U.S. Markets close in 5 hrs 53 mins

Edited Transcript of AVX earnings conference call or presentation 22-Apr-19 2:00pm GMT

Q4 2019 AVX Corp Earnings Call

FOUNTAIN INN Apr 23, 2019 (Thomson StreetEvents) -- Edited Transcript of AVX Corp earnings conference call or presentation Monday, April 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* John Sarvis

AVX Corporation - Chairman, CEO & President

* Michael E. Hufnagel

AVX Corporation - Senior VP, CFO & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Matthew John Sheerin

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Zantania, and I will be your conference operator today. At this time, I would like to welcome everyone to the AVX Corporation's Fourth Quarter and Full Year Earnings Release Conference Call. (Operator Instructions)

I would now like to turn the call over to Mr. John Sarvis, CEO of AVX Corporation. Sir, you may begin your conference.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Zantania. Good morning. I'd like to welcome you to the AVX conference call regarding the results for our fourth fiscal quarter that ended in March. I'm Johnny Sarvis. With me today is Mike Hufnagel, AVX' Chief Financial Officer. We hope you've had a chance to review our earnings release and related disclosures issued earlier this morning.

Overall orders were soft in comparison to previous quarters in FY '19, reflecting a continuous inventory build in the supply chain for commodity products combined with the weak consumer market in China. Our core product delivery lead times remain extended on certain high-capacitance ceramics. However, we are experiencing contingent lead time improvements on our standard ceramic and tantalum products. In addition, with the additional MLCC capacity continuing to come online, combined with current marketing conditions, lead times are continuing to improve, particularly with commodity-type products.

Sales in the June quarter will continue to reflect the increased inventory levels, resulting in a sales decline in a 2% range as compared to previous quarter. Our backlog has declined in light of market conditions but remains strong and continues to support growth.

As mentioned, markets were somewhat muted again this quarter, reflecting the slowdown in China's economy with tariffs and Chinese New Year being the primary drivers, along with a slowdown in automotive sales and production in all regions. Overall sales in the quarter were $439 million or 99% to the previous quarter. In this quarter, the distribution channel represented 42% of the overall shipments. Global POS was down from the previous quarter due to the seasonal China holiday period. Asia was 27% down quarter-on-quarter. The Americas was down 2.5% and up 5% year-on-year. Europe was 2% up to last quarter and 5% up to last year.

Our distribution book-to-bill was negative in the previous quarter as a result of the continuous inventory build over the last 2 quarters. We do expect a contracting shipment level through the next quarter as our franchise partners align their inventory levels to the reduced lead time situation for commodities. We estimate the overall POS will be flat in the June quarter. Europe will be slightly down to the previous quarter, with the Americas remaining flat. On the brighter side, we estimate that the Asia POS has bottomed out this calendar quarter and we should see growth in the coming quarters after 2 sluggish quarters.

Regionally and looking at our revenue split, market conditions in Asia dominated the economic scene. We saw some changes in revenue as a percentage of the total due to the economic conditions, product demand and availability, with the decline in the Asia region resulting in share increases in the Americas and Europe, with the Americas at 29%, Asia at 29% and Europe at 42% of our sales.

The overall book-to-bill for AVX in the quarter was 0.94, AVX total bookings being down 4% to last quarter. Americas bookings increased 7% to the third quarter, reflecting a continuous strong demand for advanced components in the high-rel market. Europe bookings were up 1% to the previous quarter, and the Asia bookings were down 20% compared to our third quarter related to the unusual Chinese New Year holiday slowdown and the softer consumer market activities.

The worldwide economy continues to be in turmoil after the peaking in early 2019. The Global Purchasing Index consistently dropped through the year as we approached the crucial 50-point crossover mark. Major manufacturing regions like China did fall below 50 and into contraction. In calendar quarter 1 2019, the global manufacturing index has shown a slight uptick. The U.S. and China have increased, while Europe continues to be dragged down by the uncertainty of Brexit and the reduction in automotive demand. In addition, the GDP growth for 2019 is now projected at 3%, only slightly off the 2018 result of 3.1% growth. These economic indicators, along with in-depth discussions with our customers, lead us to believe we should have a solid recovery in the second half of calendar 2019.

Addressing our various market segments. Automotive represented 40% of our total revenue, 3 percentage points up from the previous quarter. In general, the automotive sector lost momentum through the second half of 2018 due to China's economic slowdown and the newer European fuel emission standards. China's light vehicle auto sales have seen month-on-month double-digit percentage drops during each month for the last 6 months. China year-on-year sales are down by 18%. Vehicle output in the United States has remained relatively flat to last year. Even with the total light vehicle output down, electronic content in each of the new models continues to dramatically increase. We continue to see new demand for increased electronic components in all applications such as safety, infotainment and electrification.

Computer, networking and telecom represented 24% of the overall revenue, 1 percentage point down from the previous quarter. 5G has been and will continue to be a slow rollout among all regions. We've seen intense growth in the mobile infrastructure and new product introduction featuring 5G technology, but the global mobile industry will gradually adopt. Most projections indicate only about 15% of the world will be running on 5G by 2025.

Our cellular and consumer business was 18% of our total revenue in fiscal quarter 4, 1% down to the previous quarter. The mobile phone market continued to be under pressure due to weak demand especially in China. The market is saturated with the range of options in all price points, and the slowdown of the phone manufacturers seen in the last 6 months continues to result in more handset inventory.

It's increasingly to note that the 4G currently makes up 43% of the global mobile infrastructure market with the infrastructure still being built up around the world, especially in developing economies. We will continue to see 4G infrastructure growth over the next 7 years with over 60% of the market using 4G. In spite of the overall handset market slowing, the new Galaxy S10 is doing well, and our latest antenna design in this phone is gaining wide praise for innovation and performance.

Our high-rel sector, medical, defense and aerospace, were strong last quarter and represented 10% of our total revenue. The global aerospace and defense industry continues to experience strong growth as passenger travel demand strengthened and the global military expenditures continue to rise. We expect this growth trajectory to continue through 2020. Our backlog for our specialty products and ceramic capacitors that support these markets continues to grow, and we are aggressively expanding our capacity to support market demand.

The medical equipment market continues to show solid growth with revenues up 5% in the past year. In the specifics market that AVX serves for implantable devices, growth in pacemakers and defibrillators was almost at 5% range while implantable devices for pain management grew at 10%. We are engaged with a large number of start-up companies developing innovative therapies for treatment of pain and neurological conditions, and we're confident that this market will grow further in the coming years.

As we've mentioned in the past calls, we foresee an overall long-term growth for electronic components based on new IoT applications, the increase of electronic content in cars, smart home devices that are connected to the Internet and new consumer wireless devices. We are and will live in a connected world, which continues to require increased demand of the electronic components and solutions.

Our gross profit percentage was 27.8%, 0.7 points down to previous quarter, reflecting a different mix of product shipments and some price pressure on low-cost commodity MLC products. However, overall margins continue to be strong, reflecting on our focus on improved operating performance in our operations and an improved mix of higher-margin value-added products.

During the quarter, SG&A expenses came in at $45.5 million or 10.4% of sales, an increase from the prior quarter primarily due to higher legal and professional fees related to ongoing patent and antitrust litigation. The impact of the lower tax rates resulting from last year's tax law revisions in the U.S. continue to impact our tax provision this quarter as reflected in our overall lower effective tax rate compared to last year.

For the quarter, we paid $19.4 million in dividend payments and spent $32.9 million for facility improvements and equipment purchases. Depreciation expense totaled $21.3 million. The intangible amortization expense was $3.6 million.

For the full year, net sales rose $14.7 million to $1,791.8 million, which includes $354.7 million of S&C sales and $113.3 million of Ethertronics sales.

For the fiscal year, cash flow from the operations approximately was $235 million. Depreciation expense totaled $75.8 million, and intangible amortization expense was $14.2 million.

As mentioned, we currently anticipate sales in the June quarter to be down in the 1% to 2% range. We estimate that the gross profit margins in the June quarter will be in the 25% to 27% range, reflecting the price pressures we're seeing in the marketplace. Total selling, general and administrative expense should come in between 9% and 10% of net sales. The blended tax rate should be approximately 21%.

We are optimistic about our prospects over the coming quarters as we continue to integrate the integration of the sensor, control and antenna products in our sales channel and the inclusion of the Kumatec business acquired earlier this year. Our design win pipeline continues to expand driven by the introduction of innovative products designed to address stringent application requirements.

I would now like to open it up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John, just a few questions from me here. Just starting off, you gave the end market breakdown for sales. Could you give us the breakdown by product set, by product breakdown?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay, Matt. In the ceramics, we're at 27%. Tantalum is at 18%. Our advanced at 25%, and our interconnect, sensing and control was 29%.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. And then just going back, you said the book-to-bill was 0.94 for the overall company. Was that at the end of the quarter? Is that where it is now?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That's where it was at the end of the quarter. We're still seeing the first quarter and the month of April still relatively running at that same rate, so that's why we anticipate this quarter to be slightly down from the previous quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. And you talked about this continued inventory correction. Do you get a sense of the inventory maybe by weeks or months at distribution now versus where -- I mean I guess they are running very lean obviously when there are short -- or when there are long lead times. But do you get a sense of what the inventory looks like at distribution right now?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Matt. And our 2 major product groups, that are ceramic and tantalum area, the ceramic number, latest input is around a little over 4 months of inventory versus when we started last year this time, we were probably at about 2. In the tantalum area, we're running close to 6 months of inventory, whereas last year this time, we were probably around 3. So we're looking at maybe inventories increasing substantially over the course of the last several months. The positive side is, though, that the POS, although we did see a drop in the POS last quarter, is still relatively strong, and we're looking at the close of March being a little bit of an uptick as compared to the previous 2 months.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And are you getting a sense of the distributors are also seeing their own customers are adjusting inventories down because they may have double-ordered as well and they are starting to see adjustments? Or are they just adjusting now, and that might come later?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No. I think we all anticipated over the last 6 months to 9 months that there's been speculation, and everybody wants to be assured of having product that there have been inventory builds in basically all the channels. And over the last 2 quarters, we've seen adjustments from some of our distributor channels and distributor partners where they are adjusting that now based on what they see as the actual demand. And we'll continue to see that probably another quarter or so.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. And that book-to-bill is obviously below 0.94, right? Do you know the number on that? Or...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think it's roughly about 0.9.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

0.9, okay, okay. Great. And then you said in your opening comments that you actually expect a recovery in the markets in the second half. Are you talking specifically about the overall business or about the inventory correction? Could you just elaborate on your expectations for this second half of the calendar year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So Matt, I think in the first half, we're going to continue to see, as we just mentioned, the channel adjustments to the current inventory situation, and we're also -- I think, expect to see China. Kind of think that has bottomed out in the last month, and although we're not foreseeing dramatic improvement, we do see slow and gradual improvement starting after the latter part of the summer. And also, I guess a lot of it also will depend upon what happens in the tariffs, that they're -- as you know, we're still in discussion relative to the United States and China about how we're going to resolve that current issue. So I think we'll see some -- hopefully see some improvement there, which will also contribute improvements. So that kind of leads us to believe that the second half will be quite a bit stronger.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. And if I could just delve into the capacitor business, the ceramics versus tantalum where there seems like a bigger tantalum buildup, and then ceramics, I know there's various segments. There's still some shortages I know of, like the large-case size MLCCs, but the low-case size in the more commodity ones, as you said, there's been a big inventory build. And could you just talk about maybe those 2 areas and then also pricing and then maybe dovetail into the tantalum business? Because it sounds like we may get more severe pricing pressure just because of the more pronounced inventory build there.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We'll separate it between the ceramic and the tantalum, and I'll first address the ceramic. As you've mentioned and as we mentioned previously, in the commodity side of the ceramic business is where we're seeing lead time reductions and somewhat slight pricing pressures and will continue. In the high-CV area in the large chip sizes, they've continued to be basically a shortage in the market, and all the suppliers have continued to invest in that business to increase capacity. But most of the investment in that high-CV area has been in the smaller case sizes, as we all know and by what we read based on our current competitors looking to downsize more. So I guess if you look at it from a commodity side, yes, we'll see more pressure.

On the non-commodity side, I think prices are stable and will remain stable for the next several quarters. On the tantalum side, also split into 2 section. One is the MnO2 side of the business, and the other side is the polymer. The polymer side of the business continues to grow, and demand is very tight. We're continuing to invest in the polymer side of the capacity. MnO2, as we all know and have participated for a number of years, is a market that is not growing, and we will see some price pressures probably in that area. But I don't foresee the price pressures that heavily in the polymer side of the tantalum business.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. And on the tantalum, what's the breakdown in terms of segment, the polymer versus the MnO2?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Of the market or AVX?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, AVX.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We're probably in the 30% range of our -- in our tantalum to polymer, so about 70% of our tantalum business is in the MnO2.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

70% in MnO2. Okay, okay. Great. And then -- and just appreciate you taking in these questions. Just on the -- how does this whole inventory correction demand picture play into your capacity expansion plans? Because I know there's still -- I mean you still have obviously equipment you've ordered. You're still adding capacity. So how does this play into that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Most of our -- again, going back and separating tantalum to ceramic, again starting with ceramic, as you know, we built -- we just completed the building, a new building of ceramic in our Malaysia plant. We'll do our grand opening in June, and we do have additional capacity that's actually installed in that facility, and we will continue that through this quarter and will continue to bring capacity all throughout the year. And so we still foresee continued growth in that high-CV area of the business, and that's where primarily our investment is going. On the polymer side, again, we are investing heavily in the polymer section of the tantalum business, and we're expanding our capacity in that area. At this point, we do not have any expansion plans in the MnO2 side of the business, and most of our effort there again is in polymer.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, okay. Great. And then just lastly, just in terms of the P&L, you had a spike in your other income line, the $6.5 million. Could you elaborate on that? What was behind that?

--------------------------------------------------------------------------------

John Sarvis, AVX Corporation - Chairman, CEO & President [23]

--------------------------------------------------------------------------------

$6.5 million in the other income?

--------------------------------------------------------------------------------

Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [24]

--------------------------------------------------------------------------------

Yes. No, in the -- yes, in the interest and the other income line where it was $6.5 million, it was $1 million last quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matt, that was primarily related to currency. So nothing else in there unusual.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Currency gains?

--------------------------------------------------------------------------------

Michael E. Hufnagel, AVX Corporation - Senior VP, CFO & Treasurer [27]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [28]

--------------------------------------------------------------------------------

Okay. And then -- and how should we think about that next quarter?

--------------------------------------------------------------------------------

Michael E. Hufnagel, AVX Corporation - Senior VP, CFO & Treasurer [29]

--------------------------------------------------------------------------------

I would not project that for next quarter. Back to more normalized levels.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John Sarvis, AVX Corporation - Chairman, CEO & President [31]

--------------------------------------------------------------------------------

Zantania, I see no more questions. I think we'll close our call. Again, thank you for joining. I think the market still has a lot of dynamics to play through, I think, and more positive than negative. So we're looking forward to the beginning of our summer quarter here. And as we continue to go on a quarter-on-quarter, we see market getting stronger in those areas. So again, thank you for your time, and thank you for your support.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Thank you for participating in today's call. You may now disconnect.