Dominion Diamond Corp AVX
Q4 2013 Earnings Call Transcript
Transcript Call Date 04/24/2013

Operator: Good morning. My name is Kirk, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Fourth Quarter and Full Year Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

CEO, John Gilbertson, you may begin your conference.

John S. Gilbertson - CEO and President: Thank you very much, Kirk. Good morning. I'd like to thank you for attending the AVX conference call regarding the results for our fourth quarter that ended in March. I am John Gilbertson, and with me today are Kurt Cummings, AVX’s Chief Financial Officer. And we hope that you’ve had a chance to review our earnings release that was issued this morning.

The March quarter sales of $360.5 million came in better than anticipated, partially as a result of a stronger demand from our manufacturing customers who are launching new products. We had about $8 million of additional Tantalum product sales manufactured by plants we purchased from Nichicon in early February 2013. We are optimistic on revenues as even the base business met our projection exclusive of the acquisition.

Our backlog rebounded late in the quarter as some movement was seen in the distribution market, but these orders were not for immediate delivery. Our 90-day backlog increased almost 2% when compared to the end of December. This is the most positive movement we’ve seen in some time. The gross book-to-net bill was 1.04 to 1. Today in April it's much stronger than that.

The real positive was the activity with several of our key distributors. As always, some distis moved before others, and we need another quarter to see if others will follow in restocking, which has reached a low level in the total industry inventory.

The order and sales activity during the March quarter were impacted by the Asian New Year holiday, as is typical, but it did not limit our activity as significantly as last year. Following the holidays, we continue to see selling price pressures in this uncertain environment. As we have mentioned previously, when orders moderate, there tends to be more spot pricing, yet in general, we were satisfied with our margin performance considering the overall sales level and mix of product.

The inventory situation, particularly in distribution channel, on an overall basis continues to decline during the March quarter, reflective of the caution in the marketplace. Our shipments to distribution channel decreased 1.5% from the December quarter. This is not unusual, as December quarter has much more consumer activity. At this time we would say we're still on a period of inventory moderation, but seeing some positive movement. This quarter the distribution channel represented 38% of our overall shipments.

We expect that the distribution channel will increase, but again, we feel comfortable with our position in this channel when inventory requirements improve. At this level of inventory even a modest improvement in end market demand could cause constraints on supply.

Regionally, Europe remains a question mark due to reductions in exports. Yet this quarter the region remained steady at 25% of our overall sales. This was again helped by our connector activity. Asian sales decreased 1 point to 47% of the total, and some of this was due to the New Year holiday period. The Americas increased 1 point to 28% of the total.

As to the market segments, the cellular handset market, where most of the action has been, we saw a broader ramp-up in demand as a result of new product launches during the quarter. This is even after one major model was pushed out by a customer in Asia, and this push-out should help the June quarter bookings, although, it limited this quarter's shipments.

Again, (all phones) are being made, but the mix of manufacturers is changing constantly, and we need to react quickly to service these changing needs. We are seeing more product orders from the Chinese manufacturers than normal. Tablets are a similar story and following the same trend as smartphones, but are not dominated by one or two suppliers as of yet. We think this competition will grow as time proceeds.

Growth is expected to continue in both the solution, but also the forms they will take is shifting, i.e., the switch to larger screen sizes. Other than the traditional server market, the rest of the PC-related market is going through a structural change. The tablet and eReader solutions are seriously altering the notebook and ultrabook demand. All this data sharing, cloud-related activities and the thirst for more and faster bandwidth is putting a squeeze on IT infrastructure. This increased demand requires memory storage, routers, base-stations and fiber installations to upgrade capacity and capability. We continue to see improvements in this segment.

In the consumer market, television and gaming appears to be flat to slightly down, with all suppliers looking to integrate more functionality in the current box solutions. The convergence of these two markets along with Internet capabilities is the main drivers, but these components already exist separately and consumer reaction has not reflected an increased demand for an all-in-one package as of yet. When it does, it could put significant strain on the supply of components.

The traditional military markets remain under pressure, but is being offset by the continued emergence of commercial avionics and the increase in space-related applications. Satellite launches are increasing year-over-year with applications ranging from 3-D imaging, communication, digital mapping and reconnaissance. These features require sophisticated electronics and high reliability, and are a particular sweet spot for us in the Americas and in Europe.

The medical market growth outlook is still in the low single digits, with a few new products related to nerve stimulation beginning to gain some traction to offset the weaker ICD demand. In the rail transport and industrial segment market, demand is stagnant. This area is frustrating, as we’re seeing a lot of activity in samples and qualification for new products, but few orders. Funding subsidies from local governments to improve or increase their infrastructure will dictate the direction, but right now it's flat to down a little.

Automotive electronics continues to be holding up in all product sectors. Though the vehicle demand appears to be abating somewhat, we are seeing the electronic content for vehicle continue to rise faster than the percentage of vehicles manufactured. The major impact appears to be a spread of electronics to lower-end products. We remain optimistic in this sector, but concerned with recent slowdowns in Germany in particular. I was in Europe this last week and was surprised by the enthusiasm of the major manufacturers, particularly in Germany.

In general, the market segments across the board are seeing more activity than the order pattern would indicate. The economy is holding up volume related to many programs. As mentioned earlier, we saw continued pressure on pricing as uncertainty continues and much more spot buying activity in the market. This always puts pressure on commodity product pricing, which fell in the 1% to 1.5% to 2% range during the quarter. This is in line or slightly little bit better than our long-term historical pricing trends.

We anticipate this will be a bit more of a decline in the June quarter. The uncertainties in the visibility to the end market demand will likely continue to put pressure on selling prices until the end market demand increases in a bigger way. We believe that ceramics capacity utilization was flat to up slightly during the quarter as more of the component mix shift to smaller case sizes and more high capacitance products to support more sophisticated electronics.

Lead times have remained steady. We would estimate that ceramic capacitor industry utilization remains in the 75% to 80% range, depending on the product type, but is now at the higher end of that range. The higher capacitance product segment continues to see high utilization rates, even though it is see pricing pressure. This is driven by some competitors trying to replace decreases in the demand for the lower end components with this higher-end product. This is a good example where we’re at the top of our capacity on this type of product, although not at the lower ranges of product types.

In tantalum product, we maintained production this quarter based on healthy demand in the product line. Our plans this quarter are to increase the tantalum output.

As previously announced, we are optimistic about the acquisition on the Nichicon Tantalum Components business that closed in early February. With design and production facilities in Japan and China, and special product capabilities and strong customer ties in Japan and throughout the Asian region, we'll see growth in the overall business. This will further enhance our position in automotive segment and bring AVX a new product that has been well received by our customers.

We will continue to work this new acquisition and bring in new materials and further consolidation as the quarter progresses – that quarters progress that should further help the margins. Our strong material purchasing advantage and worldwide sales and marketing network will reinforce our clear number one global tantalum component supplier position.

In the connector product line, I just returned from a trip for our new plant in the Czech Republic, and is up and running, and most customer qualifications are now complete. This will help us grow further our connector business in Europe. During my European trip I also reviewed the status of our new product going in to the ATV market, which was just approved by a major OEM in that field where we will supply directly. That is unusual, in that generally we are working with suppliers to OEM and other customer sources. That project is progressing, but we expect longer incubation periods that is being discussed in the press.

During the quarter, overall inventory remained steady. This quarter's gross margin performance at 17.6% reflects continued solid operating performance, but has been impacted by lower sales prices. We continue to examine all our costs, especially overhead, again, in order to address gross margin. SG&A expenses in the quarter came in at $28.8 million below last quarter and 8% of sales.

The profit from operations was $34.7 million and almost 10% of sales. Our earnings came in at $0.15 per share for the quarter. Sales for the full year were $1.414 billion. Gross profit for the full year was $263.8 million, or 18.6% of net sales. Excluding the unusual environmental charge recorded earlier in the year, operating income was $146.4 million, or 10.3% of the net sales.

This quarter we paid $86 million in cash in connection with the February tantalum operation acquisition. We paid $12.7 million in dividends and we spent $3.3 million repurchasing AVX shares on the market during the quarter. For the full year, we paid $50.8 million in dividends and spent $10.6 million repurchasing AVX shares on the market. We spent $43.7 million for facility improvements and equipment expansion during the year, and depreciation expense totaled $42.5 million for the year.

Our overall financial position continues to remain strong. The visibility going forward continues to be uncertain into the next few quarters, but we expect to see increasing business that tracks a general economic improvement as we progress through the new year. Based on input from our customers, at this time we would estimate the revenue in the June quarter could increase in the 2% to 3% range compared to the March quarter, if that demand increases or hold steady and our customers gain confidence in the global economic improvement.

To-date, as I mentioned earlier, the April book-to-bill has been very healthy. We would expect margins to come in near the same range, but about 0.5 point lower. However, this will depend upon the sales level and the selling price pressures in that quarter. The issue today continues to be uncertainty across the board as our customers are still optimistic, but careful to take risk with inventory. Near term is dependent upon the general macroeconomic concerns and how that plays out.

We continue to have the financial strength to address our customer needs for electronic solutions in order to create new products that will drive further growth opportunities. We will continue to look for additional acquisition opportunities that will enhance our technology and product portfolio. I would now like to open it up for questions.

Transcript Call Date 04/24/2013

Operator: Matt Sheerin, Stifel Nicolaus.

Matt Sheerin - Stifel Nicolaus: First question, John, regarding the book-to-bill. Could you tell us what the number has been in April so for?

John S. Gilbertson - CEO and President: Matt, the reason I didn't give it was it’s so high, I’m a little skeptical regarding the number. But the actual number is 1.34. This is early in April, but it has been very healthy, and I suspect it will weaken as the month progresses. But actually our shipments have also been good. So sometimes when we get an unusual book-to-bill, it’s because our shipments earlier in the month haven’t been strong. But our shipments are on forecast and we still have a strong book-to-bill.

Matt Sheerin - Stifel Nicolaus: That 2% to 3% guidance sounds fairly conservative. Also, given the fact that you’re going to have a full quarter of the Nichicon business, right, which is – what’s the run rate, quarterly run rate there? Is it, what, $10 million or $15 million a quarter or more?

Kurt Cummings - VP, CFO, Treasurer, and Secretary: Well, Matt, we said that they had been running in the $70 million to $75 million kind of annual rate, and that’s what we’re expecting. But you may think 2% to 3% is conservative, and in this market and what's going on in Europe, it's a hard call.

Matt Sheerin - Stifel Nicolaus: No, I understand that. It’s just with the full quarter if you have incremental extra $10 million or so of sales from Nichicon, then that 2% to 3% on an organic basis is actually lower. Given the strong book-to-bill, it sounds conservative, but it’s certainly fairly enough, and probably the right place to be right now. In terms of the distribution, restocking and inventories, John, it’s sounds like you're seeing some distributors starting to have more confidence and bring on some inventory and others are not. What does the sell-through in distribution look like and in the book-to-bill in distribution relative to the rest of the business?

John S. Gilbertson - CEO and President: Well, that POS is up a little bit, Matt. The real problem that we’re having there is as the POS goes up, and you're aware you can broker that part to the system, you’re little bit better off with lead times low. So some are more aggressive than others on the future of the business; others have, let’s say, under-shot their inventory level. They perhaps have gone below what they will like to have seen in their inventory level and they’re upping their numbers there. So we're seeing a mix bag. I would say, just roughly, that number we’re seeing movement or activity in about 35^ to 40% of those distributors and more packages that we’re seeing going into April. But the in the quarter, I would say that was at 30%, 35% range we’re getting activity.

Matt Sheerin - Stifel Nicolaus: Is that gross margin number – I guess, the flattish kind of guide, is that impacted at all by the Nichicon inventory or anything else there that’s impacted by that acquisition?

John S. Gilbertson - CEO and President: Yes, it definitely is, Matt. As we mentioned early when we did the acquisition, A, they’ve got higher-cost material in there. It’s going to take us three to six months to get that done. Plus, we've got just some of the consolidation that’s got to be done. So that’s going to hurt us for two or three months on the gross margin. But we are anticipating when that material gets through there, some of the machine and equipment changes that we’re making, we’re spending a little extra money both in training and other issues there that would come with a new acquisition. So we think that in the June quarter that will hurt us a little bit, but we expect as the year goes on it will add to the margin, particularly with material and the new product that’s coming on.

Matt Sheerin - Stifel Nicolaus: Just lastly, could you give us specific breakdown on the end markets, on either percentage?

John S. Gilbertson - CEO and President: If you look at the numbers, the automotive was 20%; cellular was 16%; computer was 13%; consumer, again it dropped another point, 8%; industrial, 13%; medical, 8%; military, 4%; networking is 4%; and telecom is 14%.

Operator: Jim Suva, Citi.

Jim Suva - Citi: You made a comment in your prepared remarks about plans to increase your tantalum output. Just a quick clarification or follow-up on that. Is that a direct relation to the Nichicon acquisition, or is it AVX adding organic capacity or turning on more equipment? How should we think of that?

John S. Gilbertson - CEO and President: In both ways I was really talking about the organics of tantalum business. We’re seeing an increase there and we will increase it in this quarter. So our – yes, call it our base business. The Nichicon, we’re going to also increase the Nichicon output. We put a lot of equipment in there and new personnel, and right now we’re trying to get that up to speed. That new product is being used both in automotive, particularly in Japan, which is picking up a little bit. It's also being used in new cell phone products. So our big pressure right now in the Nichicon is, get the new product up to speed and get more production at it. Right now we're behind where we need to be in the Nichicon production, but we’re also a little light on the organic business, our base business.

Jim Suva - Citi: Then having visited some of your plants in the past, sometimes it appears like there is still some square footage where you could install more equipment in it. Is that the way to think about it, like you have the square footage/shell area to do it, or would you actually have to be like putting up new sites for these additional tantalum output?

John S. Gilbertson - CEO and President: Generally, we’re going to expand some existing facilities, or we have that space we’re bringing more equipment online, putting on more personnel perhaps to work a different shift in some cases. But you got to realize that the new plant in the Czech Republic has really helped us. That’s a pretty good-sized plant and it left on a vacant plant there. So we’re not going to be building any new plants, but we do have the space there to increase production quite a bit.

Jim Suva - Citi: Can you comment on CapEx plans, kind of for the year how we should think about CapEx given this capacity build-out that you're seeing?

John S. Gilbertson - CEO and President: Jim, I think we’re probably in that, again, at $40 million range. Maybe that's a little heavy. But we spent a lot of money last year on that new Czech plant and we expanded one of the other – didn’t expand it, but modified it quite a bit. So those two ate up some capital. I would say we’re probably going to see that $40 million range.

Operator: We have no further questions at this time. I’ll turn the call back over to you Mr. Gilbertson.

John S. Gilbertson - CEO and President: Alright. Thank you very much. We look forward to the June quarter and a successful second half. Thanks again.

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