisition, we've taken and restructured that sales into our RF and antenna group where we see compatibility, especially with the 5G group. It's going to drive a lot of that market in the next couple of years. So in those 2 areas, we're making progress. We're not where we want to be, but we're definitely above where we were when we started out the year. So we'll continue to kind of work those.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [18]

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Okay. And then I know you recently announced the expansion of MLCC capacity with expanded factory. Could you talk about what your capacity levels are, utilization levels are now? And then what the expectations for CapEx is through the rest of this year, fiscal year?

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John Sarvis, AVX Corporation - Chairman, CEO & President [19]

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Well, let me separate it into -- on the MLC side, the -- from the commodity versus the -- what I'd say the higher capacitance area. They're 2 different markets. We see -- the commodity market in the MLCC side, we're still running probably 90-plus percent utilization. A lot of that being driven still by automotive. And in the high-CV area, we're still running 100%, right, at capacity.

As we bring in -- every time we bring on additional capacity, the market is still strong there. So we'll continue to bring on high-CV capacity throughout the course of the next 3 years is our plan, and we'll probably see another 10% to 15% increase in that area of capacity over the second half of the year. But again, we've got expansion plans for the next 2 to 3 years there.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [20]

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Okay. And then sort of a ballpark for the CapEx number for the year?

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John Sarvis, AVX Corporation - Chairman, CEO & President [21]

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Probably be somewhere in excess of $100 million.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [22]

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Okay. And what was it in the June quarter?

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Michael E. Hufnagel, AVX Corporation - Senior VP, CFO & Treasurer [23]

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$30 million...

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John Sarvis, AVX Corporation - Chairman, CEO & President [24]

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$30 million -- Mike?

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Michael E. Hufnagel, AVX Corporation - Senior VP, CFO & Treasurer [25]

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Well, Matt, it was about $33 million.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [26]

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$33 million. Okay. Okay.

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Operator [27]

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(Operator Instructions) And there are no further questions at this time.

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John Sarvis, AVX Corporation - Chairman, CEO & President [28]

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Okay. Well, thank you, Dorothy, and thanks for those who joined in on the call. Again, this past quarter was an adjustment quarter, and I think this coming quarter will also be another adjustment quarter, but we still are very optimistic about the second half of our fiscal year.

So again, thank you for taking your time out this morning.

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Operator [29]

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Thank you. Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.